Outset Medical, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Outset Medical Third Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Brian Johnston, please go ahead.

Thanks, operator. Good afternoon, everyone, and welcome to our third quarter 2021 earnings call. Participating from the company today are Leslie Trigg, President and Chief Executive Officer, and Nabil Ahmed, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our third quarter financial results released after the close of the market today, after which we will host a question and answer session. The press release can be found in the investor relations section of our website at outsetmedical.com. This call is being recorded and will be archived in the investor section of our website. Before we begin, I would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events, market trends, results, or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information and Outset assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's public filings with the Securities and Exchange Commission, including Outset's latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us to review our third quarter 2021 results. In the third quarter, we were again successful in delivering strong revenue growth and gross margin improvements. while building a foundation for sustained growth in Q4 and into 2022. Specifically, we reported 26.3 million in total revenue, representing 91% growth year over year. As Nabeel will elaborate on, given our progress in the third quarter and visibility into the fourth quarter, we are raising our fiscal year 2021 revenue guidance today. Our top line growth continues to be driven by our commercial success in the acute market. In Q3, we added new customers, progressing well toward our year-end goal to sign sales agreements with a third of the top 100 largest regional health systems. Our team also successfully drove expansion within our current customer base, propelling the land and expand strategy forward. As I mentioned before, health systems are expanding their use of Tableau across additional hospitals within their networks, as a result of rapidly recognizing economic and operational workflow benefits. The CEO of a health system using Tableau put it best last week when he said to our team, quote, there are three things I care about when deciding whether to adopt new technology. First, is it good for patients? Second, does it drive down costs? And third, will it be accepted by my nursing staff? Tableau meets all three of these criteria. As our installed base grows, health systems implementing Tableau continue to see a 50% to 70% reduction in the cost of a hospital's inpatient dialysis program. These savings are driven by supplies cost reduction, labor cost reduction, or both for hospitals that adopt Tableau in order to insource their dialysis service line. Some of the operational workflow advantages of Tableau were demonstrated in a study of 100,000 consecutive acute dialysis treatments using Tableau that will be shared at the American Society of Nephrology's Kidney Week meeting this week. Leveraging the power of Tableau's two-way wireless data transmission, this retrospective data analysis showed that Tableau was used in a wide range of treatments from two to 24 hours, demonstrating its unique clinical versatility. The data also showcased labor efficiencies in that the mean number of alarms the nurse had to respond to was just 2.5 per treatment, regardless of how long the treatment was, which we believe is far lower than conventional dialysis machines. And last, Tableau's simplicity was highlighted by data on alarm resolution time, which was just 14 seconds on average. Also to be released at the ASN conference is an interim preview of our EXTEND study, which analyzed 50 consecutive Tableau XT treatments with a median treatment time of 23.5 hours in the ICU setting with very high acuity patients. One of the most common complaints about the conventional dialysis machines used in the ICU for extended treatments is a high clotting rate. When a cartridge tubing set clots, the nurse has to stop treatment, disassemble the machine, go through the setup process again with a new cartridge tubing set, and restart the treatment. When patients are prescribed ongoing extended therapy, Interrupting treatment in this way is obviously disruptive to the patient's clinical needs. For these reasons, we are really thrilled with the early results of the EXTEND study, which show just a 4% clotting rate, far below what we believe to be industry standard. Tableau XT's ability to deliver long, interrupted treatments provides clinical value to patients and, once again, operational workflow benefits to nurses, since a low clotting rate means less nursing time required per treatment. we see these benefits resonating with customers as demonstrated by a continued strength in our XP attachment rate in the third quarter. In addition to our success in the acute setting, we are also encouraged by our continued progress on the home front. In the third quarter, chronic and home console bookings again increased significantly on a sequential basis as we make further inroads across the spectrum of existing and emerging home dialysis providers from health systems to progressive dialysis operators to other new entrants in the space. Similar to what we're seeing with acute customers, we believe the clinical and economic value of Tableau for home is resonating with decision makers. Another data set being shared this week at the ASN conference draws from the first 1,000 real-world treatments with Tableau at home. The headline here is that the results mirrored our IDE study. Specifically, in this retrospective analysis using Tableau's proprietary cloud-based data analytics platform, the data showed 100% patient retention at home, 93% treatment adherence, and 95% of the treatments completed within 10% of the treatment time prescribed by the patient's nephrologist. The study also showed a mean patient training time of just 7.4 days, which is meaningfully lower than the four to six week training time commonly associated with the incumbent home hemo machine. The mean number of alarms the patient had to respond to was just one per treatment, with an average resolution time of 10.7 seconds, again highlighting Tableau's ease of use and also its unique software and sensor design. From our earliest days of product development, we focused on eliminating nuisance alarms, which our early market research indicated both patients and nurses disliked about the existing machine options. Alarms are loud, they're stressful, and they're intimidating. And for someone at home, something that is stressful and intimidating probably isn't conducive to retention, which is our most important goal. Our engineering team developed ways to employ sensor and software solutions to minimize nuisance alarms and deliver a quiet treatment. And these study results suggest we're delivering on that ambition. We see the accelerating appreciation of Tableau's benefits amongst administrators, physicians, and patients as instrumental in driving demand for Tableau at home. In a new, recently conducted market research study of several hundred nephrologists and dialysis patients, 83% of nephrologists stated that limitations with the existing HHD device option constituted the greatest barrier to HHD adoption in the past. Notably, 90% of these same nephrologists surveyed said they were likely to, extremely likely, to prescribe home dialysis to more patients specifically because of the attributes of Tableau. According to those surveyed, the most important features driving their preference for Tableau were, one, flexibility in treatment frequency, i.e., the ability to prescribe three, three and a half, four, five, or more treatments per week as needed. Two, the system's ease of use and reduction of manual steps. And three, Tableau's remote monitoring capabilities and reduction in supplies. What we also found interesting was that the patient market research results revealed that 84% of patients who are currently on home hemodialysis with the incumbent device view Tableau as a significant improvement, while nearly 60% of in-center and PD patients said they were extremely likely to try HHD based on Tableau's benefits. For patients, flexibility in treatment frequency the availability of dialysate on demand, automated data and remote monitoring, ease of use, and the reduction in storage requirements were paramount to their decision-making about which device they would choose. Every time I have the chance to talk with home patients, I am reminded of the impact Tableau can have on someone's life. Just last week, I was talking with a gentleman using Tableau at home here in the Bay Area who is an accomplished musical professional who used to tour with some of the greats, and someone who learned the craft from his father, who was himself a legendary jazz musician. His story is both common and uncommon. Common in the sense that he spent years dialyzing in center, being told without choice what days to show up, what time, where to sit. Uncommon in the sense that he was fortunate enough to get a transplant. And then his transplant failed, and his choice was back to the learned helplessness of in center, or into the new frontier of controlling his own destiny through home dialysis. He chose freedom. Starting on Tableau, in his words, quote, changes your life without changing your surroundings. He shared with me that what Tableau affords him is, quote, consistency and control. That's something that I didn't understand until Tableau came in, control. Instead of sitting in a clinic freezing cold and waiting for a tech to come by to increase his dialysis temperature, He now can adjust it automatically with Tableau and warm himself. Instead of cramping during treatments and in his words, quote, not wanting to bother any of the nurses to address it, he can instantly alter parameters on Tableau to make the cramping go away. He can choose what days and what times he wants to dialyze around his music schedule. He's chosen to increase his knowledge about the links between kidney failure and heart disease. He now views his nephrologist as a peer partner. He's changed his diet and his fluid intake. All because agency and self-worth have been returned to him through home dialysis made easier and accessible through Tableau. The power of one over time becomes the power of many in time. Our continued focus on creating a differentiated patient experience on lowering barriers around adoption and driving high retention rates are all vital building blocks in the service of sustainable high growth home revenue over the long term. As we work to facilitate the expansion of home hemodialysis, we remain encouraged by the new administration's continued demonstration of commitment to the same goal. In the final rule, CMS increased the measurement benchmark for the home dialysis and transplant rates in the ESRD treatment choices model known as the ETC. By applying a new incremental 10% increase every 18 months to the benchmark, CMS is further incenting dialysis providers to continuously improve their rates of home dialysis and transplant beyond the incentive set forth in the original ETC model. The expected impact of this change is that home dialysis and transplant benchmarks will continue to increase through 2027. In addition, to help ensure patients have access to home dialysis and transplant regardless of race, ethnicity, or socioeconomic status, CMS finalized a new incremental health equity incentive payment to dialysis facilities that improve their performance in growing home dialysis among disadvantaged populations. Another important element in driving demand for home dialysis is a CMS program called TIPNES, the Transitional Add-on Payment Adjustment for New and Innovative Equipment and Supply. TIPNES was implemented by CMS specifically to encourage providers to adopt new renal-related technology. Although this program has been around for two years, none of the applicants to date have received approval. However, on Friday, October 29th, that changed when Tableau received Tiffany's approval. Notably, Tableau is the first and only dialysis technology to benefit from this new CMS payment policy. The decision was grounded in CMS's belief that Tableau constitutes a substantial clinical improvement over the incumbent home hemodialysis system. This incremental per treatment payment will further incent providers to adopt Tableau and thereby bolster our economic value proposition to customers. We believe this validation of Tableau's advantages over the incumbent home hemo system provides a commercial tailwind to our sales efforts in 2022 and 2023, which is the duration of the Tipney's benefit. Beyond Tipney's, we continue to work with partners across the space to advance progressive patient-centric policies designed to enable greater flexibility, convenience, and care-setting choice for patients. We're seeing that even with the change in administration, there is an enduring commitment in Washington to collaborate on expanding access to home dialysis. Further, we continue to see a growing policy focus on health access equity, which, as we've emphasized in the past, is a critical component of our mission at Outset. Moving now from top-line growth to margin performance, the team delivered another quarter of gross margin expansion. Q3's 11.4% non-GAAP gross margin enabled us to attain our target of low double-digit non-GAAP gross margins one quarter ahead of schedule. Our supply chain and manufacturing initiatives continue to deliver expected capacity increases and cost reduction despite the tough supply chain environment. On the console side, all of our consoles are now built at our facility in Tijuana, Mexico, and our ongoing cost-down programs drove sequential reductions in the cost of our console. On the cartridge side, we continue to productively engage with the FDA on our 510K application to enable our new contract manufacturing partner to produce Tableau cartridges in Mexico. Assuming FDA clearance within the expected timeframe, we believe we are on track to start production there in the fourth quarter. Before turning the call over to Nabeel, I'd like to highlight our forthcoming ESG report that we plan to make public on our investor relations website in the coming days. As many of you know, Outset has been and will remain dedicated to inclusivity, environmental impact mitigation, the advancement of social well-being, and of course, the enhancement and enrichment of the lives of our patients, our employees, and all other Outset stakeholders. We strive to be a leader across ESG initiatives, and as this report will demonstrate, We've taken significant steps on that path already. Specifically, we have believed since our inception in advocating for progressive patient-centric policies to improve the lives of dialysis patients. To that end, we are working with leading patient-focused organizations to promote increased access to home health care, drive better outcomes for all kidney patients, and critically, to help erase racial and socioeconomic disparities in access to optimal care. In fact, CMS pointed out in their TIPNYS decision that, quote, while health equity is not a specific TIPNYS eligibility criteria, we strongly support health equity and believe that the approval of the Tableau system will encourage uptake of home HD for vulnerable patients with ESRD. At the board level, we have long championed gender diversity, and we're proud that Outset's board is comprised of more women than men. placing us in a select group of companies that are leading the way in closing the gender gap in corporate boardrooms. We also have a tight focus on environmental stability at our Outset Mexico manufacturing facility, setting very ambitious water recycling goals, which we exceeded in our very first year of operation there. Looking ahead, we plan to build on our success and provide periodic updates on our ESG initiative. In summary, I could not be more proud of Team Outset and their performance in the third quarter. As we look to year end and into 2022, we will remain steadfast in reaching our four key strategic imperatives. First, expanding within the $2.2 billion acute setting where we see tremendous greenfield opportunities and a long runway to expand penetration within our current customer base. Second, building a solid foundation for home growth over time by focusing near term on creating differentiated retention, and treatment adherence results for patients and providers. Third, further increasing manufacturing capacity while reducing costs to facilitate sustainable and profitable financial growth. And fourth, continuing to invent with intensity and imagination across all the dimensions of our business. With that, I'll now turn the call over to Nabeel to review our financials and provide more resolution on our expectations and key drivers for the remainder of 2021.