Heartbeam Inc (BEAT) 2008 Q1 法說會逐字稿

Good morning. Thank you for joining us for the CardioNet first-quarter 2008 earnings conference call.

Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities and (sic) Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company in the future to be materially different from the statements that the Company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our final prospectus filed on March 19, 2008 in connection with our initial public offering. We assume no duty to update these statements.

At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Arie Cohen. Sir, you may begin.

Welcome to the CardioNet first-quarter 2008 conference call, our first investor update call as a public company. With me this morning is Marty Galvan, Chief Financial Officer and Head of Investor Relations; and Jim Sweeney, Executive Chairman.

As most of you know, we completed our initial public offering on the NASDAQ on March 18, 2008. The IPO is a milestone in the evolution of our Company and serves as a springboard to execute our business plan and build on our leadership position in wireless medicine and cardiac arrhythmia monitoring.

Marty Galvan will be speaking in a few moments to provide you the financial highlights of our first quarter 2008. But I would like to just spend a few moments reviewing some of the business developments at CardioNet begin.

I am very happy to report a quarter with 68% year-over-year revenue growth; that is ahead of our expectations. But I'm even more excited about our Company's recent progress and our prospects for continued growth. As you know, CardioNet's primary near-term focus is on cardiac arrhythmia detection and diagnosis. Four million Americans are affected by cardiac arrhythmias, 750,000 of which are hospitalized annually. Atrial fibrillation is the most prevalent life-threatening cardiac arrhythmia, affecting 2.2 million Americans.

One of the most striking statistics is that the national average charge for a hospital admission for cardiac arrhythmias is approximately $25,000. In short, CardioNet is trying to transform an industry that has historically relied on event and Holter monitors, which are essentially intermittent tape recorders with a very low diagnostic yield. Traditional technologies like event and Holter monitors have suffered from one or more drawbacks, including the inability to detect asymptomatic events, failure to provide real-time data, memory constraints, the need for a significant patient informant and the inability to measure patient compliance.

With the CardioNet System's superior diagnostic yield, which is 3 times higher than event monitors, we can help avoid the $25,000 hospital admission charge.

I mentioned 3 times higher diagnostic yield for the CardioNet System. This was proven by a landmark 70-center randomized clinical trial with 300 patients. As a reminder of how the trial was designed, every one of the 300 patients in that trial already had an inconclusive Holter monitoring session. The 300 patients were randomized into an event monitoring group and CardioNet monitoring group. The trial, published in March 2007, showed that CardioNet has 3 times higher diagnosing yield than event monitors for clinically significant arrhythmias.

We have taken this, the definitely clinical evidence to payers, some of whom have previously been reluctant to reimburse for the CardioNet System, and the response has been very positive. Since publication of the trial, we have secured contracts with three payers who previously required proof of product superiority, evidenced by a published randomized clinical trial. These three payers represent over 26 million covered lives.

As many as you recall, a few days before pricing our IPO in March, we announced the signing of one such contract with a major national payer, representing 16 million lives.

To provide a little color here, this payer is one that we have been working on for probably over four years. After substantial discussions with the tipping point really being our clinical trial, the payer began coverage on March 15 with a comparable reimbursement rate. Given the timing shortly before the end of our quarter, any impact of this payer on our Q1 2008 results was certainly minimal.

More broadly, as payer thinks about the value of CardioNet, they compared the reimbursement rates for our products not against Holter monitoring and event monitoring, given the low diagnostic yields of these technologies, but against the $25,000 average hospitalization charge that they would like to avoid. So let's recap where we stand today from a payer perspective.

We believe that we have approximately 176 million covered lives from 170 commercial contracts and paid accounts, representing over 70% of the total targeted lives under contract. We will continue to work hard to make progress with the remaining payers and report progress to our investors as appropriate going forward.

In the first quarter, we have made some significant hires to bolster our senior management team. Most notably, we hired Manny Gerolamo as Senior Vice President Sales and Marketing. Manny most recently ran the cardiovascular specialty sales of Reliant Pharmaceuticals, which, as many of you know, was required by GlaxoSmithKline in late 2007. Under the leadership of Manny, we have organized the sales force across 10 regions within the U.S. to provide greater focus on driving sales at the territory level. Our sales force now consist of 96 sales personnel, by far the largest in the industry.

During the American College of Cardiology meeting in March, CardioNet launched a new branding campaign, the CardioNet Comprehensive, promoting the CardioNet system and also positioning the Company as a one-stop shop for other arrhythmia monitoring needs with the legacy PDSHeart product.

A new clinical study out of the Cleveland Clinic was published in February, evaluating the efficacy and safety of CardioNet's System in use with pediatrics. The study showed superior diagnostic yields and deemed CardioNet System useful for evaluation of children with suspected arrhythmia. With this release of this clinical study, greater focus will be placed on the pediatric market segment.

In addition, we hired Chuck Gropper, an experienced R&D executive to serve as our Vice President of Research and Development. On future calls and discussions, we will spend more time illuminating some of our research and development efforts. But needless to say, we're not standing still and remaining content with our leadership position in this space. We are continuing to invest in new diagnostic algorithms and new products.

Along those lines, I would like to provide you with some update on the rollout of our latest CardioNet System monitoring sensor that we referred to as the Phase III, our third generation product. The Phase III builds upon the features of our prior C2 product with numerous performance and functional enhancements. From a cost perspective, the cost of manufacturing the Phase III is approximately 35% less than the cost of manufacturing our older generation device. We began commercial delivery of the Phase III system in October 2007. We expect to roll out the Phase III throughout 2008.

Finally, I wanted to inform you that we have initiated final integration plans related to the March 2007 PDSHeart acquisition. The objective is to eliminate redundant functions, gain efficiencies and improve profits. As a reminder, CardioNet acquired PDSHeart in March 2007. The acquisition immediately expanded CardioNet's presence in 48 states with a sales force that was immediately 3 times bigger than the CardioNet field sales force.

As we celebrated the one-year anniversary of the acquisition this quarter, we are very pleased with the results. As we have reported to you previously, we have been able to convert numerous physicians who previously were accustomed to prescribing event and Holter monitors through the CardioNet Systems of the strength of the CardioNet System's 3 times higher diagnostic yield.

At the end of 2007, we have converted approximately 8% of the patient volume of the old PDS to the CardioNet System. One contributor to our strong Q1 2008 results was the continued strength of conversion that has outpaced our expectations. We expect the integration activities to be completed by the end of July.

As I turn the presentation over to Marty, who will dive into the details of our Q1 2008 results, I just want to remind everyone that CardioNet is participating in a $2 billion addressable market. If you annualize our Q1 revenue of $25.5 million, this would imply only a 5% penetration of our potential market. So we have a lot of room for continued growth here, and I believe that CardioNet will continue to have a very bright future.

With that, let me turn the presentation over to Marty Galvan, CardioNet CFO.

Thank you, Arie, and good morning, everyone. Now that Arie has provide you with an update on our operations, I will review our first-quarter 2008 financial results and we will be discussing some of the key drivers that have contributed to these results. Please keep in mind that unless mentioned otherwise, all of my comments will refer to the financial results on a non-GAAP basis. There is a reconciliation included in the press release that we issued earlier today, that describes in detail how we have calculated these non-GAAP figures.

In the first quarter, revenues increased by 129% to $25.5 million compared to $11.1 million in the first quarter of 2007. If you adjust the prior year as if the PDSHeart acquisition was completed as of January 1 of 2007, the year-over-year revenue increase was 68%.

This growth of 68% was driven by a 115% increase in CardioNet System revenue from $9.3 million to $20.1 million, offset by modest decreases in event and Holter monitor. In the quarter, CardioNet System revenue accounted for 79% of our revenue compared to 62% of adjusted revenue in the first quarter of last year.

Payer mix was 33% Medicare and 67% commercial, which reflects a modest increase in the Medicare percentage as compared to the same period in the prior year. This increase is primarily the result of introducing the CardioNet System in new territories, where, as a result of our national Medicare coverage, reimbursement by Medicare occurs earlier than commercial reimbursement.

Gross profit in the quarter increased to $15.9 million or 62.6% of revenues compared to gross profit of $7.3 million or 65.9% of revenues in the first quarter of 2007. If you adjust the prior year to include PDSHeart for the entire quarter, the prior-year gross profit would have been $9.7 million or 64% of revenue.

The first quarter 2007 adjusted gross profit percentage is lower than the first quarter 2007 GAAP gross profit percentage due to including an entire quarter of the lower margin PDSHeart event and Holter monitoring products. The year-over-year reduction in our gross profit percentage is primarily due to a fuel surcharge on device shipments to and from patients. Although we expect this charge to continue during 2008, we have identified manufacturing costs and operating expense reductions to offset its impact on the year.

It is important to note that there is a significant mix aspect to our gross profit. Gross profit -- the gross profit percentage on the CardioNet System is in the high 60s, while the gross profit percentage on the event and Holter business is some 10 percentage points lower. As our mix of revenue shifts more to the CardioNet System, this will have a favorable impact on our gross profit.

Year-over-year operating expenses increased as we continued to make investments in our management team, sales and marketing and research and development. However, despite this increase, operating expense as a percent of revenue declined year over year as we continued to gain leverage.

We are very excited to report that we have achieved our third consecutive quarter of profitability and a major improvement in operating income as compared to the prior year. Adjusted operating income increased to $600,000 in the quarter from a loss of $2.2 million in the same period last year. This increase was driven primarily by the significantly higher revenue in 2008 and the decline in operating expenses as a percent of revenue.

The first quarter of 2008 adjusted operating income exceeded our expectations. However, Q1 also reflected a sequential decline from the fourth quarter of 2007. This is due to the fact that in the first quarter of 2008, we have invested according to plan in various operating areas which will help drive future growth. As our revenue continues to grow over the balance of 2008, we will be able to leverage these expenses over a larger revenue base. We expect operating margin to increase substantially over the next several quarters.

Our effective tax rate for the quarter was 40%. The 40% rate assumes no utilization of the $62 million in federal operating loss carryforwards that we had as of year end 2007. We are currently evaluating the status of the utilization of our federal operating loss carryforwards and will true up the tax rate in the second quarter as appropriate. This is explained more fully in our recent S-1 in the income tax note of the financial statements.

Our GAAP income statement includes $356,000 for integration and restructuring charges, primarily related to the acquisition of PDSHeart. In the quarter, we initiated exit plans for acquired activities that are redundant to the Company's existing operations. The plan is to consolidate certain functions in Conshohocken, Pennsylvania and should be substantially implemented by mid 2008. We believe the cost associated with this integration plan will be largely recovered by mid 2009.

Adjusted net income for the quarter improved significantly to $400,000 or $0.02 per diluted share compared to an adjusted net loss of $3.2 million or a loss of $1.06 per diluted share in 2007. The adjusted EPS of $0.02 per diluted share for the quarter was calculated using a share count of 18,320,000 shares.

Let me explain why we are using the 18.3 million shares as opposed to the 4.7 million that you see on our income statement. On a GAAP basis, we incurred a net loss in the quarter, and using the higher share count would have had an antidilutive impact on EPS. Therefore, for GAAP purposes, we were required to use the basic share count of 4.7 million for both basic and diluted EPS. But because our adjusted net income is positive, we have used the 18.3 million share count to calculate the adjusted net income of $0.02 per diluted share.

Net loss available to common shares was $2.4 million, or a loss of $0.50 per diluted share compared to a net loss of $3.6 million or a loss of $1.22 per diluted share for the same period last year. Net loss available to common shares is derived by reducing net income by the accrued dividends and accretion on our mandatory redeemable convertible preferred stock.

This preferred stock was issued in March of 2007 to finance the acquisition of PDSHeart in the same month, and was converted to common stock in connection with CardioNet's IPO last month.

Now, to touch briefly on the balance sheet and cash flow -- cash and cash equivalents were $62 million, reflecting an increase of $43.9 million as compared to year end 2007. The increase was due to proceeds from the IPO, offset by a payment to the former PDSHeart shareholders. Accounts Receivable was $25.8 million compared to $22.9 million at the end of 2007. DSO increased by six days to 86, reflecting the usual receivables pattern of companies like CardioNet that have a significant percentage of revenue which is reimbursed by commercial health plans. As you know, health plans reset co-pays and deductibles annually at January the 1st, and as a result, in the first quarter, a larger percentage of our receivables are due from individuals rather than from plans. This had the effect of softening collections and extending DSOs at the end of the first quarter. We expect this situation to be largely resolved by the end of the second quarter. We ended the quarter with negligible debt that we paid off on April the 1st.

Regarding equity on the balance sheet, as I mentioned above, our mandatorily redeemable convertible preferred stock converted to common stock in connection with the IPO, as did our Series A to D convertible preferred stock. Our capital structure is now simplified and consists of only common stock. Operating cash flow for the quarter was $800,000. Capital spending was $1.7 million and free cash flow was a negative $900,000.

Turning to our expectations for 2008, we have set a revenue target of $117 million to $120 million for the year 2008. We expect to leverage our strong balance sheet to invest in sales and marketing resources to drive revenue growth, R&D projects, to enhance our product portfolio and opportunistic strategic acquisitions that we believe will further strengthen our performance in 2008 and beyond.

Thank you. I will now turn the call back to Arie for some closing comments.

Thank you, Marty. Let me just say we are very encouraged by the positive results in our first quarter. CardioNet is well positioned to deliver sustained great results in 2008 and beyond. We remain very comfortable with our competitive position in this space. We have not seen any significant developments on the competitive landscape lately that changes our view that we have a very significant market lead here.

As we have said many times, CardioNet's true competition is event and Holter monitoring, and we've got 3 times higher diagnostic yield than event monitoring, proven by 300-patient clinical study, I think that we have a great story to tell.

While a $2 billion market opportunity with 5% penetration will keep us busy for a long time, we have not lost sight of the fact that our CardioNet System and our wireless medicine and patient monitoring capability represents a platform that can be leveraged for application in multiple markets. These opportunities excite us. However, our mission now is clearly to focus on arrhythmia monitoring and continue to move the needle on penetrating that market. We look forward to updating you on our accomplishments and progress going forward.

Operator, please open the call up for Q&A.

(OPERATOR INSTRUCTIONS). Amit Bhalla, Citigroup.

Thanks for taking the question. I wanted to start first with Marty. On 2008 guidance, can you talk a little bit about the expense side of guidance? I know you gave us the revenue; so could you start, could you give us a little bit more on the expenses -- what should we be looking at for the full year?

Yes, Amit. Hi, this is Marty. So as you know, in our press release, we have given revenue guidance for 2008. We have not provided then the EPS guidance for the year. The comments I would make are that we do have -- there's a couple of, as you know, a couple of reports out -- initiation reports -- as of yesterday, and we are comfortable with the consensus within those two reports. And I think we're going to hold our comments to that more or less at this stage.

Right now, what's going on is that we're making significant investments and basically still calibrating the right level of investment in operating expenses. And we may be increasing these expenses as we continue to fuel our growth.

You'll see there is a significant increase in expenses, as I mentioned, sequentially from the fourth quarter of 2007 to the first quarter of 2008 that reflects the types of investments we are making now at this stage. And basically I will leave it at that for now.

Let me just add to that with respect to the EPS guidance, we do expect to give EPS guidance for 2009 later this year.

Okay, thanks. Maybe one other thing on '08. Can you quantify any impact or is that in your revenue guidance right now? And then also, just tell us what percentage of total is the C3 device right now?

On the C3, in terms of -- we're using right now one-third of the total product in the field our C3, and obviously two-thirds are still the older generation. And as I indicated in my comments, this obviously is going to change. We expect to replace the old product line, obviously, throughout 2008. And we expect by the beginning of next year, we will have C3 in the marketplace, totally replacing our units.

I have a question of the recent payer added in. Are they factored into your guidance?

As you recall, as I indicated, the recent payer it's the national payer a major payer that we got on board in March 15. We did not account that upside into our guidance. So definitely it is an upside opportunity for us, and I will leave it at that.

Okay. If I could just add one quick one. Last week, I think you had a meeting with LifeWatch on some outstanding litigation. Did anything come out of that meeting? And I will jump back. Thanks.

The parties met on April 16, as you know. The claims of the lawsuit have been resolved, but the details are confidential. And I cannot comment further on that.

Okay, thank you.

Jason Wittes, Leerink Swann.

Just first I have a follow-up here. The 17 million lives that you just added, you're saying that's pretty much all upside to the numbers and the guidance that you provided this morning?

Yes. As we indicated before, Jason, in our road show and other publication, we did not account for that upside. As you recall, as you know, it takes time obviously to get on board, but it is certainly an upside for us an opportunity.

No, I'm aware of that, but I guess you're saying at this point you still leave it as upside as opposed to actually putting it into the guidance?

Yes.

Okay, that's fair. I guess I don't know if you can give us any kind of indication of -- there's still several -- there's still multiple insurers out there which have not yet agreed to reimburse. I don't know if you can give us any color in terms of how you think the landscape looks as we approach the year. I assume you do expect to get many of them. I don't know if you can tell us anything -- if there's anything near term on the horizon or if you just want to leave it open for now.

Jason, I'll make a general statement. Obviously, reimbursement is extremely important to our business. We are engaged -- actively engaged with those payers. And again, especially I went to emphasize the clinical trials publication has been a tipping point for us. So we are actively engaged with, and we are positive about the results. And I think, as we're going forward, we will bring those payers to our side, and I will leave it at that.

Okay, great. Did you guys give the number of reps that you have currently active during the quarter?

Sales reps?

Sales reps. Yes.

Well, we have a total of 96 -- we have total of 96 sales personnel in the field; and that's including the account executives and their field managers. And that has been growing, but it is 96 at this point of time.

Okay, great. And in terms of R&D, I think -- I think a lot of numbers out there look like they're about $5 million for R&D this year. If you were to start another major clinical trial, what kind of expense should we assume to add into that $5 million? Or does that $5 million account for a lot of potential clinical trial activity?

The R&D budget does include obviously the investment -- covers the investment in the new product, the new diagnostic tools that are under development, and some of them are including clinical trials with that. So overall, the budget is adequate to cover any type of expenses related to trials, as related to the new products.

Okay, great. One last question. You mentioned A-Fib is obviously a major arrhythmia out there. But when we talk to docs, they can name quite a few other things that they are starting to use your system for. Could you give us a breakout at least of the top three or four arrhythmias that, as you see it, that the docs are using your system for?

In terms of the arrhythmia monitoring detection, which this is the main focus of -- but we have the normal one, obviously, is A-F, syncope, VT; those are the three that come in mind. We also, the equipment is used really in A-F management, drug titration. We also have an opportunity actually going forward to use it in post ablation surgery, monitoring type of things. So it's people actually extending the application in -- beyond this just so-called traditional monitoring arrhythmia monitoring application.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS). Bob Hopkins, Lehman Brothers.

First, back on the number of sales reps, could you tell us for the quarter, the average number of sales reps that are actually out selling in the field? We had estimated a number of around 80 for the quarter; just so we can try to track sales productivity. Is 80 a good number or was it higher than that?

The actual account executives, which is really the direct sales reps, 80 is a good number. I mean, to give you a little bit of color here, we have account executives, I think 76. They are actually -- we have 10 other working managers to work with them. So we're increasing it. So the total actually people in the field, the total, if we count those account executives and their managers, 80 is a correct number.

Okay. And then Marty, in your comments on EPS for 2008, since I don't have the benefit of seeing what other reports are out there, can you just be explicit with the EPS range that you're seeing out there that you are comfortable with?

The range that I'm seeing out there, it's somewhere in the range of I believe it's $0.38 up to $0.42 or so that we're seeing out there.

Okay. So again, to emphasize, that's the range that you are comfortable -- you are comfortable with that range for 2008 despite the investments that you are talking about needing to make?

We're comfortable with the consensus of that range, yes.

Okay. And then how much is this fuel charge impacting gross margins?

Well it's impacting it at about -- the deterioration we saw in the quarter, it's roughly about half. It's up to close to about $150,000 in the quarter. So, and then there's another number of maybe $100,000 of other items which it's several different areas of additional cost.

But I think the important point to note there is that the fuel surcharge, we do expect to continue, but already we've developed plans to mitigate that elsewhere within the income statement.

Okay. And then can you give me a sense as to what bad debt expense was in the quarter, that runs through the income statement in addition to the total bad debt accrual?

Yes, the bad debt expense in the quarter was about -- was just over $2 million or so in the quarter. That's how much we have, it's in G&A.

So $2 million of -- okay. So $2 million. And where is that running relative to your expectations?

It's right on what we expected, within our own modeling for 2008.

Okay, so, all right.

(multiple speakers)

$2 million for the quarter.

Probably if you are going to work with a number, I would say use $2.2 million, around there.

Okay. Thank you very much.

I'm sorry, Bob, that's -- sorry. You're welcome.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue at this time.

So, let me thank you for your time today. We appreciate your support. We, the management team here, are fully committed to increasing the shareholder value and we will update you going forward on our progress. Thank you.

Ladies and gentlemen, if you joined the conference late today, you may listen to the conference on digital replay, which will be available from April 29 to May 13, 2008 on 888-286-8010 or 617-801-6888 with pass code 50515401. This does conclude today's cup presentation, and you may now disconnect. Have a great day.