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NxStage Medical Rebounds on Wall Street, Looks to Grow Home Dialysis Biz

Xconomy Boston — 

For a while last year, it looked like investors had lost faith in NxStage Medical. But the Lawrence, MA-based company (NASDAQ:NXTM), which makes portable dialysis machines for kidney failure patients, found its stride last May when it struck a financing and partnership deal with Japanese medical supplies firm Asahi Kasei Kuraray Medical.

The Asahi deal included a $40 million loan that enabled NxStage to pay off more expensive debts of about $30 million to GE Capital. Asahi also agreed to market NxStage’s kidney dialysis system in the Asian market under its own brand, among other facets of the agreement between the two firms. And since the deal, NxStage’s stock has been booming. The stock price hit its nadir at $1.90 per share just days before the Asahi deal was announced on May 18, and by last Friday, the stock closed at $8.11 per share.

NxStage is blazing a new trail by providing the first system that makes hemodialysis in the home a practical option for people whose kidneys can no longer remove toxins and water from their blood. It’s been hard work for the company to convince the healthcare providers to adopt home-based hemodialysis as opposed to the standard practice of having patients travel to centralized dialysis treatment facilities. The company also competes for the attention of doctors with industry giants such as Fresenius and Baxter International.

Nevertheless, NxStage has seen its sales grow consistently in recent years, in large part because more and more healthcare providers have warmed up to its portable hemodialysis machine, called System One. In November, the company reported that its revenue for the first nine months of 2009 was $108.2 million, up 16 percent from its $93.1 million in revenue from the same period of 2008. Yet the company’s sales of System One, which was launched after it was cleared for the U.S. market in 2005, haven’t been enough to make the business profitable.

“We’ve had a very consistent and predictable performance across multiple metrics,” says CEO Jeff Burbank, “Having done that for eight consecutive quarters now, that’s starting to build some confidence.”

No company before NxStage had succeeded in bringing a practical device for home hemodialysis to market. (Wealthy people had installed hulking hemodialysis machines like the ones used in clinics in their homes for decades, but those systems require professional clinical assistance as well as plumbing and electrical infrastructure upgrades that are impractical for most people with kidney failure.) The NxStage system, which is about the size of an old-school computer monitor, features several key innovations. One of them is a disposable cartridge loaded with the blood and fluid circuits. Burbank says that precise fluid management is a key to the overall function of the system. The system also had to be easily operated by patients, or a family caregiver, for them to use it in their homes.

Indeed, the company is years ahead of its competitors in providing home-based hemodialysis. Still, Burbank is keeping track of his neighbors to the north at DEKA Research and Development. That is the prolific inventor Dean Kamen’s Manchester, NH-based contract R&D firm, which is developing a home hemodialysis system on behalf of Deerfield, IL-based Baxter (NYSE:BAX). Baxter has been pumping $25 million a year into the project at DEKA since 2007, according to its annual reports for 2007 and 2008. Baxter’s system was expected to enter clinical trials in 2009.

Burbank says that machine that DEKA is developing for Baxter is likely to be years away from the market, and he believes that the competition from Baxter will actually help grow the market for home hemodialysis. Unfortunately, there has been a rapid increase in the number of Americans with diabetes and high blood pressure, the two leading causes of kidney failure. There are already more than half a million people in the U.S. with kidney failure that requires dialysis treatment, and many more with less-severe kidney problems that may end up on dialysis, according to the National Institutes of Health.

Kidney transplants are the best option for people with kidney failure, but someone could wait for years for a donated kidney. Yet the vast majority of patients with kidney failure are treated with hemodialysis in clinics. Though those patients typically go to their dialysis centers three times a week, Burbank said, studies have shown that more frequent hemodialysis helps patients stay healthier and live longer. (The company has also gathered evidence that use of System One reduces depressive symptoms, compared with patients who traveled to dialysis clinics.) He decided to start NxStage to develop machines that could be used by patients in their homes, where patients could more easily get more frequent treatments than traveling to a dialysis center. Hospitals are another large market for the company’s portable systems, which can be brought into a patient’s room rather than moving them to a dialysis clinic.

Still, there are an estimated several thousand patients using NxStage’s system. (The company doesn’t reveal exact numbers of patients.) And while the system offers potential health benefits, Burbank says that the company believes that its market is about 10 percent to 15 percent of people with kidney failure. He agreed that patients who want to adopt the firm’s technology are those who want to take charge of their care. (The truth is that many sick patients don’t take pills like they’re supposed to, which means that taking on the responsibility of managing hemodialysis in their homes may be too much for some people.)

A big plus in the company’s strategy is that it’s not entirely focused on selling equipment. Rather, the company receives about $18,000 per patient per year, a sum that covers the use of the system as well as the disposable cartridges and supplies of dialysate, which is the fluid used to clean the patient’s blood and replace electrolytes during hemodialysis. This means that the company gets recurring revenues from each system it deploys, rather than relying on one-off sales of medical equipment for all of its revenue. The 1,400-employee company also sells accessories for hemodialysis machines.

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