Outset Medical, Inc. (OM) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Outset Medical Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants lines are in a listen-only mode. And after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And I would now like to hand the conference over to your speaker today, Lynn Lewis. Please go ahead.

Good afternoon, everyone, and welcome to our earnings call for the fourth quarter and full year 2020. Participating from the Company today will be Leslie Trigg, President and Chief Executive Officer, and Rebecca Chambers, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our fourth quarter and fiscal year financial results released after the close of the market today, after which we will host a question-and-answer session. The press release, along with slides that accompany our commentary 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 Investors section of our website. Before we begin, I'd like to remind you that is our intent that at 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 our 424 Vifor prospectus filed with Securities and Exchange Commission on December 3, 2020 in connection with the Company's Secondary Public Offering. With that, I'll now turn the call over to Leslie.

Thanks, Lynn. Good afternoon, everyone, and thank you for joining us to review our fourth quarter and our full-year 2020 results. 2020 was an interesting year to say the least for all of us. Our Outset team was tested and stretched in ways we really could not have imagined heading into the year, and yet time and again this team rose to the occasion. For example, we were called on by the Department of Health and Human Services to deploy almost overnight dozens of Tablo Consoles and a Tablo support team to train users at 10 different hospitals in New York during the height of the initial COVID surge in the spring, and our answer was, we'll be there. Later in the year, we were asked if we could possibly fly a Tablo team and Consoles 21 hours around the world to train nurses to dialyzed patients in Guam, and our answer was, we'll be there. More recently, patients in Texas needed urgent dialysis support as power and water dwindled rapidly, and our answer again was, we'll be there. And in the background we scaled rapidly and simultaneously across the organization. Our supply chain team worked in overdrive throughout the year, ensuring continuity against a challenging and uncertain landscape. And our quality and manufacturing teams worked tirelessly to lift production capacity, while maintaining an exceptional level of quality. And so as a result, our team met the moment. Of all the results we're going to discuss today, watching an exceptional group of people rise together to do exceptional things is what we will remember most about 2020, And in this period, I'd like to extend my deep gratitude, my respect and awe for the Outset team behind the successes Rebecca and I are about to share. So with that color as a backdrop, I'll now turn to the quantitative aspect of the Company's performance in Q4 2020 and the full calendar year. During the first quarter, we continued to build commercial momentum, particularly within the acute market, with total revenue exceeding our expectations. For the fourth quarter, we reported $17.2 million in total revenue, representing 143% growth year-over-year and 25% growth sequentially. This performance resulted in full year 2020 revenue of $49.9 million, representing year-over-year growth of 231%. Our momentum in the fourth quarter extended beyond revenue, with Console orders exceeding our forecast as well. We exited 2020 with approximately 550 consoles in backlog, which provides us with strong visibility into our 2021 revenue trajectory. As a reminder, we will be providing Console backlog annually, but we don't intend to provide updates on a quarterly basis. In addition to revenue growth, gross margin improvement is a central pillar of our commitment to shareholders and to our strategic plan. We are very pleased to report good news on this front. Non-GAAP gross margin improved by almost 42 percentage points in Q4 to 2.8%, enabling us to reach positive gross margins for the first time in Company history, significantly ahead of plan. This achievement was driven by higher margin revenue as well as the team's execution against a very robust ambitious R&D and supply chain driven cost reduction roadmap. The drivers of our fourth quarter revenue outperformance were multifactorial. In addition to selling more Consoles to existing customers, we also broadened our installed base with shipments to new customers, all the while continuing to maintain a consistently positive experience for patients, physicians, nurses and health care administrators. We ended the year with approximately 1100 Tablos in the field, of which roughly 900 were in the acute setting, 100 in the subacute setting and 100 in clinics and homes. Throughout the quarter, we also continued to lay the groundwork for sustainable long-term growth. We signed new agreements with numerous thought-leading regional health systems, and as a result, we are now partnered with approximately 20 of the top 50 regional health systems as well as six of the top eight national health systems. What's equally as important is that our success extended beyond growth in new customers, and in fact we saw meaningful expansion amongst existing customers both national and regional that purchased more Tablos for additional hospitals in their respective networks due to positive experience with the technology. For example, in Q4, we received additional follow-on orders from more than half of the national and regional accounts that signed master sales and service agreements in Q3. With marketplace momentum continuing to gather, our value proposition is resonating exceptionally well with health system executives who are the primary decision makers in the acute setting and view the operating margin improvement the Tablo offers to be a key strategic tool. We'd be remiss without mentioning COVID given the current environment and for Outset, COVID has not been a headwind or an independent sales driver. It certainly has presented opportunities to demonstrate to administrative decision makers and clinicians the real world benefits of treating patients with Tablo. However, it's Tablo clinical versatility, it's point of care mobility and it's data rich simplicity that really continue to drive adoption and utilization. Another exciting development for us in 2020 was receiving FDA clearance for the use of Tablo in the home, and additional home dialysis options are sorely needed for patients as the last new device for home was over 15 years ago. Even more gratifying for us last year was supporting our first commercial patients in the home. As we've previously stated, we remain intentionally deliberate in our strategy to expand our home market presence. This year, we are focused on delivering an exceptional Tablo home experience for patients and their families, while also gathering real world outcomes in economic data to build the foundation for deeper penetration in the future. And to that end, we believe we are very well positioned for further expansion into this market. In fact, in the fourth quarter, we signed new contracts and grew our home population, validating demand amongst providers and patients. We finalized new home agreements with leading health systems, while also signing contracts with several forward-thinking dialysis providers committed to aggressively growing their home program. Additionally, we have already begun generating encouraging user data on training time, retention and patient outcomes, which together demonstrate the favorable impact Tablo can have on the total cost of care. For example, we continue to find that it takes consistently just two weeks to effectively train a Tablo home patient, which is a very significant reduction compared to the four to six weeks it typically takes to train a patient on the incumbent home hemo technology. On top of that, our initial retention data is also tracking above our expectations. And while we continue to sign new contracts, place additional systems and expand the number of home patients on Tablo, we remain to committed to doing it well, not quickly. Because of our go-slow to go-fast strategy, we expect home revenue to remain modest relative to total revenue in 2021. That said, our bullishness on the total addressable market for home dialysis continues to rise due to several macro drivers emerging as tailwinds for home adoption. Specifically, as of January 1, 2021, CMS's ESRD Treatment Choices Model became effective. And as a reminder, with the ETC model, dialysis clinics receive either increases or decreases to their overall treatment reimbursement based on their success in improving the rates of home dialysis and patients on the transplant waiting list. Over the coming years, participating dialysis clinics in the US will see up to an 8% increase in their per treatment reimbursement across the board or up to a 10% decrease in per treatment revenue. Further, CMS recently released the specific levels of home dialysis adoption that clinics will need to reach in the 2022 payment year in order to avoid penalties or benefit from higher payment, and we applaud CMS for setting very ambitious targets that we anticipate will activate greater use of home dialysis. Also beginning this January, dialysis patients became eligible to enroll in Medicare Advantage, which commercial payers have cited as a new motivator for taking a more active directive approach to managing costs and improving outcomes, both for upstream chronic kidney disease management and downstream for their members on dialysis. We anticipate payor engagement to function as another home dialysis tailwinds as data in the clinical literature has long shown better patient outcomes and lower cost of care when patients dialyze in the home instead of a dialysis clinic. For example studies have demonstrated meaningfully lower rates of cardiovascular hospitalization, mortality and cost with home dialysis compared to in-center dialysis. Now, looking ahead to potential home upside in the future, CMS established a new program called TPNIES, with the acronym TPNIES, which stands for the transitional add on payment adjustment for new and innovative equipment and supplies. As a reminder, TPNIES was implemented by CMS in 2020 to encourage dialysis providers to adopt new technology that represents a significant clinical improvement. In 2021, the program was expanded to include new capital equipment for home dialysis. We recently decided to submit an application on the basis of the Tablo Console. While a positive response from CMS would represent another tailwind for Outset, receiving approval is not included in our current forecast nor is it required to meet our ambitions in the home. Additionally, if we are not granted TPNIES approval this year, we will have the ability to reapply in 2022 with even greater insight into this new CMS program. If we are successful in either year providers would receive incremental reimbursement for Tablo home treatment based on rates to be determined by CMS. As I mentioned earlier, one of our most vital strategic initiatives is to deliver on our cost reduction plan, particularly via our new Console manufacturing facility and our second source contract manufacturer for cartridges. Our team made exceptional progress on both fronts, culminating in the initiation of commercial production in our new Mexico manufacturing facility a full quarter ahead of schedule. We have now manufactured over 100 Consoles there to date this quarter. We see manufacturing is another example of innovation within Outset. Our new facility incorporates a state of the art cloud-based manufacturing and documentation system. Our integration of manufacturing 4.0 technology allows our facility to run paperless with the ability to perform material, personnel and equipment traceability inquiries in minutes not days or weeks. With digital work instructions and process control tracking, we collect manufacturing process performance data continuously and we can identify trends in anomalies in real time. We are very proud of the forward thinking approach our team in Mexico has taken to ensure the production behind the product is just as cutting-edge. On the consumable side, our initiative to move most of the production of Tablo cartridges from our existing contract manufacturing partner in Asia to a facility operated by our partner in Mexico continues to track to plan. We plan to submit our 510-K to FDA March and expect that the lower cost cartridge will benefit the P&L in the second half of 2021. As we execute our strategic plan in 2021. We are focused on achieving three critical objectives; first, driving growth in the acute market by expanding more deeply within our current customer base, and signing new agreements with large regional and national health systems. Second, accelerating home patient adoptions to capture incremental user data, bolster customer relationships and provide a launch pad for significant growth in 2022, while working to ensure an exceptional Tablo home experience for patients and their families. And third, to continue to focus on increasing manufacturing output while driving gross margin expansion. Looking ahead, I believe we are better positioned than ever to execute on each of these objectives. I remain very confident in our growth trajectory and our promise to dialysis patients and providers that better begins now. And with that, I will turn the call over to with Rebecca to review our financials and provide more granularity on our expectations and key drivers for the remainder of 2021.

Thanks, Leslie. As Leslie mentioned, fourth quarter revenue grew 143% year-over-year to $17.2 million, driven by the impact of our HHS lease agreement, higher console shipments, the launch of our Tablo XT products and continued growth in consumables and services tied to our larger installed base. Our full-year revenue equaled $49.9 million, an increase of 231% over the prior-year period. Product revenue grew 111% year-over-year to $13.2 million. Console revenue grew 96% year-over-year to $10.6 million, driven by an increase in Console shipments, higher HHS leasing revenue and recognition of XT upgrade revenue. Consumable revenue grew 369% to equal to $2.5 million, driven by rising volumes associated with our growing installed base and higher ASPs as compared to the prior-year period. Utilization in the quarter also increased, meeting our expectations based on the end market mix of our installed base. Service and other revenue grew $3.2 million compared to the fourth quarter of 2019 to equal $4.1 million. Growth in service agreements across our larger installed base as well as the impact of HHS lease service revenue contributed to the growth. Moving now 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 and on Slide 10. Our non-GAAP gross margin was 2.8 %, an improvement of 42 percentage points versus the prior-year period. This year-over-year expansion was primarily the result of significantly lower Console and treatment costs as we benefited from our cost down activities, higher service margin and the impact of XT deferred revenue release. Sequentially, gross margin improved by roughly 39 percentage points, benefiting from a full quarter of the Q3 cost reduction activities as well as higher margin revenue including the XT deferred revenue release. Moving to non-GAAP operating expenses; fourth quarter operating expenses equaled $25.8 million, up $10.3 million versus the prior year, driven primarily investment by investments in our commercial organization as well as G&A expenses tied to operating as a public company. Compared to the prior quarter, non-GAAP OpEx grew $4 million. Higher commissions tied to the bookings outperformance as well as an increase in G&A expenses primarily attributable to the secondary offering drove the sequential pickup in OpEx. As detailed in the GAAP to non-GAAP reconciliation in our earnings release, fourth quarter stock-based compensation was $6.3 million as we recorded expense tied to satisfying the performance vesting conditions for certain stock options upon the closing of the IPO. We expect to recognize an additional $4 million of stock-based compensation expense related to these performance options in the first quarter. We reported fourth quarter GAAP net loss of $32 million, resulting in the net loss of $0.75 per share compared to a net loss of $19.4 million or $21.18 per share for the prior-year period. Non-GAAP net loss was $25.8 million or $0.60 per share, compared to a non-GAAP net loss of $19.2 million $21.91 per share for the same period in 2019. We ended the year with approximately $348 million of cash, cash equivalents, restricted cash and short-term investments. Moving now to our 2021 outlook; we expect total revenue for the full year 2021 to be in the range of $89 million and $94 million, which represents 78% to 88% growth over fiscal year 2020. This guidance contemplates higher sequential growth in the first half of the year, as we ship backlog to meet requested customer timing as well as the expiration of the first HHS lease in Q3 2021. Our intention is not to provide quarterly guidance. However, given the timing of this call, we are doing so for the first quarter. Specifically, we are projecting Q1 revenue of $21 million to 22 million, which represents approximately 192% to 206% growth compared to the prior-year period. Included in this projection is our expectation that we complete the XT Console upgrade and recognize the associated revenue. With our Console manufacturing facility up and running, our 2021 gross margin outlook has also improved. In the first quarter, we are projecting gross margins to be slightly lower sequentially due to higher Console mix. However, we are now projecting positive gross margins for the full year, ramping as we move more Console production to Mexico and benefit from the anticipated delivery of lower cost cartridges in the second half. In summary, we are very pleased with our progress through 2020 despite unprecedented times, and believe we are well positioned financially and operationally to build on our success through 2021 and beyond. Thank you for your time. We look forward to providing an update on our Q1 progress during our next earnings call. We will now move to the Q&A session. Operator, please open the line.

Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. And your first question from David Lewis. Your line is now open.

Good afternoon and thanks for taking the question, and congrats on a great quarter, gross margins and a very constructive start to the year on guidance. So a lot of congratulations there all in one. So a couple of -- a couple of things here -- I wanted to isolate. I think first thing I guess for you mostly, Rebecca, is there's a significant upside relative to our expectations for 2021. I want to try to isolate what that is. So the two part question, one, that first quarter dynamic obviously doesn't feel sustainable Q2 through Q4. I think, Rebecca, you talked about that in terms of HSS relative to backlog. Just help us understand what the biggest drivers are that are driving 2020. It seems like it's acute care traction, but why wouldn't those acute care IDNs you specified be sustained post the first quarter? That's question one. I'll stop there, and I've got a couple of quick follow ups.

Yes, happy to handle that, David. Obviously, we are very pleased with the strong demand we saw in the fourth quarter and the strong demand we're projecting for this year. We did mention that we are exiting the year with 550 consoles in backlog, which sets us up for a really solid 2021. That demand, as you can imagine, came from customers that want their consoles quickly which obviously is a high class problem if you will. And we'll really deliver those consoles in the first half, which is part of what's leading to the dynamic on the sequential trends that you're asking about. Also, I did mention HHS. If you think about the trends in HHI it is the highest from a revenue component in the first quarter and is a headwind each quarter from there on out for the rest of the year. So we absolutely do see strong demand continuing in both the acute and in the home setting. It's really revenue puts and takes throughout the year that is lending itself to the sequential commentary.

Okay, that's super helpful. So just two quick ones for me and I'll jump back in queue. And just the first and probably most important question is just on gross margins. I think that was a key focus of the story and it's obviously dramatically better here in 2021. The question, Rebecca, is does this reflect just a stronger trajectory now over the next several years? So your comfort level and pulling forward gross margin expectations on a multi-year basis relative to just 2021. And then, the second question would be in terms of 2021, I'm assuming mostly upside is acute. Just help us understand how we think about home traction in 2021. We would have thought that was, I don't know, something around 10% of the mix in 2021. Is that changing in an appreciable way or should we assume most of this traction in 2021 is more acute and the home mix is pretty stable? Thanks so much. Once again, congrats again.

Thanks, David. Yes, so to answer your question in 2021 and on gross margin and obviously over the forecasting period. With us seeing ahead for 2021, I do think it's a fair conclusion to plus or minus a forecasting margin of error, if you will, to propel that forward Obviously in the first half of this year, we do have specific dynamics that we talked about in the prepared comments. So I don't think it's perfectly applicable to take quarter by quarter and just pull it ahead three or four quarters, but we are ahead and that does propel itself through the forecasting period, again with the margin of error in any given period depending on many different factors including console mix as well as ASP. With regard to home traction, I think that Leslie can speak about that qualitatively. But quantitatively, I think roughly the mix that you're sharing is not outside the realm. We are seeing traction in the acute, the upside is primarily coming from the acute and we do have as well as -- yes-- and we do have good outlook, pipeline and backlog for home just again being very prudent with regard to the rollout for the reasons we've shared numerous times.

Great. Thanks so much.

Thanks, David.

And your next question from Bob Hopkins [ph].

Well, thanks and good afternoon. So just wanted to follow up on a couple of quick things here. First, Leslie, I'd love to get your view on the home, and I realize you guys are going to go slow and that makes all the sense in the world. But I'm just curious, now that you're out in the marketplace, where you're learning about demand. Because I think that remains the key question. I think people agree, you've got really interesting technology for the home. I think the question mark has really been around what is the patient demand going to ultimately look like. So understanding that you're going to go slow and you want to make sure the patient experience is the right experience, but have you learned anything interesting about demand that makes you more bullish, more cautious now that you're out in the marketplace?

Yes, sure. I'm happy to comment on that. I think the short answer on patient demand is probably it has not ever been higher if you look back over the last 10 to 15 years. And I do attribute that -- you know in the prepared remarks, we talked about the impact that COVID has had on the acute business, which for us again is neither a single independent sales driver or a headwind. I would say on the home side, I do think it's had a material impact on the way that the dialysis patients think about where and when and how they want to dialyze. We have seen only a steadily increasing patient interest in and an activation around going home, and I think that part of the reason is COVID. I think other reasons of course we believe that we have a technology that is finally accessible enough and simple enough to help patients overcome any apprehension they may have about their ability to manage in the home. So I would say what we've learned is patient demand has exceeded my personal expectations. Other things that we've learned beyond that, we have learned a lot and we're learning every day, every hour, we are continuing to find that our training time --and this has been a very widely diverse patient population, but that our training time on Tablo is a lot less. Our goal was to get again across really any patient anywhere a training time that was going to be under two weeks and we've met that. With the current technology choice in the market, training time is four to six weeks. So, getting that down to let's call it days not weeks is a big deal for people, and I continue to be very bullish that that will also one of the adoption barriers. I think that's hurt this market in the past. Second, we have learned that so far the retention times on Tablo do appear to be longer than some of the data around retention reported with the incumbent device. Again, very, very early innings and small population, but I like what I'm seeing there. And so my confidence is building little by little that people will stay on home longer with Tablo. And lastly, I think we validated that allowing patients to dialyze three times a week at home is a game changer. It's -- with the incumbent technology, patients are forced to require -- dialyze more frequently, five, six times a week and that's been a barrier to adoption and retention. And so we've seen and heard a lot of really good feedback from patients that are now choosing to go home with Tablo that maybe had refused in the past simply because Tablo allows them to maintain a three times a week schedule that they had in the clinic. So that those some highlights that we've learned so far.

Okay, that's helpful. And, Rebecca, what are you guys embedding in guidance here in terms of how many patients will be on your home hemo system in 2021? And then also on the gross margin progress, does this progress change your view at all on the long-term targets that you guys had talked about previously, or is this mostly an acceleration of the timeframe it will take to get you to your previous targets? And thanks very much.

Bob, thanks for the questions. On the home patient number, I don't think at this time that that's something that we really want to focus on. Really what we want to focus on is everything Leslie just mentioned, ensuring there's really solid patient and provider experience and the assumption in guidance is relatively immaterial compared to the total revenue number. So I, again, think that 2021 is very much about setting the stage, if you will, over the longer term. On gross margin progress, great question, and I would absolutely love to say that yes the dynamic has changed versus the non-GAAP profile that we shared of roughly 50% on the gross margin line and 20% on the operating expense line. That being said, I think we're literally a quarter or two posting public hearing and that's four or five years away. And so while I think we're very pleased with the trajectory and the progress and being significantly ahead of schedule, I think it would be premature to say that the profile has changed. So I think we still have -- we've chopped a lot of wood, we still have a lot more to chop and hopefully at some point in time, we'll be able to share an update on that. But again, I think it's premature at this point in time.

Okay, thank you. It -- but at the sequential pace, you'll be there in two quarters. No, just kidding. Thanks for taking the questions.

Thank you.

And your next question from Amit Hazan. Your line is now open.

Thank you very much. Just a couple from me. Maybe I'll start with guidance on -- and on the acute side. I think just as one of the key priorities that you noted was new agreements with top health systems, and I wonder if you can just give us a sense of how much visibility you have there when you make that comment and how much of that is baked into this guidance that you're giving for the year?

Yes, I'm happy to take that. We obviously have a deep pipeline that we are working against, and that pipeline is contemplated in guidance. That being said, we do have an opportunity to potentially do better than we had planned. But we are 10 weeks into the year, if you will, and we're already significantly ahead of our projections, more than $20 million compared to where we were originally projecting just six or seven months ago. So while there is potential there, we want to be really prudent and focus on execution. And I think, Leslie, maybe you can mention also another qualitative limiting factor, if you will.

Yes, no, I agree with everything you said, Rebecca. Maybe I'd just add that I think we really do pride ourselves in terms of commercial execution of making promises that we keep. And so that's always an element in our mind as we balance demand with implementation is making sure that again we do things well not quickly is sort of a mantra. And so we always have that lens when we look at how fast we are growing and at what pace. So I don't know if that added anything, but those are my thoughts.

No, that's helpful. And then just as a follow up on the home side, again, just teeing off of some of the comments that you had made on some of the new home agreements leading health care systems and independent providers. I'd love just some more color on the health systems side, just which type of health systems these are. Are these some of your existing larger health systems?. Whatever you can tell us about those that are now moving into the home with more contract -- contractual bigger if you will. And then, on the independent providers, if that's dialysis clinics; how much color you can give us? And that seems to maybe be a confidence builder in showing that there's margin for them on this business as well, if you can provide some color there. Thanks so much.

Sure. So to start back on the first part of that health systems, what kind, who are they, why -- what's driving interest. These are health systems that regardless of size and there is a nice mix in there, Amit, too again, your question of the national player -- players, regional players, et cetera, but the common denominator is the interest in an enterprise solution. That's the driver here. And so it starts with the economic efficiencies, the operational efficiencies of a health system being able to down select to one device, managing that patient from the acute setting all the way to the home. Whereas today, when they deliver dialysis across their enterprise it's requiring them to buy and maintain a number of different machines which obviously is more cumbersome and more costly. So the common denominator is all of these contracts for home were tied to a larger enterprise solution deal. That's one comment on the health system. And then, on the provider side; yes, we are talking about dialysis clinic providers. That's what we were referring to in the prepared remarks. And so these are dialysis clinic providers that I think see what's going on with the EPC have maybe components of their payment connected to value based care models. And I think they have a real progressive view of the future and see both the patient satisfaction and the quality of life improvements and then ultimately the total cost of care reduction to come from home and are making very assertive moves. And have set specific targets for themselves in moving greater proportions of their patients to the home environment.

Thank you for that.

Your next question from Danielle Antalffy. Your line is now open.

Hey, good afternoon ladies, thanks so much for taking the question. Rebecca, the first question might be for you and it's around, sorry, it's another guidance question. But just trying to get a sense of what level of visibility you have into the second half. And it sounds like you guys talked about utilization increasing in Q4, but your installed base presumably is growing as we move through the year yet Q1 guidance is over 20% of total guidance for the year. So maybe a little bit of color on how you're thinking about utilization for the existing installed base. And is there some dilution happening there as you bring new -- as you build the installed base or how should -- we should think about that? That's the first question.

Yes, happy to take those, Danielle. With regard to the first part of it, specifically level of visibility into the second half. As I mentioned, we were -- we exited the year with significant backlog, and we do expect to operate within a backlog environment through the course of 2021. So to that end, while we'll be shipping the vast majority of the Q4 backlog in the first half, we'll hold that backlog and therefore the visibility in our minds will be pretty consistent throughout the year. Obviously today, that's in the form of pipeline and not in the form of orders, but that's the case as you go through or any given year, if you will. So we do feel good about the visibility through the remainder of 2021. With regard to utilization of the installed base. Our forecast for 2021 is plus or minus a small bit, if you will, of the expectation of each of the sub end markets for the appropriate utilization that we've talked about. So we're not forecasting dilution as we add on new customers. If anything, the customers we're adding on now often in are full house conversions and those tend to, while it takes some time, those tend to be very high utilizing acute customers. And so we're pleased with where the utilization is currently forecasted in 2021, and we look forward to really doing whole house conversions for major health systems over the course of the year.

Understood, that is super helpful. And then my next question is, as it relates to the acute market. And what you're seeing from a competitive standpoint, if I -- just trying to get a sense of are your competitors getting more aggressive on the counter-detailing side of things? Obviously, this is a high growth market, so maybe it doesn't matter a ton but just curious what you guys are seeing out there. Thanks so much.

Sure. Maybe I'll provide some color on that. When our sales team enters discussions with a health system of any size, the conversation really anchors around again reducing cost and simplifying operations. It's not so much a conversation about, hey we have a device and there is other device and ours is better and here's all the feature and benefit reasons why. It really is a strategic cost reduction initiative for them, an opportunity for them, to view a dialysis service line strategically, which is the first time that hospitals and health systems have been given the opportunity to do that. And so I think because our commercial team is having a different kind of conversation, we usually don't find ourselves in conversations around, let's say, an RFP process. We're not entering where the hospitals just need to replace old machines or they're looking to buy new machines. We are really presenting them with a new idea, a new way to meaningfully increase operating margin across a range of VRG's. Data from a couple of years ago shows that dialysis ends up being delivered across 600 different types of procedures, VRGs, and because hospitals are not separately reimbursed for the dialysis that they provide in the acute setting this is a real pinpoint. And so we continue to find it very powerful and to get to a pretty immediate receptivity to the idea that by lowering their cost of dialysis and also controlling their outcomes that they can get a pretty significant operating margin lift across a pretty wide base of their procedure volume.

Super helpful. Thank you so much.

Yes, sure.

Next question from Rick Wise. Your line is now open.

Good afternoon. Hi, to both you, and I'll add my congratulations. Great to see. I'm going to start just to follow up on a couple of your points. First back to manufacturing. I don't know if it's appropriate to ask your 2021 goals, maybe talking about both on the console side and the cartridge side. I guess a couple of questions around both sides. When, if all goes smoothly, when are you 100%? And maybe you said this and I missed it, I apologize. When you're 100% manufacturing your consoles in the new facility. when do you expect that to be the place -- to be the situation? And ditto for -- on the cartridge front. Rebecca, you talked about the gross margin benefit in second half 2021, maybe you'll also as part of this answer quantify that expected benefit -- annualized benefit, if you will, when you get to 100%. If that makes sense.

Yes Rick, it does make sense. With regard to our goals on the Console, as Leslie mentioned, we're making great progress with 100 -- over 100 consoles manufactured to take in Q1. That will increase sequentially and we'll manufacture even more in the second quarter. By the third quarter, with the expect -- exception of business continuity planning, we'll be fully based out of Tijuana. So there'll be -- Q2 will be more of a mix between the two, and then in Q3 you'll see our facility down in Mexico really being the full provider. Obviously, with the exception of business continuity which is just prudent planning; I think with regard to the cartridge, I don't want to quantify today, Rick. I will say that the gains are coming primarily from both increased productivity of the second source manufacturer as well as reductions in distribution and logistics cost, given we're obviously trucking over the border versus coming from Thailand. Similarly to the console, we will also always continue to have a portion of the business at the current contract manufacturer. So it's probably not worth it. If you want to get wrapped around the dollars and cents between the two, given it will be on a blended basis, but we'll see that benefit in the second half as well.

Okay. Leslie, maybe you could expand on your comments on some of the CMS payment or reimbursement initiatives, particularly the TPNIES program you submitted -- and a couple of questions. When would you expect to hear realistically? What kind of payment are we talking about? And if it's approved, maybe you can help us think about the dollar impact. And I heard you loud and clear, may not happen this year. But whether it happens in 2021 or 2022, how would we think about that impact?

Sure. The impact for Outset or the impact for providers?

Either or both, but obviously most interested in Outset.

Okay, sure. So yes, let me maybe take a half step back on TPNIES. As I said in the prepared remarks, I think first and foremost the big win is that this program even exists. Nothing like this has ever existed for new technologies in the renal space. So that's win number one. I think win number was that they did expand it to include capital equipment, originally it was only going to cover supplies. So that was a big win. And I think the third win coming online here was that the capital equipment inclusion pertains specifically and only to new home dialysis devices. So I think that is all very, very good news. But it's new, and I think with anything new there is going to be some learning all the way around. It's new for industry, it's new for CMS. And so for that reason, we are thinking about it conservatively and I think it is why is not to count on it or put it into our projections. But we feel really good about what we've put forth, and we think it's a compelling body of evidence that anchors the application. So I guess with that as a backdrop, when do we expect to hear. So the proposed -- the CMS initial commentary on TPNIES applications will -- is expected, I should say, to be in the proposed rule, which typically is in that mid-year timeframe usually around July. And then they invite public comment, they consider the public comment and then their final decision is published as part of the final rule in the fall and we would expect it to follow a similar timeframe. What payment that could portend? Short answer, premature, too early to tell. If the application was accepted, then we would go into a dialog with CMS about the pricing methodologies that they would use, ultimately to calculate per percentage payment. But the framework of the program itself, setting Tablo aside, is that CMS has said in the past that they would pay for perhaps approximately 60%, 65% overpayment on the treatment rate. But again, more details to be revealed. And we'll just be very careful -- very, very lucky and pleased to be accepted, either in 2021 or in 2022. I think the impact for providers, I would hope, is an additional nudge to moving more patients home and be moving more patients home with Tablo, and therefore the potential impact on Outset could be in future years, could be, emphasis could be, a potentially accelerated home adoption rate that would preference on Tablo versus other choices.

Yes, that's great rundown. Thank you. And just one last from me, you emphasized, and you had extraordinary success in contracting with as you said six of the eight top national health systems, 20 of the top 50 regional health systems, pretty extraordinary. Can you give us any more color on the conversations that are underway or what we might see or what you're hoping for in 2021? Are you talking with the other two already speaking with the other -- the remaining two of national health systems, are you talking to another 10 or all of the regional health care systems? Just that backdrop of what's going on would be great to hear. Thank you so much.

Sure. Thanks, Rick. Well, I think that, look, we're an ambitious bunch, so this commercial team knowing them as I do is unlikely to be satisfied with six of the eight. We're a group of people that tend to focus on but what about the other two, and what about the other 30 of the top 50, and then once we need to the top 50, it's going to be great, and then how do we get to the next 50 and the next 50 after that. So I would say, Rick, we're really proud of the progress to-date in a relatively short period of time, but we are just getting started. This train is just starting to roll forward and I think that the additional customers and additional facilities really gives us the benefit of just a deeper and wider successful base of reference results and brand awareness, visibility and word of mouth. And so I think this is a really nice early start to a flywheel that I expect to get only faster in the coming quarters and years.

And just one thing to add to that, Rick. I think the commercial team's focus is not only signing additional new customers, but also we're equally focusing on expanding across the customer base of those that we already have.

Good point.

And we're still early in the penetration curve in the acute market that there's plenty of opportunity for both. So in general, we're really excited about the acute market and the value proposition of Tablo and the success we have had and the success we continue to plan to have.

Appreciate the color. Thanks, again.

Thank you.

[Operator Instructions] Suraj Kalia, your line is now open.

Hi Leslie, Rebecca. Can you hear me all right?

Yes, hi.

Perfect. Hey congrats, both. good quarter. So Leslie, I know you provided qualitative comments on the quarter and we appreciate that, maybe I missed the numbers. Can you quantify the pull through from COVID related sales? What we're same store versus new store sales? And also maybe, Rebecca, if I could just ask an esoteric question. What was the average treatments per week per console, where are they tracking currently?

Yes. Can you repeat the first question, I apologize.

I was just curious, what was the pull through…

Yes, COVID related. Yes, so let's take those one at a time. So on the COVID related, we had said earlier on in the year [indiscernible] rise that we expected roughly around $7 million of total COVID related revenue in 2020. What we delivered was exactly that. So we then have a couple hundred thousand dollars more than expected, but still rounding to $7 million. So, I think really the reason for that is, is as Leslie mentioned in the script. COVID is just the demonstration of our value proposition for the technology and has been an opportunity to highlight the technology, but really this is more about cost reduction. And for the reasons that you cited, COVID is not a single-handed value driver of adoption, if you will. With regard to your pull through your question; I can go through this offline with you. But effectively, we have expectations for each end market for pull through, and the business traffic exactly to that on an installed base weighted basis, if that statement makes sense. So in the quarter, we were just around 4.5 times, which is on the nose given the mix of the installed base that we shared. With regard to same store and new store sales, I don't think it's necessarily -- that's not a number that we plan on sharing on a routine basis. The penetration, as I mentioned, is still nascent that -- and we're seeing growth across both figures, if you will, that overall It's a good news story across both, but probably not worth quantifying it, not certain comment that we'd add.

Got it. Leslie, one question from my side and hop back in queue. The patients you're targeting for home hemo, how should we -- admittedly, these are early, early stages, right. So things will change over time. Should we consider initial targets more so as converts from system one or do you -- are these denovo patients in a commercial setting? Thank you for taking my questions.

Yes. Sure. That's actually a really good question. It actually has mirrored our clinical trial by accident. We don't select the patients, obviously, those patients are invited to dialyze at home on Tablo by the providers that they're affiliated with. But it has interestingly mirrored the clinical trial. In the trial, it's about half and half, we had about half that we're coming off an incumbent device, had already been dialyzing at home and then about half who were new to home. And again, roughly speaking and with a margin error, the real world population has been similar and also similarly diverse actually. One of the things that I found most interesting about the trial is that it really did near the real world. We had -- and the vast majority of patients had hypertension, about 60% of diabetes. We had 70% of the patients in the trial were either African American, Hispanic, and that's actually also followed in this population in the real world. So I -- we've been really happy to see the very consistent results in a pretty diverse population. Operator, is there -- are there any other questions?

Okay. And ladies and gentlemen, I'm not showing any further questions at this time. I would now like to turn the call back.

Thank you. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining us today. This concludes our call. We look forward to our next update following the close of first fiscal quarter of 2021. Thanks and have a great night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.