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Wider Losses Worry NxStage Medical Shareholders

By Dan Caplinger - Feb 26, 2018 at 10:37AM

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An increasing discount to the buyout price for the dialysis specialist's stock is raising concerns.

Mergers are exciting opportunities for companies, and investors were initially happy when home dialysis equipment specialist NxStage Medical (NXTM) got a buyout bid from larger industry player Fresenius Health Care (FMS -0.68%) in 2017. Yet after seeing its stock jump almost all the way to the full value of the $30 per share cash bid, NxStage has since watched its shares steadily lose ground, and they now stand more than 20% below the proposed purchase price for the acquisition.

As is typical for companies subject to merger agreements, NxStage made its fourth-quarter and full-year 2017 financial report available only through a Securities and Exchange Commission filing earlier this month rather than issuing a more standard press release. Despite solid revenue, a larger loss than expected raised some new concerns about what could lie ahead for the company. Let's look more closely at NxStage Medical and what its latest results say about how it's doing.

A smiling man sitting in a black leather chair reading, next to a home dialysis machine.

Image source: NxStage Medical.

A mixed finish for 2017

NxStage Medical's fourth-quarter results were mixed. Revenue of $103.6 million was up 11% from year-earlier figures and about $1 million higher than most had expected. But NxStage posted a net loss of $2.3 million, and that worked out to $0.03 per share, which was worse than the consensus forecast for just a $0.01-per-share loss.

For the full year, NxStage saw a similar trend. Total revenue rose 7.5% to $393.9 million, sustaining moderate growth. However, operating expenses grew at a much faster 16.5% pace, and that caused NxStage's net losses to widen to $14.5 million, or $0.22 per share. That was triple the $0.07-per-share loss that the company suffered in 2016.

On the revenue side, NxStage closed 2017 in a manner similar to what investors have seen throughout the year. Full-year revenue from the System One home unit segment climbed 8%, and segment profitability was even more attractive, rising 10% from year-earlier figures. However, the smaller in-center segment suffered a modest 3% sales decline, and segment profits were down almost 20% on overall weakness for the unit. Sales in the other products unit were down 3% as well, and despite sizable gains in services-related revenue, net loss for the segment narrowed only slightly from 2016 levels.

Total sales to NxStage's biggest customers continued to became a more important part of its overall business. DaVita (DVA -1.84%) stayed steady with a 20% share of NxStage's business in 2017, but Fresenius saw its share rise from 18% in 2016 to 20% over the past year.

Operating expenses once again were problematic for NxStage. Rising costs of goods sold, research and development expenses, and overhead costs all climbed, in most cases at a faster pace than sales gains. Even with the merger outstanding, NxStage has had to keep investing in its business to cover contingencies and keep up its obligations to Fresenius under the proposed agreement.

Will the NxStage merger go forward?

The Fresenius merger has gotten approval of shareholders and passed through antitrust clearance in Germany and the U.K., and the companies have until early August to complete the deal. In the event that the deal doesn't go through, then NxStage would receive a $100 million breakup fee unless it accepts a rival bid that a competitor makes -- something that seems unlikely at this juncture.

However, NxStage acknowledges that there are still significant risks associated with the merger. The deal takes away some of management's attention from its current operations, and it also requires NxStage to operate in a manner consistent with past practice. That takes away some of its competitive flexibility. Moreover, requests for further information from the Federal Trade Commission suggest that U.S. antitrust authorities might not be as willing to grant their approval as their counterparts abroad have been.

NxStage stock pushed slightly higher immediately after the company filed its annual report with the SEC, but it has since fallen back toward its lowest levels in nearly a year. Until there's more clarity about what's happening with the merger process, NxStage shareholders will have to deal with potential volatility as uncertainties remain.

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Stocks Mentioned

Nxstage Medical, Inc. Stock Quote
Nxstage Medical, Inc.
Fresenius Medical Care AG & Co. KGaA Stock Quote
Fresenius Medical Care AG & Co. KGaA
$24.94 (-0.68%) $0.17
DaVita Inc. Stock Quote
DaVita Inc.
$79.96 (-1.84%) $-1.50

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