NxStage Medical, Inc.

Transcription

1 NxStage Medical, Inc. Company Description: NxStage Medical, Inc., a medical device company, engages in the development, manufacture, and marketing of products for the treatment of kidney failure, fluid overload, and related blood treatments and procedures in the United States. Feltl and Company Research Department 2100 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN Matt Weight mjweight@feltl.com Health Care Services February 28, Q preview: expecting solid quarter yet stepping aside on valuation; reducing PT (NXTM - $20.87) HOLD Key Points NxStage reports 4Q11 results on Wednesday February 29 and will host a conference call at 9:00 AM EST. We are modeling 4Q11 revenue of $56.9M and EPS of ($0.07) relative to consensus estimates of $56.3M and ($0.08) and management s guidance range of $55.5-$56.5M and EPS of ($0.08-$0.10). We expect 2012 guidance will only bracket the consensus, not likely enough to sustain the momentum in NXTM shares. We are adjusting our 2012 revenues modestly lower to $244.2M and introducing 2013 estimates with revenue of $275M and EPS of $0.07. We are downgrading NXTM to a HOLD as 4.4x EV/Rev multiple appears rich without any near term catalyst to accelerate HHD adoption, and the risk of potential competition entering the market earlier than expected. Reducing our PT to $22 from $24 Preview 4Q11 results: NxStage will report its 4Q11 results before the market open on Wednesday, February 29th. We are modeling revenue of $56.9 million and EPS of ($0.07) that are slightly greater than the consensus estimates for revenue of $56.3 million and EPS of ($0.09) implying NXTM will at least meet its 4Q guidance range of revenue of $ $56.5 million and EPS of ($0.08) ( $0.10). The main controversy during the 3Q11 was the disappointing $200K sequential revenue growth in the Home division. That however was masked by a volatile quarter in the international markets, driven by recent changes in international accounting rules that no longer allow unit sales to be amortized. More importantly the U.S. market was strong increasing $1.1 million sequentially. We suspect 4Q will reflect a more normalized sequential growth pattern in Home, and despite facing seasonal weakness (i.e. fewer training sessions over the holiday s) we are modeling $1 million quarter over quarter revenue growth to $28.2 million. Critical Care has consistently outperformed during the year with NXTM reporting significant growth in the acute care segment, and while 3Q likely pulled forward some revenue we are modeling 17% growth for the quarter. Downgrading to HOLD on rich valuation without near term catalysts: We are downgrading shares of NXTM to a HOLD from BUY and reducing our PT to $22 from $24. We believe the shares have gotten ahead of the fundamentals and view current positions in NXTM as a potential source of funds. We are cognizant of the mounting clinical evidence supporting more frequent dialysis treatments, especially the studies citing improved mortality and quality of life specifically with the System One. However until the dialysis providers are better incentivized to promote HHD we do not expect adoption rates to hit an inflection point. Thus the current $1.2-$1.6 million sequential revenue growth Please see important disclosures on pages 7 to 9. Financial Summary Rev(mil) 2011E 2012E 2013E Mar $50.6A $57.4E Jun $53.8A $60.0E Sep $55.9A $61.9E Dec $56.9E $64.9E FY $217.2E $244.2E $275.1E P/Sales 5.2 x 4.6x 4.1x EPS 2011E 2012E 2013E Mar ($0.11)A ($0.06)E Jun ($0.10)A ($0.03)E Sep ($0.10)A ($0.01)E Dec ($0.07)E ($0.00)E FY ($0.39)E ($0.10)E $0.07E P/E nm nm 298.1x Price: $ Week Range: $24.85-$15.42 Target: $22.00 Rating: HOLD Shares Outstanding: 54.4mil Mkt. Capitalization: $1,135 mil Ave. Volume: 498,880 Instit. Ownership: 74% BV / Share: $2.79 Debt / Tot. Cap.: 21.7% Est. LT EPS Growth: 25%

2 4Q exceeds expectations, raising estimates and price tar rate should continue in the Home division, which isn t necessarily a negative aspect but we believe to maintain its current premium valuation multiple a higher rate of revenue growth is required. Our downgrade is not a reflection of deteriorating fundamentals or near term competitive positioning, but rather we believe the risk / reward proposition at 4.4X 2012 EV/Sales is not sufficient to warrant a BUY recommendation. NxStage Medical is scheduled to report 4Q11 earnings on Wednesday, February 29 before the market open. We are modeling revenue of $56.9 million and EPS of ($0.07) relative to the consensus of $56.3 million and EPS of ($0.09). We expect NXTM will report greater sequential Home revenue growth of $1 million relative to 3Q11 $200 million sequential growth that was impacted by international sales that surprisingly declined. We are downgrading the shares of NXTM to a HOLD from a BUY as the run up in the stock has expanded the EV/Revenue multiple to 4.4x which we believe presents an unattractive near term risk / reward profile given our view of a lack of near term catalysts combined with 4Q results and likely 2012 guidance that will only be inline with the consensus. We estimate the Home division can continue growing in a linear fashion approximately 16%-19% annually over the next few years as we believe HHD penetration grows from 1.5% to 2.5% by We expect this will translate into 12%-13% total revenue growth as Medisystem normalizes near 3%-4% growth and Critical Care s growth settles into a 10%-13% range. We believe it will be difficult for NXTM shares to sustain its current valuation multiple under that scenario. Unless there is a positive announcement that will accelerate HHD adoption rates we believe the current valuation appears full. This is not a call of deteriorating fundamentals, rather we believe premium valuation multiples require better than expected results, and given our current near term views we believe investors can find more attractive investment opportunities. The factors driving our downgrade include: We understand the clinical evidence for HHD continues mounting; however we do not believe that alone will accelerate the current growth trajectory. We do not expect CMS will improve Medicare reimbursement for more frequent dialysis over the next year, which we believe is required to achieve an inflection point in HHD penetration. We expect 2012 revenue guidance will only bracket the consensus, which we do not view as a near-term catalyst given the current premium valuation multiple. Fresenius (FMS HOLD) expects file for U.S. approval for its portable artificial kidney (PAK) machine in late 2012 with intentions to market in late 2013 that is likely earlier than investor expectations. NXTM shares have significantly outperformed YTD increasing 17.4% vs. 4.0% for the S&P Health Care Index and 10.6% for the S&P 600 Small Cap index. Valuation multiple appears full at 4.4x 2012 EV/Sales that is at the top of its median peer group. Mounting clinical evidence for more frequent dialysis is encouraging, but not enough to hit an inflection point: Clinical evidence supporting the claim that more frequent dialysis (5-6x per week) provides better outcomes than conventional thrice weekly continues mounting. Most recently the Frequent Hemodialysis Network (FHN) conducted a randomized trial reporting results of those undergoing dialysis treatments a average of 5.2x per week showed favorable results regarding mortality and change in left ventricular mass. Supporting these results was the Chronic Disease Research Group that conducted a matched comparison trial of 1,973 NxStage users with 9,365 in-center patients concluding that the more frequent home dialysis patient population experienced a 13% to 18% lower risk of mortality than the in-center thrice weekly patients. These were followed by NxStage s own FREEDOM study interim results for those conducting daily dialysis that reflected a significant decrease in anti-hypertension medications, a reduction in restless leg syndrome, lower depression scores, higher quality of sleep and a significant reduction in dialysis treatment recover time. Clinical evidence supporting the use of more frequent dialysis is clearly positive for increasing adoption rates over the long term. However we do not believe this clinical evidence has resulted in the large dialysis providers driving increased HHD penetration. We are skeptical under the current reimbursement structure that the clinical evidence alone can change the dialysis provider s behaviors. At this point we believe a large majority of the current System One users were driven onto NXTM by the patients and nephrologists, of which the clinical evidence most likely played a significant role in their modality decision. Therefore we believe the impressive clinical evidence is more supportive of continued linear patient growth. But with NXTM shares trading at 4.4x EV/Revenue an accelerating ramp in adoption rates is likely required to maintain what we believe is a premium valuation level. Incentivizing the dialysis providers through more predictable reimbursement: Given the mounting clinical evidence investors are likely surprised that HHD adoption remains low at approximately 1.5% of all ESRD patients. While low HHD awareness among patients, nurses and even physicians has impacted penetration rates, we believe the dialysis providers reluctances to aggressively promote or build out their own home dialysis programs has been the main factor keeping Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 2

3 4Q exceeds expectations, raising estimates and price tar adoption rates low. We believe this is largely a function of reimbursement for more frequent dialysis treatments and considering commercial insurance already largely pays for the 5x-6x weekly dialysis treatments the issue most likely surrounds Medicare reimbursement. Medicare reimburses the dialysis providers for three treatments per week (weather its in-center or at home) and will pay for more treatments to the extent medical justification is awarded. We understand it s rare for medical justification to be denied, however from a dialysis provider s perspective the simply threat that Medicare could change the benchmark regarding what is awarded medical justification likely results in some centers progressing very slowly in terms of expanding their HHD programs. While an independent study reflected that in 2009 CMS paid for an average of 4.3x weekly dialysis treatments, the perception of unpredictable reimbursement continues to exist. Until there is a change in how CMS reimburses for more frequent dialysis we struggle to identify the catalyst to drive the dialysis providers to promote greater HHD adoption, and thus the current sequential growth of $1.2-$1.6 million is likely to persist. Again that is not necessarily bad, but we believe the shares are discounting a greater level of growth. Some investors believe CMS implementing the bundled prospective payment system for ESRD Medicare patients will ultimately driver greater home dialysis. We believe peritoneal dialysis has been the greatest beneficiary of this given its lack of ESA drug requirements. However we have not yet seen any evidence that the bundle will be a positive for HHD. We believe improving the HHD training add-on of $34/session would certainly help. CMS currently reimburses up to 25 HHD training sessions which at $34 per session likely results in an operating loss given our estimate that the total training cost is approximately $3,000-$4,000. With relatively high, albeit stable drop-out rates and a loss leader in training sessions and unpredictable reimbursement it s not difficult to envision how the financial incentives have not necessarily pushed the providers to heavily promote HHD. Could the FREEDOM interim results improve reimbursement? NXTM intends to release interim data from its FREEDOM study in the first half of 2012 comparing System One users and in-center HD patients total cost of care and hospitalization days. We believe this presents one of the greatest risks in moving our recommendation to a HOLD. To the extent the interim FREEDOM data reflects lower hospitalization days and lower total cost of care we believe NXTM will have a more powerful case to argue for more predicable reimbursement, especially when considering the clinical data. However we do not expect CMS to make any change to improve reimbursement over the next year. We believe the current fiscal environment presents a challenge to improving Medicare reimbursement as it would require CMS to spend more money on the front end, and while that could ultimately save money over the longer term (assuming HHD has a lower total costs of care) we believe the present financial constraints will win out. Furthermore, CMS has plenty on its plate including the implementation of ACO s throughout the healthcare sector, and according to DaVita (DVA STRONG BUY) and FMS there has been increasing conversations with CMS about an integrated care pilot program for ESRD patients, which we also believe is likely to consume significant attention from Washington. All told we believe the clinical evidence in HHD is impressive, but we do not believe CMS has the wherewithal to tackle reimbursement changes for more frequent dialysis treatments over the near term, nor is the current fiscal situation supportive of making changes that would initially result in a greater cost outlay, in our opinion. Finally we believe it s a fairly consensus thought that the FREEDOM results will reflect lower hospital days and total cost of care. From a risk / reward perspective we worry the market could be disappointed if the results are not as strong as the clinical data has been to date. Inline 2012 guidance may not be enough: NxStage will release its 2012 guidance in conjunction with its 4Q11 earnings. We expect management will issue 2012 revenue guidance in a range of $240 million to $247 million relative to our estimate of $244 million and the consensus of $245 million. We do not believe guidance that is essentially inline with the consensus will be enough to sustain the momentum in NXTM shares. We believe management is comfortable with Home continuing its sequential revenue growth of $1.2 million to $1.6 million. Combined with our thesis that there is nothing from the reimbursement front that could accelerate that growth trajectory over the near term we believe it s unlikely the company will issue guidance that reflects a greater growth profile for Home. After an unusually strong year we expect Medisystem will normalize growing closer to the historical ESRD patient growth rate near 4%. If our estimates prove conservative it will likely come from Critical Care (we are modeling 17% growth in 2012) that has exceeded expectations this year on excellent selling success in the acute care market. Will competition come sooner than expected? NXTM s first mover advantage without any truly formable competition has allowed itself to establish a strong brand name and market position, and this enviable position is definitely reflected in its valuation in our opinion. While the company has consistently stated they expect competitors will eventually enter the market there has not been a true near term threat. Baxter (BAX not rated) at one time appeared closest but continues experiencing delays that has resulted in pushing its timeline back to 2014, which given its history could prove optimistic. We believe the greatest competitive threat could come from Fresenius portable artificial kidney (PAK) machine utilizing its sorbent technology. Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 3

4 4Q exceeds expectations, raising estimates and price tar On Fresenius recent quarterly conference call management stated its very close to filing with the U.S. authorities with hopes to be using the PAK in their assisted dialysis clinic study this year, and in 2013 intends to market towards HHD patients. We acknowledge there has not been much data on the PAK machine at this point so we re essentially going off of management s recent statements, and understand obtaining approval for HHD has not been easy for any company. While the actual financial impact to NXTM in terms of competitive pressures will likely not surface until 2014 we believe the announcement of filing and a potential approval for the PAK represents a serious near term threat to NXTM share price. We expect NXTM shares will take a pause after the recent strength: NxStage shares have enjoyed a strong rebound year to date increasing 17.4%, significantly outperforming the S&P Health Care index gain of 4.0% and the S&P 600 Small Cap gain of 10.6% gain. Outside of some additional supportive clinical data on more frequent dialysis treatments we do not believe there has been anything company specific to drive this level of outperformance was certainly a challenging year with 2Q11 and 3Q11 results having more noise than typical so a recovery in NXTM share price was warranted. However under our thesis of essentially inline 4Q results and 2012 guidance, along with no improvement to Medicare reimbursement we do not foresee catalysts to continue the recent momentum in NXTM shares. Figure 1: Price Performance YTD (2/27/12) 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% TRNX VOLC ABMD NXTM DXCM ELGX S&P 600 PODD HTWR LMNX THOR EW S&P HC Figure 2: Price Performance Last Twelve Months (2/27/12) 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% ELGX ABMD TRNX THOR LMNX PODD S&P HC VOLC S&P- 600 NXTM HTWR EW DXCM Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 4

5 4Q exceeds expectations, raising estimates and price tar Valuation looks full compared to its peers: NXTM is trading at 4.4x and 3.9x EV/Revenue based on Feltl 2012 and 2013 estimates. These are both at the median peer group as reflected below. Based on our estimates, NXTM will generate slightly lower growth than the peer median rate and while NXTM is unique in that it presently enjoys a monopoly position we believe it would be difficult to realize any more multiple expansion under this growth profile. Without the multiple expansion and our view that the current growth trajectory is unlikely to deviate from its $1.2 million to $1.6 million growth rate we believe it will be difficult to see incremental appreciation in the stock over the near term. Market Enterprise Revenue Growth Rev EV/ Sales Company Name Ticker Price Cap (mil) Value (mil) E 2013E CAGR ABIOMED ABMD $21.90 $854 $784 18% 23% 22% 18% 20% 7.8x 6.3x 5.2x 4.4x DEXCOM DXCM $10.71 $723 $626 64% 55% 27% 34% 44% 12.9x 8.3x 6.5x 4.9x EDWARDS LIFESCIENCES EW $73.57 $8,392 $8,092 10% 16% 18% 15% 15% 5.6x 4.8x 4.1x 3.6x ENDOLOGIX ELGX $12.90 $744 $724 28% 24% 26% 32% 28% 10.8x 8.7x 6.9x 5.2x HEARTWARE HTWR $74.08 $1,041 $ % 50% 35% 68% 67% 17.6x 11.7x 8.7x 5.2x INSULET CORP PODD $20.46 $970 $984 47% 57% 41% 25% 42% 10.2x 6.5x 4.6x 3.7x LUMINEX LMNX $22.52 $949 $851 17% 30% 14% 13% 19% 6.0x 4.6x 4.0x 3.6x THORATEC CORP THOR $35.53 $2,076 $1,883 37% 10% 8% 5% 14% 4.9x 4.5x 4.1x 3.9x TORNIER TRNX $24.43 $959 $949 13% 14% 9% 10% 12% 4.2x 3.6x 3.3x 3.0x VOLCANO CORP VOLC $28.73 $1,512 $1,388 29% 17% 16% 15% 19% 4.7x 4.0x 3.5x 3.0x Group Average $1,335 44% 28% 20% 22% 31% 8.5x 6.3x 5.1x 4.0x Group Median $960 29% 23% 20% 17% 20% 6.9x 5.6x 4.3x 3.8x NXSTAGE MEDICAL INC NXTM $20.87 $1,136 $1,077 21% 21% 12% 13% 17% 6.0x 5.0x 4.4x 3.9x Source: Thomson Reuters and Feltl estimates Model changes and introducing 2013 estimates: We are making modest changes to our model that result in reducing our 2012 revenue estimate to $244.2 million from $247.3 million and our EPS estimate declines to ($0.10) from ($0.04). We brought down our estimate for System One patient additions that now reflect sequential revenue growth of $1.4 million to $1.6 million. We reduced our gross margin expansion assumptions as the transition of the blood tubing sets to the Mexico facility will not be completed until sometime during the 1Q12, and we prefer to take a more conservative view as to the benefit NXTM will realize with this transition. We are modeling 2013 revenue to grow 13% to $275 million with Home revenue growing 19% and Medisystem s and Critical Care increasing 3.4% and 10% respectively. We expect the company will generate its first profitable quarter during 2Q13 and finish with EPS of $0.07 for the full year. Reducing price target on sum of the parts analysis: We are reducing our price target to $22 from $24 based on 4.2X 2013 EV/Revenue. We achieve our price target utilizing a 6x EV/Revenue multiple for the Home division that we believe is appropriate given our estimate of approximately 20% growth while maintaining its monopoly position. We believe there is risk to our valuation multiple to the extent a competitor enters the market earlier than expected. Valuation Analysis: Sum of the Parts 2013E Revenue EV/Revenue Critical Care $ x $135 Home $ x $907 Medisystems $ x $119 $ x $1,160 Net Debt ($40.3) $1,200 Diluted S/O 54.4 Price Target $22.06 Investment Thesis: NxStage is the leader in home hemodialysis with the only FDA approved HHD machine that is portable. NXTM has enjoyed a first mover advantage over the past few years that has allowed it to establish a strong brand name within the dialysis community. The clinical evidence supporting more frequent dialysis treatments continues mounting and while that will resonate with physicians and patients we believe structural changes to Medicare reimbursement are required for the company to hit an inflection point in HHD adoption. We believe 4Q results and 2012 guidance will essentially be inline which we do not expect will be enough to sustain the momentum in NXTM shares. With NXTM stock trading at the median of its peer group at 4.4x EV/Revenue we believe the stock s valuation is full and without any catalysts to accelerate its revenue growth profile we are lowering our rating to a HOLD from a BUY and reducing our price target to $22 from $24. While we believe the near term fundamentals remain intact the valuation is not attractive enough to warrant a BUY recommendation and believe investors can find more attractive investment alternatives and would advise investors to wait for a pull back before initiating any new positions in NXTM. Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 5

6 $ in 000's Q 2Q 3Q 4Q QA 2QA 3QA 4QE 2011E 1QE 2QE 3QE 4QE 2012E 2013E Critical Care $22,340 $6,059 $6,652 $6,817 $8,565 $28,093 $7,438 $8,591 $9,170 $10,070 $35,269 $9,024 $9,973 $10,285 $11,644 $40,925 $44,938 Home 63,461 19,043 20,815 22,346 23,558 85,762 26,045 27,013 27,218 28, ,541 29,579 30,982 32,436 33, , ,125 Medisystems 62,875 15,306 16,541 15,870 17,646 65,363 17,081 18,164 19,515 18,625 73,385 18,817 19,009 19,201 19,393 76,421 79,017 Total Revenue 148,676 40,408 44,008 45,033 49, ,218 50,564 53,768 55,903 56, ,195 57,421 59,964 61,922 64, , ,080 System One 64,538 16,462 17,711 18,192 19,226 71,591 19,562 20,579 20,978 21,467 82,586 21,232 22,116 22,642 23,682 89, ,850 In Center 47,274 12,133 12,535 11,888 12,951 49,507 12,969 14,324 15,386 14,435 57,113 14,583 14,542 14,401 14,448 57,975 58,072 Cost of Goods Sold 111,812 28,595 30,246 30,073 32, ,098 32,531 34,903 36,363 35, ,699 35,815 36,658 37,043 38, , ,922 Gross Profit 36,864 11,813 13,762 14,960 17,592 58,120 18,033 18,865 19,540 21,058 77,496 21,605 23,307 24,879 26,806 96, ,158 Sales and Marketing 30,047 8,017 8,565 8,452 9,132 34,166 9,210 9,369 9,446 9,557 37,582 9,043 9,332 9,483 9,817 37,674 40,779 Research and Development 9,814 3,035 3,202 3,132 3,531 12,900 3,717 3,589 3,388 3,588 14,282 4,192 4,018 4,149 4,416 16,774 18,980 Distribution 13,918 3,411 3,632 3,788 3,920 14,751 4,158 4,431 4,709 4,785 18,083 4,709 4,917 5,078 5,325 20,028 22,281 General and Administrative 19,532 4,938 5,643 6,023 6,170 22,774 5,582 5,460 5,708 5,924 22,674 5,685 5,637 5,883 6,169 23,373 24,947 Operating Income (36,447) (7,588) (7,280) (6,435) (5,161) (26,471) (4,634) (3,984) (3,711) (2,796) (15,125) (2,022) (596) 287 1,080 (1,251) 9,170 Interest Income Interest Expense 6,790 1,108 1,148 1,176 (1,165) 2,267 1,157 1,170 1,186 1,100 4,613 1,100 1,100 1,100 1,100 4,400 3,540 Other Expense (Income) (330) Pre-Tax Income (43,202) (8,813) (8,098) (7,952) (4,235) (29,105) (5,817) (5,324) (5,043) (3,896) (20,080) (3,122) (1,696) (813) (20) (5,651) 5,630 Income Tax Provision (1) 224 1,689 Net Income (43,467) (8,999) (8,256) (8,164) (4,447) (29,873) (6,010) (5,550) (5,278) (4,090) (20,929) (3,247) (1,764) (845) (19) (5,876) 3,941 EPS ($0.93) ($0.19) ($0.17) ($0.17) ($0.09) ($0.62) ($0.11) ($0.10) ($0.10) ($0.07) ($0.39) ($0.06) ($0.03) ($0.01) ($0.00) ($0.10) $0.07 Shares 46,627 46,971 47,492 48,049 50,233 48,186 53,423 54,014 54,428 54,972 54,209 55,522 56,077 56,638 57,204 56,360 58,649 COGS 75.2% 70.8% 68.7% 66.8% 64.7% 67.6% 64.3% 64.9% 65.0% 63.0% 64.3% 62.4% 61.1% 59.8% 58.7% 60.5% 57.8% S&M 20.2% 19.8% 19.5% 19.0% 18.3% 19.1% 18.3% 17.4% 16.9% 16.8% 17.3% 15.7% 15.6% 15.3% 15.1% 15.4% 14.8% R&D 6.6% 7.5% 7.3% 7.0% 7.1% 7.2% 7.4% 6.7% 6.1% 6.3% 6.6% 7.3% 6.7% 6.7% 6.8% 6.9% 6.9% Dist 9.4% 8.4% 8.3% 8.4% 7.9% 8.2% 8.2% 8.2% 8.4% 8.4% 8.3% 8.2% 8.2% 8.2% 8.2% 8.2% 8.1% G&A 13.1% 12.2% 12.8% 13.4% 12.4% 12.7% 11.0% 10.2% 10.2% 10.4% 10.4% 9.9% 9.4% 9.5% 9.5% 9.6% 9.1% System One GM 24.8% 34.4% 35.5% 37.6% 40.2% 37.1% 41.6% 42.2% 42.4% 44.0% 42.6% 45.0% 46.0% 47.0% 48.0% 46.6% 48.6% Medisystems GM 24.8% 20.7% 24.2% 25.1% 26.6% 24.3% 24.1% 21.1% 21.2% 22.5% 22.2% 22.5% 23.5% 25.0% 25.5% 24.1% 26.5% Gross Margin 24.8% 29.2% 31.3% 33.2% 35.3% 32.4% 35.7% 35.1% 35.0% 37.0% 35.7% 37.6% 38.9% 40.2% 41.3% 39.5% 42.2% Operating Margin -24.5% -18.8% -16.5% -14.3% -10.4% -14.8% -9.2% -7.4% -6.6% -4.9% -7.0% -3.5% -1.0% 0.5% 1.7% -0.5% 3.3% EBITDA (15,669) (2,124) (1,667) (633) 339 (4,092) 1,056 2,460 1,570 2,485 7,571 4,227 5,760 6,777 7,677 24,441 36,924 EBITDA Margin -10.5% -5.3% -3.8% -1.4% 0.7% -2.3% 2.1% 4.6% 2.8% 4.4% 3.5% 7.4% 9.6% 10.9% 11.8% 10.0% 13.4% Growth Critical Care 20.4% 35.6% 26.9% 20.2% 23.1% 25.8% 22.8% 29.1% 34.5% 17.6% 25.5% 21.3% 16.1% 12.2% 15.6% 16.0% 9.8% Home 31.3% 32.7% 36.9% 36.6% 34.3% 35.1% 36.8% 29.8% 21.8% 20.0% 26.6% 13.6% 14.7% 19.2% 19.9% 16.9% 19.1% Medisystems 1.6% 2.6% 3.7% -0.8% 10.3% 4.0% 11.6% 9.8% 23.0% 5.5% 12.3% 10.2% 4.7% -1.6% 4.1% 4.1% 3.4% Revenue 15.5% 19.8% 20.9% 18.4% 22.9% 20.5% 25.1% 22.2% 24.1% 14.4% 21.2% 13.6% 11.5% 10.8% 14.0% 12.5% 12.6% Operating Income -27.1% -32.4% -20.3% -25.9% -30.3% -27.4% -38.9% -45.3% -42.3% -55.2% -45.1% -56.4% -85.0% % % -91.7% % EBITDA -49.1% -65.2% -58.6% -82.2% % -73.9% % % % % % 300.3% 222.7% 201.9% 142.1% 196.0% 51.1% Net Income -15.1% -26.4% -34.0% -18.7% -48.8% -31.3% -33.2% -32.8% -35.3% -26.0% -32.4% -46.0% -68.2% -84.0% -99.5% -71.9% % EPS NM NM NM NM NM NM NM NM -42.9% -32.4% -39.9% -48.0% -69.4% -84.6% -99.5% -73.0% % Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 6

7 Analyst Certification I, Matt Weight, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Important Disclosures: The analyst or a member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part of the company s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. 2/28/2012 Ratings Distribution for Feltl and Company Investment Banking Number of Percent Number of Percent of Rating Stocks of Total Stocks Rating category SB/Buy 40 65% 3 8% Hold 20 32% 0 0% Sell 2 3% 0 0% % 3 5% The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months. Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 7

8 09/15/10 BUY Target: $19 11/5/10 BUY Target: $24 11/19/10 BUY Target: $23 1/17/11 BUY Target: $ /05/11 BUY Target: $ /28/12 HOLD Target: Date Nature of Report Rating Price Target 9/15/10 BUY $19 11/5/10 3q raising price target BUY $24 11/19/10 Baxter/DEKA IDE BUY $23 12/8/10 Investor meetings BUY $23 1/17/11 4q results BUY $ /05/11 1q results BUY $ /16/11 Management meeting BUY $ /04/11 2q results BUY $ /11/11 NxStage Users Conference BUY $ /4/11 3q results BUY $ /28/12 4q preview HOLD $22.00 Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Valuation and Price Target Methodology: Our price target on NXTM is based on a EV/Revenue multiple on FY2013 revenue that is in line with the average multiple accorded high growth medical technology companies. Risks to Achievement of Estimates and Price Target: The home hemodialysis market is small relative to other modes of dialysis and development is unpredictable NxStage has limited operating history and has never operated as a profitable entity on a GAAP basis. NXStage customers are highly consolidated and failure to access patients cared for by the two largest facility operators would severely limit NxStage s market opportunity. NxStage operates in a highly regulated market and failure to maintain quality in its manufacturing processes could lead to a product recall. Competition could limit the company s end market opportunity. Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 8

9 Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request. Feltl and Company Research Department NxStage Medical, Inc. (NXTM) Page 9

10 EQUITY CAPITAL MARKETS DIRECTORY RESEARCH DEPARTMENT INSTITUTIONAL SALES: (866) Brent R. Rystrom Director of Equity Research (612) Ernest W. Andberg, CFA (612) Mark E. Smith (612) Scott R. Berg (612) Ty M. Lilja (612) Ben C. Haynor, CFA (612) Matt J. Weight (612) Shawn P. Bitzan (612) TRADING: (866) Thomas J. Walters Equity Trading (612) Christopher S. Modene Equity Trading (612) Elliott M. Randolph Institutional Sales Trading (612) Cory N. Carlson Institutional Sales Trading (612) Luke J. Weimerskirch (612) Mark A. Hagen (612) Ryan M. Quade (612) Brandt B. Wendland (612) Jeff R. Sonnek (612) Matt J. Rasmussen (612) Mike T. Larson (612) LASALLE PLAZA, 800 LASALLE AVENUE MINNEAPOLIS, MINNESOTA (612) (866) MEMBER SIPC & FINRA