Outset Medical, Inc. Q4 FY2020 Earnings Call

Thank you for joining us for the Outset Medical Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants are currently in a listen-only mode. After the presentations, we will have a question-and-answer session. I will now turn the call over to your speaker today, Lynn Lewis. Please proceed.

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 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 our 424 Vifor prospectus filed with the 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 dialyze 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 healthcare 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 a 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 resonates 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, its point of care mobility, and its 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 and 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 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 tailwind 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 as 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 and 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 in 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 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 $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 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. Please stand by while we compile the Q&A roster. Your first question comes from David Lewis. Your line is now open.

Good afternoon and thank you for the question, and congratulations on a strong quarter, good gross margins, and a solid start to the year in terms of guidance. I have a few points to discuss. First, Rebecca, it seems there is significant upside compared to our expectations for 2021, and I would like to clarify what that is. My first question is about the dynamics of the first quarter, which don't appear sustainable for the second through fourth quarters. Rebecca, you mentioned this in relation to HHS and backlog. Can you help us understand the main drivers behind this growth? It looks like acute care traction is important, but why wouldn’t those acute care IDNs you mentioned be sustainable after the first quarter? That’s my first question, and I have a couple more 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 dynamics on the sequential trends that you're asking about. Also, I did mention HHS. If you think about the trends in HHS, 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 the 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. To address your question about gross margin in 2021 and the forecasting period, I believe it's reasonable to anticipate a degree of forecasting margin error as we look ahead. In the first half of this year, we have specific factors that we mentioned in our prepared comments. Therefore, I don't think we can simply extrapolate quarter-by-quarter results three or four quarters into the future, but we are ahead, and this momentum will carry through the forecasting period, keeping in mind the margin of error influenced by various factors such as console mix and average selling price. Regarding home traction, Leslie can provide qualitative insights, but quantitatively, the mix you mentioned seems reasonable. We're experiencing traction primarily in the acute segment, and we also have a positive outlook, pipeline, and backlog for home, though we are being cautious with the rollout for the reasons we've discussed multiple times.

Great. Thanks so much.

Thanks, David.

And your next question is from Bob Hopkins.

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, I'm happy to comment on that. The short answer regarding patient demand is that it has likely never been higher in the past 10 to 15 years. I attribute this to the impact of COVID on the acute business, which for us is not simply a single independent sales driver nor a setback. On the home side, COVID has significantly influenced how dialysis patients perceive where, when, and how they want to dialyze. We have observed a consistent increase in patient interest and activation in pursuing home dialysis, likely due to COVID. Additionally, I believe we offer a technology that is now accessible and simple enough for patients to manage at home without apprehension. I would say that patient demand has exceeded my expectations. Beyond that, we've learned a great deal and continue to accumulate knowledge every day. We have found that the training time for Tablo is considerably shorter, even among a diverse patient population. We aimed for training to take under two weeks and have achieved that. In the current market, training typically takes four to six weeks, so reducing this to days is significant. I remain optimistic that this will help overcome adoption barriers that have previously affected the market. Furthermore, our early findings suggest that retention times for Tablo appear to be longer compared to data on retention with existing devices. Although it is still early and based on a small population, the signs are promising. I am gradually building confidence that patients will remain on home dialysis longer with Tablo. Finally, we have validated that allowing patients to dialyze three times a week at home is transformative. With conventional technology, patients are often required to dialyze five or six times a week, which has hindered adoption and retention. We have received excellent feedback from patients who are now opting for home dialysis with Tablo, who previously declined this option simply because Tablo allows them to maintain a three-times-a-week schedule like they had in the clinic. These are some key insights we have gained 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.

Thank you for the questions. Regarding the number of home patients, I don't think that's a primary focus for us right now. Our main concern is on what Leslie just discussed, ensuring that we provide a solid experience for both patients and providers. The assumptions in our guidance are relatively minor compared to total revenue. I believe that 2021 is primarily about laying the groundwork for the future. Concerning gross margin progress, that's a great question. I'd love to say that we’ve seen a shift from the non-GAAP profile we previously estimated, which was around 50% for gross margin and 20% for operating expenses. However, we're still a quarter or two away from posting public hearing, which is several years down the line. While we're pleased with our current progress and trajectory, I think it’s too early to declare any changes to that profile. We’ve made substantial progress, but we still have more work ahead of us, and hopefully, we’ll share updates on that in the future. However, I feel it’s premature to make any definitive statements at this time.

Okay, thank you. At the current pace, you'll reach that point in two quarters. Just joking. Thanks for taking the questions.

Thank you.

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

Thank you very much. I have a couple of questions. I'll start by asking about guidance, particularly on the acute side. One of the key priorities you mentioned was new agreements with top health systems. Can you provide some insight into how much visibility you have regarding that comment and how much of it is reflected in the guidance you're providing 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 contracts, 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.

To begin with the health systems, there is a diverse mix of these systems, including national and regional players, but they all share a common interest in adopting an enterprise solution. The main motivation behind this interest is the potential for economic and operational efficiencies. Health systems aim to streamline their processes by selecting a single device that can manage patients from acute care to home, instead of dealing with multiple machines for dialysis, which can be cumbersome and costly. Additionally, contracts for home care are often linked to broader enterprise solution agreements. Regarding dialysis clinic providers, we are indeed focusing on those who are moving towards the home setting. These providers are increasingly aware of changes in the healthcare landscape and may have payment models tied to value-based care. They are optimistic about the benefits of home care, including improved patient satisfaction, better quality of life, and reduced overall healthcare costs, and are actively setting goals to transition more of their patients to home treatment.

Thank you for that.

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

Good afternoon everyone, I appreciate you taking my question. Rebecca, my first question is directed at you and revolves around guidance. I'm trying to understand the level of visibility you have for the second half of the year. It seems you mentioned an increase in utilization for Q4, but given that your installed base is likely growing throughout the year, Q1 guidance accounts for over 20% of the total guidance for the year. Could you provide some insight on how you view utilization for the existing installed base? Is there any dilution occurring as you expand the installed base? How should we interpret this? That's my first question.

Yes, I'm happy to address that, Danielle. Regarding visibility into the second half, we ended the year with a significant backlog and expect to continue operating with a backlog throughout 2021. While we will ship most of the Q4 backlog in the first half, we will maintain that backlog, so our visibility should remain consistent over the year. Currently, this visibility is based on our pipeline rather than actual orders, which is typical as we progress through any given year. We feel optimistic about our visibility for the rest of 2021. As for the utilization of the installed base, our forecast for 2021 is slightly variable depending on the expectations for each of the sub-markets, but we are not predicting dilution as we add new customers. In fact, the new customers we are acquiring often involve full house conversions, which tend to be high-utilizing acute customers. We are pleased with the forecasted utilization for 2021 and are looking forward to completing whole house conversions for major health systems throughout the year.

Understood, that is very helpful. My next question relates to the acute market and what you are observing from a competitive perspective. Are your competitors becoming more aggressive with counter-detailing? This is a high-growth market, so it may not be a significant issue, but I’m curious about your observations. 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 another 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 pinch point. 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, 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. Congratulations to both of you, it's great to see you. I'll start by following up on a couple of your points. Let's talk about manufacturing. I'm not sure if it's appropriate to ask about your goals for 2021, but I'd like to discuss both the console and cartridge aspects. I have a couple of questions regarding both. If everything goes well, when will you be operating at full capacity? Specifically, when do you expect to be at 100% manufacturing for your consoles in the new facility? I might have missed this, so I apologize if you already mentioned it. Additionally, when do you anticipate being fully operational for the cartridges? Rebecca, you mentioned the gross margin benefit expected in the second half of 2021. Could you quantify that expected annualized benefit when you reach full capacity?

Yes, Rick, that makes sense. Regarding our goals for the Console, as Leslie mentioned, we are making significant progress with over 100 consoles produced so far in Q1. This number will grow sequentially, and we plan to manufacture even more in the second quarter. By the third quarter, except for business continuity planning, we will be fully operational out of Tijuana. In Q2, there will be a mix between the two facilities, and in Q3, you'll see our Mexico facility operating as the main provider. The business continuity aspect is just a precautionary measure. As for the cartridge, I won’t provide specific numbers today. However, the improvements are primarily coming from increased productivity of our second source manufacturer and lower distribution and logistics costs, since we are trucking across the border instead of shipping from Thailand. Like with the console, we will continue to maintain a portion of the business with our current contract manufacturer. It may not be worth getting caught up in the specific financial details between the two, as it will be on a blended basis, but we expect to see benefits in the second half as well.

Okay, Leslie, could you elaborate on your comments regarding some of the CMS payment or reimbursement initiatives, especially the TPNIES program you submitted? When do you realistically expect to receive feedback? What kind of payment are we discussing? If it's approved, could you help us understand the potential financial impact? I understand it may not happen this year, but whether it occurs in 2021 or 2022, how should we consider that impact?

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

Either or both, but obviously most interested in Outset.

Sure. Let me take a moment to discuss TPNIES. The significant achievement here is that this program exists at all. There hasn’t been anything like it for new technologies in the renal space before. Another positive development is the expansion to include capital equipment, which was initially limited to supplies. Additionally, the inclusion of capital equipment specifically relates to new home dialysis devices. Overall, this is great news, but since it's a new initiative, there will be a learning curve for everyone involved, including the industry and CMS. Because of this, we are approaching it cautiously and not integrating it into our projections just yet. However, we are confident in the evidence we have presented to support the application. Regarding when we can expect updates, CMS's initial commentary on TPNIES applications is usually found in the proposed rule, typically around mid-year in July. They will invite public comments, consider them, and then publish a final decision in the fall, following the same timeline. As for potential payments, it’s too early to say definitively. If our application is accepted, we would enter discussions with CMS about the pricing methodologies for calculating payment percentages. Historically, CMS has mentioned a willingness to cover about 60% to 65% of the treatment rate. More details will emerge later. We will be fortunate and grateful if we are accepted, whether in 2021 or 2022. For providers, this could encourage more patients to transition to home care with Tablo, potentially leading to a faster adoption rate for home dialysis in the coming years, favoring Tablo over other options.

Thank you for the summary. I have one more question. You've highlighted your remarkable achievement in securing contracts with six of the eight top national health systems and 20 of the top 50 regional health systems, which is impressive. Can you provide more insight into the ongoing discussions or what we might expect or hope for in 2021? Are you currently engaging with the remaining two national health systems or connecting with an additional ten regional health care systems? It would be great to get some context on what is happening. Thank you.

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.

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.

Yes, regarding COVID-related revenue, we previously estimated about $7 million for 2020, and we achieved that amount. Although we exceeded our expectations by a couple of hundred thousand dollars, we round it to $7 million. This demonstrates the value of our technology, particularly in the context of cost reduction, as COVID alone is not the main driver for adoption. Concerning your question about pull-through, I can discuss that further with you privately. We have specific expectations for each market, and our business traffic aligns with an installed base weighted basis. In the most recent quarter, our pull-through ratio was approximately 4.5 times, which is consistent with the mix of our installed base. As for same store versus new store sales, we don't plan to share those numbers regularly. The penetration is still in the early stages, but we are seeing positive growth in both areas. Overall, it's a good news story, although it's probably not necessary to quantify it at this time.

Got it. Leslie, I have a question and then I'll return to the queue. For the patients you're focusing on for home hemodialysis, how should we view these early stages? Should we see the initial targets as conversions from the existing system or are these new patients in a commercial setting? Thank you for answering my questions.

Yes, that's a great question. Interestingly, the patient selection has reflected our clinical trial findings by coincidence. We don’t choose the patients; they are invited to use Tablo for home dialysis by their providers. Notably, the patient demographics in the trial were about evenly split. Roughly half had experience with another device and had been dialyzing at home, while the other half were new to home dialysis. This real-world population has shown similar diversity. One of the most striking aspects of the trial was how closely it resembled real-life scenarios. The majority of patients had hypertension, with about 60% also having diabetes. Additionally, around 70% of the trial participants were either African American or Hispanic, which aligns with the demographics in the real-world population. We are pleased to observe such consistent results across a diverse group.

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 the 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.