Ladies and gentlemen, thank you for standing by and welcome to the Outset Medical Third Quarter 2021 Earnings Conference Call. At this time all participant's lines are in the listen only mode. After the speaker's presentation, there will be a question and answer session. [Operator instructions] I would now like to hand a conference over to your speaker today, Brian Johnston, please go ahead.

Thanks operator. Good afternoon, everyone. And welcome to our third quarter 2021 earnings call. Participating from the company today are Leslie Trigg, President and Chief Executive Officer; and Nabeel 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 Investors section of our website. Before we begin, I'd like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events, market trends, results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Outset assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the Securities and Exchange Commission including Outset's latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Thanks Brian. Good afternoon, everyone and thank you for joining us to review our third quarter 2021 results. In the third quarter, we were again successful in delivering strong revenue growth and gross margin improvement 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 acute market. In Q3, we added new customers progressing well toward our yearend goal to find sales agreements with the 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 Tablo across additional hospitals within their networks as a result of rapidly recognizing economic and operational workflow benefits. The CEO of a health system using Tablo 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 cost? And third, will be accepted by my nursing staff. Tablo meets all three of these criteria. As our installed base grows, health systems implementing Tablo continue to see a 50% to 70% reduction in the cost of hospitals inpatient dialysis program. These savings are driven by supplies cost reduction, labor cost reduction or both for hospitals that adopt Tablo in order to insource their dialysis service line. Some of the operational workflow advantages of Tablo were…

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 so placements and increased ASP. Given the availability of, and demand for Tablo XT consumable revenue was $6.4 million and 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 four and a half 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 X three of a portion of our HHS service and agreements. As we have discussed previously moving to gross margin and operating expenses, I will highlight our non-gap results. I encourage you to review the reconciliation of gap to non-gap measures, which can be found in today's earnings release. Our non-GAAP gross margin was 11.4% ahead of our expectations and improvement of approximately 48 percentage points versus the prior year period and a sequential improvement of approximately seven 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 work closely with our customers and…

[Operator instructions] Your first question comes from the line of Amit Hazan from Goldman Sachs. Your line is open.

Hey, this is Phil on for Hazan. Thanks for taking the question. I guess I probably should start with guidance, raised by $1 million to $2 million over the beat in 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.

Yeah, Phil. Thanks for the question. So first of all, we are, are really pleased with Q3 coming in at 91% year over year growth, and then being able to guide to between 98 and a hundred, 2% full year growth here in four Q. 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 expect it to given our commentary in August. And the one thing we had in, 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.

Okay. I'll switch gears a little bit here and touch on the Tiffany's. There was one specific line that CMS provided an, an estimate for payment from their perspective of two and a half million next year. I'm wondering if, if you can put some context around that in light of the nine 50 per treatment, add on payment, there's, 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, maybe explain if that's the right way to be thinking about it. Thanks.

Yeah, sure. I happy to. So I think we're, we're, we're talking about two different things here, so let's talk about the, the per treatment add-on payment. And just to clarify you, the applicants don't apply for an amount of payment. We apply for approval that the device meets the substantial clinical improvement threshold, which, 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 this new device in this case, Tablo less and 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 will know of 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 max 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 refer to is, is this 2.5 million and so varies 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, what CMS estimated was simply its calculation of the number of Medicare are beneficiaries currently on home hemo and really kind of a swag for lack of better word at what percentage of those beneficiaries might actually go on to Tablo during the tapon period. And this is really a calculation or an estimate that they make before it goes to review from the office of, of management 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, in communicating the potential impact to healthcare system costs.

Okay. That's great. Just one quick follow on you, 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?

Well, that affected is what they are helping providers to defray the cost on actually. So our application was on the basis of the Tablo console because it was the Tablo console that met the newness criteria of, of Tim's because that console received home clearance in March of 2020. And that, that is one of the criteria you have to meet newness. And so what CMS did, and I, I don't want to get into too much elaborate detail. But I'll tell you at a high level, they use the calculation methodology that starts with what they believe to be the average selling price of Tablo divided by a five year sort of operating or useful life period divided by the number of, or 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 Tablo cost call. 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.

Your next question comes from Bob Hopkins with Bank of America. Your line is open.

Good afternoon. Just a couple quick follows on the Mexico the shift of Mexico from a cartridge perspective. Can you just remind us when that happens?

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.

Okay. That's great. And then on the, on the, on the guidance question I assume that that Q3 consumable order was maybe one to 2 million, something like that. Just wondering if you could confirm that and are there any other issues impacting Q3 to Q4 the sequential? Like you mentioned staffing, I'm just curious, you sort of just are, are you actually seeing that impact the business towards the end of the quarter? Or are you just, kind of mentioning it's a topic just, you wanted to get a little more clarity on those two topics.

Yeah, of course, Bob, so let me maybe talk about the consumable order and then maybe less we 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 their less. You want to talk about that?

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 when implement their Tablo program and get the training done and the install, excuse me. I see on the other hand, the simplicity of the device and, and the clinical versatility does give hospitals new flexibility in who can deliver dialysis in patient and that flexibility can and is helping to alleviate staffing pressures. So did short, it has not reached a point for us where it's significantly affected our bookings or our ship schedules, but it's, it's most certainly a trend that we're watching closely, But I would think it would kind of be equal parts of potential positive going forward as you know, as maybe a, a negative, depending on how big the problem is because you in, like you said, you are a solution to this problem. So I would, right. I think that might actually be a net benefit.

Yeah, no, I think you said it well, I think there's probably two sides at this coin and so 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, the group here is navigated. I think a lot of the challenges that we've heard from other medical device companies NA navigated it very, very well, very astutely.

Yeah. 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 maybe just some preliminary thoughts on that as an opportunity?

Yeah. I think speaking for myself and the team, I, 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 in kind of the first inning, we have really have barely scratched the surface there. So I think that's a whole another long runway of, 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, kind of goodness and, and richness in the core part of the acute business, but absolutely looking forward. It's certainly a part of, and of the opportunity that we're excited about.

Great. Thank

Next question comes from Danielle Antalffy with SVB Leerink. You line is open.

Hey, good afternoon. Thanks so much for taking the, the question. Leslie, just a question for you Tiffany's or however you say it. I like two ponies because I like ponies. But how can we think about the potential incentive? Thanks for all the color to the first question on 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. Is this a meaningful incentive? Is this 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 Tony, so we have that comment. But yeah, I, think if we just, obviously we do the mass is that the bundled rate was elevated another piece of good news. The bundled rate was elevated to 57. So, if you're in the $23 to $25 zone again, if we speculate it will be you're at a eight, nine, 10% improvement, and yes, I think it's a kind of margin 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, I think we we've always said, and, and hopefully consistently communicated that our you on, on Tiffany's is a, a nice to have and certainly a, a very, a very nice to have, but not a need to have, in terms of meeting our internal growth projections over the next couple years. And we still feel that way. It, 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 etcetera and the new health equity incentive. And, but I think beyond that, it's probably too really for us to prognosticate or try to quantify the, the impact. But is it is it a good news story, almost certainly it is. Yeah.

Okay. That's helpful. And then a quick follow up, and this is on the, the home business, and I know there's a lot of moving parts. COVID, and these labor shortages, certainly aren't helping, at least as it relates to the end stage renal disease, patient population and things like that. But when do we start to think about the home business inflecting? 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 a more controlled launch, but if 2022, the year, this really starts to inflect, is it further out, how do we think about when we're talking about no putting numbers around the home business, on these quarterly earnings calls? Thanks so much.

Yeah, sure. Well, first and foremost, just around the numbers that, our plan is to provide our installed 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 or the, I know people have sort of said when we need to flip the switch, I, 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. I, we looked at other devices and you could argue the, 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 in materialized later, like high dropout rates, etcetera, that I think could have been avoid to 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, 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 a hundred percent retention and, 90% plus inherence treatment, time compliance. 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 in the out years. So, so no particular change in commercial strategy. I think what we're doing is it's helping us win and in all the ways that we projected that we would win in in '21 and '22. Thank you.

Next question comes from dusk Josh Jennings with Cowen. Your line is open.

Hi, thanks for taking the questions and it's great to see the Toponas Tiffany's excuse me. The question on follow up on Tiffany's just with the success that you've had with, with CMS, CMS is, is usually a leading decision maker for private payers. Is there a route that, that outset can take with, with private payers that convince them that Tablo is the best machine for their, their dialysis population and potentially secure some type of similar head-on payment in the private payment, private payer arena?

Hi, Josh. I think that's a really interesting question. Short answer to too early to tell, obviously prepare 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, 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 raised is a very interesting one,

Understood, and it should too early, but we'll see how that plays out. And then just, you announced a couple of partnerships this year, I think, strive in the satellite, any, any update on whether or not you've seen early traction from those channels. Thanks for taking the questions.

Of course. Yeah. On the home side, the progress in the last, this last quarter was similar to acute in the sense that we both added new customers a couple that were really, really excited about and then also saw expansion. I E more patients being put home or sat home within our current customer base. So again, continue to be pleased with the progress. And we obviously don't intend to press release every new customer. But yeah, we, we had some, some pretty nice I would say meaningful new partnerships that were in the third quarter on home.

Next question comes from Drew Ranieri with Morgan Stanley. Your line is open.

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 were kind of getting our models geared towards next year from a, from a revenue perspective or, or gross margin perspective. I understand that home won't be a flip the switch type of, of that, but just maybe broader about your acute opportunity or some of those skilled nursing facility.

Yeah. true, 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, we've run our business in a backlog position this year, and we expect to end 2021 in a backlog position. Again, we will, we'll 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 acute, more consoles into the acute setting. We'll also look to continue to expand working through the top a hundred regionals and beyond. So there's a lot of land and there's a lot of expands that's left to do for us in the acute setting. And I, and that will propel, 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 manufactured in Mexico. We'll continue to drive productivity and absorption benefits there. Number two, we'll continue to run our costs 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 and lead four Q here, we will see benefit in 2022 from both lower component cost on the cartridge, but also from freight savings. So we will look, we will look to grow line revenue and also look to sequentially, expand gross margin in 22. Again, we'll provide more details when we print you four and sort of give you a view of our '22 guidance, but hopefully that sort of helps frame 22 for you.

Got it. I appreciate it the details. 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 with this hire, it seems like maybe this is more in the next 12 to 24 months, then five years away, which is kind of curious about your thoughts there on approaching the international opportunity now, thank you.

Yeah, for sure. So international, we have said that international is something we're going to explore and hiring. Our first set of international is really just helping us cement who was going to do that exploration internally. And so nothing has really changed international as an exciting opportunity for us. We believe the us has 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 through. 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 that we enter a country needs to be accretive to us, both from a revenue growth perspective, as well as a gross margin perspective. So to use the Lesley analogy, we're going to measure twice and cut once before we enter any countries internationally.

[Operator instructions] The next question comes from Suraj Kalia with Oppenheimer and Co. Your line is open.

Can you hear me all right. Perfect. Hey thanks for taking that questions and Leslie congrats on all the ESG efforts. So that's a couple of couple for you and maybe I'll post them to the VR world. So, Tecnis, as I understand it, that has a certain outlay for a certain period for certain number of beneficiaries. And that's then you back calculate the $23.83 treatment based on three treatments per week, if an HD patient were to do four to five treatments per week with the stellar level still hold.

Yes. So I think two separate two separate ideas here that are related, but, but separate. So one is the methodology that CMS used to estimate the benefit. Okay. So the methodology that they use to estimate it was based on three treatments per week, or is it said in the final rule, 156 treatments per year. So again, what they did was they looked at what they believed was they, I think they used an estimated like $40,000 Tablo ASP. And again, we have yet to submit our actual invoice pricing. So these was their guests and then over five years and divided by 156 treatments per year. So that's the calculation methodology that establishes what was estimated the final rule to be about $23, $24. But once that, 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 head picks code, which has been newly assigned to Tablo for any and all treatments that, that patient complete at home. Does that make sense?

Got it. Fair enough. And maybe in the Beal, I'll let you take this in terms of the high consumable ordered this quarter did they get it right? 6 million or maybe there was a different amount and maybe you could characterize it what's the support forward sale or what's the specific issues, customer specific issues that 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 port forward? Thank you for taking that.

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 as it's really the driver of our upside in the quarter, right? So it was a big order, but certainly not $6 million now, in terms of what, in terms of sort of these large orders, we have seen one large customer placed 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, maybe it's locked 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 it, this particular order was unique to this one customer, it is not 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 consumerable expectations into our revenue guidance that I've shared for Q4. Does that answer the questions for edge?

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.

Great. Thank you. Well, thanks to all of you for joining today and have a great evening,

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