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spk01: 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.
spk08: 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.
spk03: 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.
spk04: Thanks, Leslie. Hello, everyone. As Leslie highlighted, revenue grew 91.3% year-over-year in the third quarter to $26.3 million, driven primarily by increased console shipments to acute customers, higher consumable shipments, the impact of XT upgrades, increased services to support our growing install base, and our HHS lease agreements. Product revenue grew 102% year-over-year to $21.8 million in the third quarter. Console revenue grew by 71% year-over-year to $15.4 million, driven by higher console placement and increased ASP given the availability of and demand for Tableau XT. Consumable revenue was $6.4 million, an increase of 257% versus the prior year, driven in part by a large customer order. Service and other revenue grew by 53% year-over-year to $4.5 million, as we serviced a larger installed base and recognized the impact of HHS lease service revenue. Service and other revenue was down slightly on a sequential basis as strong renewals and service contracts on new console placements were offset by the expected expiry of a portion of our HHS service agreements as we have discussed previously. Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures which can be found in today's earnings release. Our non-GAAP gross margin was 11.4%, ahead of our expectations, an improvement of approximately 48 percentage points versus the prior year period, and a sequential improvement of approximately 7 percentage points. This improvement compared to 2020 was primarily the result of our ongoing cost reduction activities, which have meaningfully lowered console and consumable costs while enabling increased console output. Notably, This progress was made despite emerging supply chain headwinds as our commercial and operations teams worked closely with our customers and our suppliers to respond to challenges posed by the global disruption and ensure our ability to fulfill orders and meet the growing demand for our products. We also saw some benefit in Q3 from the large consumable order that I previously mentioned. Non-GAAP operating expenses in the third quarter were $30.3 million, up $8.4 million versus the prior year period, driven primarily by headcount growth resulting from investments in our commercial organization, investments in R&D, and G&A expenses tied to operating as a public company. Compared to the prior quarter, our non-GAAP OPEX increased by $3.2 million as a result of the investments we're making in our commercial execution and in R&D. Our G&A expense in Q3 is down by $0.7 million sequentially largely as a result of a favorable conclusion to the primary manufacturing relationship we had with our contract manufacturer. We reported third quarter gap net loss of $30.5 million, resulting in a net loss of $0.65 per share compared to a net loss of $42.3 million, or $3.44 per share for the prior year period. Our non-GAAP net loss was $27.6 million, or 59 cents per share, compared to a non-GAAP net loss of $28.4 million, or $2.31 per share for the same period in 2020. As detailed in our press release and the GAAP to non-GAAP reconciliation, our stock compensation expense in Q3 2021 was $2.9 million, a decrease compared to Q3 2020, largely because our Q320 results included expense associated with the completion of our IPO. We ended the quarter with a strong balance sheet, including approximately $406.4 million of cash, cash equivalents, restricted cash, and investments. I'd like to move now to our 2021 outlook. We project revenue for the full year 2021 to range from $99 million to $101 million, which represents approximately 98% to 102% growth over fiscal year 2020 revenue. This compares to prior revenue guidance of $97 million to $100 million. Our updated guidance reflects our unchanged conviction around second half 2021, given our backlog position and our visibility into Q4 shipment schedules, and in spite of some recent trends we're monitoring around hospital nursing shortages. We also expect to exit 2021 in a backlog position, which should set us up well entering 2022. Moving to gross margin, we were very pleased with our sequential improvement in the third quarter, enabling us to reach our expectation for low double-digit gross margin one quarter ahead of schedule. And in line with our previous guidance, we expect to roughly maintain a low double-digit margin level in Q4. Notably, this expectation contemplates some level of emergent distribution and logistics headwinds, specifically around the transportation costs of shipping our cartridges from Southeast Asia. Given our anticipated transition to a new cartridge manufacturer in Mexico, we expect this elevated level of transportation cost exposure to decrease once the Mexico cartridge production comes online. Both this cartridge production move to Mexico and our ongoing cost-down initiatives are expected to contribute to long-term margin expansion. Finally, we continue to forecast sequential increases in operating expense given planned investments to drive long-term revenue growth. In closing, we have been very pleased with our financial results through Q3 and look forward to a strong finish to the year. Operator, please open the lines.
spk01: A reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the bound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Amit Hazan from Goldman Sachs. Your line is open.
spk09: Hey, this is Phil on for me. Thanks for taking the question. I guess I probably should start with guidance. Raised by $1 to $2 million over the beef and 3Q, but implies flat to down sequentially. I think I just heard what might be part of the answer on the staffing front, but hoping you can give a bit more detail on what's driving the sequentially flat to down number in 4Q and then what's going to change moving forward as there's some acceleration expected on a sequential basis thereafter. Thanks.
spk04: Yeah, Phil, thanks for the question. So, first of all, we are really pleased with Q3 coming in at 91% year-over-year growth. and then being able to guide to between 98% and 102% full-year growth here in 4Q. Now, when we sort of talk about our guidance, and I think back to our comments in August, our business is really performing the way we expected it to given our commentary in August. And the one thing we had in the third quarter here was this large consumable order which contributed to our beat. And so if you think about it, sort of excluding that, if you will, the business is performing just the way we expected from that August comment.
spk09: Okay. I'll switch gears a little bit here and touch on the Tiffany's. There was one specific line that CMS provided in an estimate for payment from their perspective of $2.5 million next year. I'm wondering if you can put some context around that in light of the 950 per treatment add-on payment. There's pretty simple math implies a number of treatments that are embedded in that 2.5 million number, but I'm hoping that you can put some context and maybe explain if that's the right way to be thinking about it. Thanks.
spk03: Yeah, sure. Happy to. So I think we're talking about two different things here. So let's talk about the per treatment add-on payment. And just to clarify, the applicants don't apply for an amount of payment. We apply for approval that the device meets the substantial clinical improvement threshold, which CMS, of course, affirmed that it did. And so CMS then says, okay, we're going to reimburse 65% of the cost of using this new device, in this case Tableau, less an offset for what's already baked into the Medicare base rate regarding the cost of equipment in that base rate. So the add-on, the extra add-on payment is not expected to be $9.50. We expect it to be somewhere in the neighborhood of $23 to $25. We won't know for sure what the final add-on payment amount will be until the end of the year, kind of beginning of next year. This becomes effective January 1. And again, it's a new program. It's new to us. So we're expecting it. We don't know. But we now have to complete a process with CMS that involves submitting our invoice pricing, working with CMS and the MACs to finalize that payment amount. But our expectation remains what we've communicated over the year, which is likely something in the $23 to $25 per treatment amount above and beyond the bundled rate. The second part of what you referred to is this $2.5 million. And so very kind of at the back of the final rule, CMS has to estimate the aggregate impact of any and all new proposals that it ratifies in the final rule. And so what CMS estimated was simply its calculation of the number of Medicare beneficiaries currently on home hemo and really kind of a swag, for lack of a better word, at what percentage of those beneficiaries might actually go on to Tableau during the Tiponi's period. And this is really a calculation or an estimate that they make before it goes to review from the Office of Management and Budget. And so there is no implication really in the $2.5 million for outset or for any of the providers. That's effectively a communication tool that CMS uses in communicating the potential impact to healthcare system costs.
spk09: Okay, that's great. Just one quick follow-on. You specified that it's going to likely be on a per-treatment basis. Is there still any room or flexibility that there could be a component of this that's for the upfront capital, or is that not really on the table for this year?
spk03: Well, that effectively is what they are helping providers to defray the cost on, actually. So our application was on the basis of the Tableau console, because it was the Tableau console that met the newness criteria of Tiffany's, because that console received home clearance in March of 2020, and that is one of the criteria. You have to meet newness. And so what CMS did, and I don't want to get into too much elaborate detail, but I'll tell you at a high level, they used a calculation methodology that starts with what they believe to be the average selling price of Tableau divided by a five-year sort of operating or useful life period divided by the average number of treatments per year. And that's kind of what you use to calculate this roughly $23 to $25 per treatment benefit. And so the idea of this per treatment incremental payment actually specifically ties back to the cost of the Tableau consult. It's just that the payment mechanism or the incentive mechanism that CMS is using is being delivered to providers on a per treatment basis.
spk00: Great. Thanks for all the details.
spk01: Your next question comes from Bob Hopkins with Bank of America. Your line is open.
spk07: Good afternoon. Just a couple of quick follow-ups. On the Mexico, the shift to Mexico from a cartridge perspective, can you just remind us when that happened?
spk04: Yeah, Bob. So we are expecting FDA approval here late in the fourth quarter and then we'll be ready to go once we get that. The real benefit from that will be in 2022, and it'll come in two forms. One, the cost of the actual cartridge is lower in Mexico than it is at our current manufacturer. And two, we won't have the supply chain. It'll be a shorter supply chain, right, coming from Mexico here. So it's a cheaper, simpler supply chain to navigate.
spk07: Okay, that's great. And then, on the on the on the guidance question um i assume that that q3 consumable order was maybe one to two million dollars something like that just wondering if you could confirm that and are there any other issues impacting q3 to q4 the sequential trends like you mentioned staffing i'm just curious you sort of just um are you actually seeing that impact the business towards the end of the quarter you're just you know kind of um mentioning it because it's it's a it's a topic just you want to get a little more clarity on on on those two topics
spk04: Yeah, of course, Bob. So let me maybe talk about the consumable order and then maybe Leslie can touch on the staffing. With respect to the consumable order, you are essentially right. This consumable order, the magnitude you gave is in the zone. It really was the big driver of the beat. What we are seeing, and candidly what I'm really pleased with, is that Q3 played almost exactly the way we expected it to, given the backlog and the pipeline that we had as we left Q2. And that actually gives me a lot of confidence into our Q4 trajectory, given the backlog and the pipeline we have sitting here today. So hopefully that helps there. Leslie, do you want to talk about that?
spk03: Yeah, sure. Well, I guess I'd say obviously staffing shortages are on everyone's mind, and it's something that we are monitoring very, very closely. In our experience, hospitals are definitely contemplating staffing levels and thinking through that when they're planning out the timing of of when they want to implement their Tableau program and get the training done and the install. Excuse me. I'd say on the other hand, the simplicity of the device and the clinical versatility does give hospitals new flexibility in who can deliver dialysis inpatient, and that flexibility can and is helping to alleviate staffing pressures. So I'd say in short, it has not reached a point for us where it's significantly affected our bookings or our shift schedules, but it's, it's most certainly a trend that we're watching closely.
spk07: I would think it would kind of be equal parts of potential positive going forward as, you know, as, as maybe a negative, depending on how big the problem is. Cause you, like you said, you are a solution to this problem. So I would, I think that might actually be a net benefit.
spk03: Yeah, no, I think you said it well, I think there's probably two sides of this coin. And so we're, you know, we've got our eyes and our ears open, but I also credit the team, our clinical and our commercial implementation team. I think much like our supply chain team, you know, the group here has navigated, I think, a lot of the challenges that we've heard from other medical device companies navigated it very, very, very well, very astutely.
spk07: Are you seeing, one last quick one, are you seeing any, are you selling into skilled nursing facilities yet in any kind of magnitude and and maybe just some preliminary thoughts on that as an opportunity.
spk03: Yeah, I, you know, I think, speaking for myself and the team, we continue to be very enthusiastic about the skilled nursing facility opportunity and view it getting bigger in the future for a whole variety of reasons we can talk about later. But that being said, I say we're in kind of the first inning. You know, we have really have barely scratched the surface there. So, I think that's a whole other long runway of growth for us in the future. It's not something that we've penetrated into with any magnitude, to use your word, only because we've just had so much, you know, kind of goodness and richness in the core part of the acute business. But absolutely looking forward, it's certainly a part of the opportunity that we're excited about.
spk07: Great. Thank you very much.
spk03: Yeah, thank you.
spk07: Thanks both.
spk01: Next question comes from Daniel Antalfi with SV Billering. Your line is open.
spk02: Hey, good afternoon. Thanks so much for taking the question. Leslie, just a question for you on Tiponis or Tiponis or however you say it. I like Tiponis because I like ponies. But how can we think about the potential incentive? Thanks for all the color to the first question on Tiponis. how they calculate it and all that. So just how meaningful is this from an incentive perspective when you think about the margins that these dialysis service providers operate under? I mean, is this a meaningful incentive? Is this just incremental? How should we be thinking about it as far as motivating centers even more than they already are to build home programs? Yeah. Well, first of all, let me start off by saying that I, too, like ponies.
spk03: So we have that in common. But, yeah, you know, I think if we just obviously if we do the math, the bundled rate was elevated. Another piece of good news, the bundled rate was elevated to 257. So, you know, if you're in the 23 to 25 zone, again, as we speculate that we'll be, you're at 8%, 9%, 10% improvement. And, yes, I think it's the kind of margins that providers typically operate within for the Medicare population at least. That is meaningful. That is meaningful. I don't think we're going to hear from any providers that they don't want to be paid more. Right. So that said, you know, I think we've always said and hopefully consistently communicated that our view on Chibneys is a nice to have and certainly a very nice to have, but not a need to have, you know, in terms of meeting our internal growth projections over the next couple of years. And we still feel that way. It certainly will not hurt. I think providers very likely are happy to hear that they're going to receive higher payment even beyond the ETC and beyond the new health equity incentive. But I think beyond that, it's probably too early for us to prognosticate or try to quantify the impact. But is it a good news story? You know, almost certainly it is.
spk02: Okay, that's helpful. And then a quick follow-up, and this is on the home business. And I know there's a lot of moving parts. I mean, COVID and these labor shortages certainly aren't helping, at least as it relates to, you know, the end-stage renal disease patient population and things like that. But when can we start to think about the home business inflecting? I mean, my sense is that you guys are really kind of controlling or holding the reins on the launch to some extent so you can ensure that you can supply the acute market, correct me if I'm wrong there, and have learnings from, you know, a more controlled launch. But is 2022 the year this really starts to inflect? Is it further out? How do we think about when we're talking about putting numbers around the home business on these quarterly earnings calls? Thanks so much.
spk03: Yeah, sure. Well, first and foremost, just around the numbers, you know, our plan is to provide our install base numbers at the end of the fourth quarter and as we head into 2022, both for acute and also to separate that out into chronic, which will be both the home and then the clinic or the transitional care unit environment. In terms of the inflection point, I know people have sort of said, when are you going to flip the switch? I don't think you will ever hear me use the word flip the switch even like 10 years from now. Well, I don't know, 10 years, maybe 10 years from now. But that's just not in keeping with our commercial strategy, period. We looked at other devices, and you could argue the incumbent device arguably sort of flipped the switch or inflected rapidly after FDA clearance, and while that ride might have been kind of fun and exciting in the beginning, there were challenges that materialized later, like, you know, high dropout rates, et cetera, that I think could have been avoided by a more patient linear approach that really focused on nailing the consumer experience one patient at a time. And that's how we've conducted our rollout in 2021, you know, our focus on really getting the fundamentals right, which we continue to believe and see are producing the right sort of results. So I don't think you'll discern any change in commercial strategy. We still feel great about it. What I continue to anchor to is the results in the study that we are presenting at the ASN around 100% retention and 90 plus percent adherence, treatment time compliance. I mean, those are the things that physicians and providers really care about. So I believe that if we continue to kind of deliver on those promises, all the rest will follow in the out years. So no particular change in commercial strategy. I think what we're doing is helping us win in all the ways that we projected that we would win in 21 and in 22.
spk02: Thank you.
spk01: Next question comes from Josh Jennings with Calvin. Your line is open.
spk05: Hi, good evening. Thanks for taking the questions, and it's great to see that Tiffany's woman, excuse me, The question on follow-up on Tiffany's, just with the success that you've had with CMS, CMS is usually a leading decision maker for private payers. Is there a route that Outset can take with private payers that convince them that Tableau is the best machine for their dialysis population and potentially secure some type of similar add-on payment? in the private payer arena?
spk03: Hi, Josh. I think that's a really interesting question. Short answer, too early to tell. Obviously, premature with this just coming out a few days ago. Commercial payers pay for dialysis treatments, whether it's in the clinic or at home, in the same way, i.e., a single bundled rate. They don't break it out by this much for the device and this much for drugs. And so it follows the sort of the Medicare payment mechanism. And so technically today, as it stands, there's no existing mechanism for private payers to, quote, unquote, pay more preferentially for a device. But I think the idea that you raise is a very interesting one.
spk05: Understood. Understood. Too early, but we'll see how that plays out. You've announced a couple partnerships this year, I think Strive and Satellite. Any update on whether or not you've seen early traction from those channels? Thanks for taking the questions.
spk03: Of course, yeah. On the home side, the progress in this last quarter was similar to the acute in the sense that we both added new customers, a couple that we're really, really excited about. And then also saw expansion, i.e., more patients being put home or sent home within our current customer base. So, again, continue to be pleased with the progress. We obviously don't intend to press release every new customer. But, yeah, we had some pretty nice, I would say, meaningful new partnerships that were in the third quarter on home.
spk05: Great. Thanks again. Yeah.
spk03: Yeah.
spk01: Next question comes from Drew Ranieri with Morgan Stanley. Your line is open.
spk00: Hi, thanks for taking the questions. Just thinking a little longer term into next year, I know you're not ready to provide guidance. Can you at least help frame maybe some of the puts and takes that we should be thinking about as we're kind of getting our models geared towards next year from a revenue perspective or a gross margin perspective? I understand that home won't be a flip-the-switch type of event, but just maybe broader about your acute opportunity or some of the skilled nursing facilities.
spk04: Yeah, Drew, thanks for the question. So with respect to 22, as you said, we are not giving guidance, but I'll say a couple of things. First, you know, we've run our business in a backlog position this year, and we expect to end 2021 in a backlog position. Again, we will share that number when we print our Q4 results, and that'll give us a lot of sort of good visibility into the opening innings of 22. Now, our strategy in 22 is really an evolution in the acute setting of our 21 strategy, where as we exit this year, we will have signed agreements with seven of the eight large nationals and a third of the top 100 regionals, and we'll look to sort of expand those relationships and place more consoles into the acute setting there. We'll also look to continue to expand working through the top 100 regionals and beyond. So there's a lot of land and there's a lot of expand that's left to do for us in the acute setting. And that'll propel our 22 growth, and we're optimistic about 22. Now, shifting to gross margin, the three large drivers of margin expansion for us on the cost side are, number one, there's given the move of our console manufacturer to Mexico will continue to drive productivity and absorption benefits there. Number two, we'll continue to run our cost down programs that have taken out and will continue to take out meaningful costs out of our console. And number three, once we get this FDA approval on the cartridge that we expect in late 4Q here, we will see benefit in 2022 from both lower component costs on the cartridge, but also from freight savings. So we will look to grow top line revenue and also look to sequentially expand gross margin in 22. Again, we'll provide more details when we print Q4 and sort of give you a view of our 22 guidance, but hopefully that sort of helps frame 22 for you.
spk00: Got it. I appreciate the detail. Thank you. And Leslie, for you, I think Outset recently hired a head of international. I know at our conference I asked you about international, but, I mean, with this hire, it seems like maybe this is more in the next 12 to 24 months than five years away. I was kind of curious about your thoughts there on approaching the international opportunity now. Thank you.
spk04: Yeah, for sure. So international, we have said that international is something we're going to explore, and hiring our first head of international is really just helping us cement who's going to do that exploration internally. And so nothing has really changed. International is an exciting opportunity for us. We believe the U.S. is only 30% of the global dialysis market, and so there's a huge TAM that exists outside the U.S. for us that we fully intend to explore. International is not baked into our current projections, Drew. And so again, when we're ready to go and enter a market, we're going to sort of bake it into our assumptions. What I will say, we have a high bar for international expansion. That business, to the extent we enter a country, needs to be accretive to us, both from a revenue growth perspective as well as a growth margin perspective. So to use the Leslie analogy, we're going to measure twice and cut once. before we enter any temptries internationally.
spk00: Understood. Thanks for taking the questions.
spk04: Thank you.
spk01: Thanks. As a reminder, to ask a question, you will need to press star 1 on your telephone. The next question comes from Suraj Ghalia with Oppenheimer & Co. Your line is open.
spk06: Good afternoon, Leslie, Nabil. Can you hear me all right?
spk03: Yes, hi.
spk06: Perfect. Hey, thanks for taking my questions, and Leslie, congrats on all the ESG efforts. So Leslie, a couple for you, and maybe I'll pose them to Nabil also. So kidneys, as I understand it, there is a certain outlay for a certain period for a certain number of beneficiaries, and then you back-calculate the $23.83 treatment based on three treatments per week. if an HHD patient were to do four to five treatments per week, would this dollar level still hold?
spk03: Yes. So I think two separate ideas here that are related but separate. So one is the methodology that CMS used to estimate the benefit. So the methodology that they used to estimate it was based on three treatments per week, or as it said in the final rule, 156 treatments per year. So again, what they did was they looked at what they believed was, I think they used an estimated $40,000 Tableau ASP. And again, we have yet to submit our actual invoice pricing, so this was their guess. And then over five years and divided by 156 treatments per year. So that's the calculation methodology. that establishes what was estimated in the final rule to be about $23, $24. But once that incremental payment benefit is established, again, let's say it is $24, taking the midpoint between $23 and $25, then the provider has the ability to use, they bill a HCPCS code, which has been newly assigned to Tableau, for any and all treatments that that patient completes at home. Does that make sense?
spk06: Yep. Got it. Fair enough. And maybe, Nabil, I'll let you take this. In terms of the high consumable order this quarter, did I get it right, $6 million? Or maybe there was a different amount, and maybe you could characterize it. Was this a pull-forward sale, or was this specific issues, customer-specific issues, that, you know, the order had to be the large order. I guess I'm just trying to understand from a customer-specific perspective, did the utilization change or was this put forward? Thank you for taking that question.
spk04: Yes, Raj, for sure. So first of all, our total consumable revenue was $6.4 million, inclusive of this order and all of the other orders. This order, I mean, the way you can think about it is it's really the driver of of our upside in the quarter, right? So it was a big order, but certainly not $6 million. Now, in terms of sort of these large orders, we have seen one large customer place an order in Q1, you may remember, and we've seen another one here. I think as we grow, we will start to see more of these. There's no reason why a customer wouldn't do it for, you know, maybe it's the lock down their own supply chain considerations, or maybe it's just to make sure that they can deploy to their facilities. So I think we'll just see these more and more. Now, if this particular order was unique to this one customer, you know, it is not sort of a huge pull through from Q4, and sort of it isn't inflecting our Q4 in any particularly negative way. So we've baked in our consumable expectations into our revenue guidance that I've shared Does that answer the question, Suraj? Yep. Fair enough. Thank you.
spk06: Thank you. Yeah.
spk01: And ladies and gentlemen, I'm not showing any further question at this time. I would now like to turn the call back to your speakers for any further remarks.
spk03: Great. Thank you. Well, thanks to all of you for joining today and have a great evening.
spk01: Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.
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