By Jay Smith

According to SEC filings, Steve Cohen's Point 72 has accumulated 3,163,744 shares in NxStage Medical (NASDAQ:NXTM). 3.16 million shares is 5% of NxStage Medical's float and is a major position relative to the average daily volume of 486,000 shares. Cohen joins James Flynn's Deerfield Management and Justin Ferayorni's Tamarack Capital Management as major holders of NxStage Medical.

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NxStage Medical is a medical device company that manufactures products for end stage kidney failure. The company has three segments, a segment that sells a home dialysis product named System One, a services segment that provides dialysis services at NxStage owned dialysis centers, and a segment that sells blood tubing sets and needles to non-NxStage dialysis centers.

NxStage's home dialysis product, System One, accounts for the majority of the company's revenues. It accounted for 71% in 2014 while the segment that sells blood tubing and needles to other dialysis centers accounted for roughly 26% of total revenues in 2014.

System One is the first and only portable hemodialysis system approved for home use by the FDA. It is also the first and only system cleared for home nocturnal hemodialysis by the FDA. The product has successfully delivered ten million treatments to thousands of patients with end stage renal disease. It has also delivered better health outcomes than alternatives. According to NxStage Medical's annual report, a study showed that more frequent application of System One lowers mortality by 16%, lowers hospitalization outcomes by 8%, and ensures better patient compliance versus the other home therapy alternative, peritoneal dialysis. Patients that use System One five to six times a week better mimic natural kidney behavior than patients that do dialysis three times a week at traditional dialysis centers.

Because of System One's value proposition, NxStage revenues have grown around 14-15% year over year, growing from in $149 million in revenues in 2009 to $301 million in revenues in 2014.

While NxStage revenues have increased, the company is not profitable. Analysts expect the NxStage Medical to lose $0.36 per share in 2015 and to lose $0.26 per share in 2016. NxStage's customer base is also concentrated. Because Medicare rules require all chronic end stage renal disease patients to be under care of a dialysis clinic, NxStage sells System One to dialysis clinics even though the patients are using System One for home treatment, making the dialysis chains DaVita and Fresenius NxStage Medical's largest customers. In 2014, DaVita represented 30% of System One sales and Fresenius represented 22% of sales. The large concentration gives DaVita and Fresenius pricing power, lowering NxStage's margins.

NxStage hopes to be profitable and cash flow positive in three years. It plans to do this by increasing demand for System One by doing more direct customer advertising, selling internationally, and by adding more features into System One to broaden the product's addressable market to a larger subset of patients among the chronic and critical care dialysis markets. If this occurs, System One's gross margins should rise above 50% and make the company profitable. In the medium term, NxStage also plans to launch a new peritoneal dialysis product.

NxStage shares are difficult to value because the company is not profitable and the validity of management's roadmap is uncertain without knowing the added features NxStage hopes to introduce in System One. Also, although the company is targeting a multi-billion dollar market in treating ESRD and has a superior and differentiated product, home hemodialysis has not replaced peritoneal dialysis as the standard of care for home dialysis. Establishing home hemodialysis as the standard of care requires the medical community to change its views and upgrade its infrastructure, which will take significant amounts of time. Medicare also only pays for dialysis three times a week, not the five or six times a week that System One requires to generate better healthcare outcomes. Because of these factors, NxStage's upside is uncertain.

Disclosure:The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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