Heartbeam Inc (BEAT) 2009 Q2 法說會逐字稿

Good afternoon, and thank you for joining us for the CardioNet Second Quarter 2009 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 Litigation Act of 1995.

Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance or achievements of the Company in the future to be materially different from the statements that company executives may make today.

These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on form 10-K or 10-Q. 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 open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Randy Thurman. Sir, you may begin.

Thank you very much, and welcome to the CardioNet second quarter investor conference call. I am Randy Thurman, Chairman, President and Chief Executive Officer of CardioNet. With me this afternoon is Marty Galvan, Senior V.P. and Chief Financial Officer, Anna McNamara, Senior V.P. of Operations, and Phil Leone, Senior Vice President of Managed Care.

I'll begin today's call with some comments about the Company's performance, and discuss the status of the industry reimbursement issue. Marty will then provide a detailed review of the financial results and then we will take all of your questions.

As you can see by today's announcement, the growth and acceptance of the CardioNet MCOT technology continues to be outstanding. Physicians are rapidly incorporating the MCOT technology into their practices and patients' health is truly being better served by this revolutionary approach to cardiac monitoring and diagnosis.

Year-to-date results bare this out. With revenues up 35%, a nearly 60% increase in MCOT patient volume, a 42% increase in physician practice coverage and a total of 29 completed clinical studies, demonstrating the efficacy of CardioNet's MCOT by using CardioNet's MCOT technology to support other clinical research.

We know MCOT avoids more costly alternatives such as hospitalization and most certainly prevents some patients from progressing to more serious disease, such as stroke, with far more costly consequences. In the world of healthcare reform, CardioNet greatly benefits the three major constituencies -- patients, physicians and payers. This is in fact the promise held by the revolution in healthcare we refer to as wireless medicine.

Now the industry challenge is to refocus the payers from a predominantly cost-focused approach to one of cost benefit. That is, avoiding more costly forms of monitoring and diagnosis, preventing more serious disease and avoiding the associated costs to earlier more comprehensive and more accurate monitoring and diagnosis, MCOT.

CardioNet may be leading this effort as a result of our current negotiations with CMS to obtain an appropriate national payment rate. As you know, on July 10, for the first time, CardioNet and other providers received notice from Highmark Medicare Services, that the reimbursement rate would be reduced by 33% effective September 1.

CardioNet and other industry competitors had no warning of this change and we firmly believe this new rate is not supported by the facts or accepted methodologies for establishing appropriate reimbursement rates. Since the notification from Highmark, we've had very constructive discussions and meetings. Both Highmark and CMS have shown a willingness to review all MCOT data, proper categorization for reimbursement and appropriate bays of use.

We are confident that the overwhelming advantages MCOT offers to patients, physicians and payers in conjunction with a comprehensive understanding of the cost to deliver our technology and service, supports a materially higher rate of reimbursement.

In addition, MCOT drives substantial cost avoidance from other higher cost forms of monitoring and reduces the risk to patients progressing to far more serious disease. Within a month, a quarter of a million patients will have been enrolled in CardioNet's MCOT technology alone with physicians, patients and payers greatly benefiting from the technology.

There is no certainty with respect to the outcome of the CMS negotiations. And any decision on national pricing would not likely be determined until November. A process has begun with Highmark and CMS. Meetings have taken place and follow-up is scheduled.

In the meantime, CardioNet has asked that the September 1 decrease be suspended pending the completion of a thorough and comprehensive review that has already begun. A reasonable approach, we believe, is for the September 1 decrease to be suspended and continue the constructive dialogue between the industry and CMS and Highmark and for a national price to be set by year-end.

To proceed with the September 1 decrease would preclude a more informed decision and to put into jeopardy the MCOT industry which is leading the world in the development of wireless medicine. Given the uncertainty of any outcome of these reimbursement discussions, CardioNet continues to believe that providing guidance is not wise. It is also important to note that reimbursement for whole-turn event monitoring is scheduled for substantial reduction in 2010.

Any guidance for the remainder of 2009 would be based on conjecture regarding the planned September 1 decrease; an assumption as to any national rate set by CMS and would be ignoring the four-year impact of the whole-turn event reductions.

Needless to say, in order for any guidance to be of value our greater certainty needs to exist. But let me assure everyone, that as soon as there is clarity on reimbursement, CardioNet will schedule a conference call with shareholders, potential investors and analysts to clarify the outlook financially on our future.

We firmly believe in the unparalleled clinical and economic value of MCOT and believe that a fact-based process with CMS can result in an acceptable outcome. It is now one of our highest priorities to educate the medical community about the value of wireless medicine in the diagnosis and detection of disease.

Specifically, we will increase our efforts to demonstrate potential to dramatically lower costs to both patients and payers. Now, we intend to continue to execute our mission to expand the adoption of the technology throughout the medical community. From an industry perspective, defending the value of our innovation is fundamental to the prospects, not only of CardioNet, but for other future wireless applications as well.

Now before I turn the call over to Marty, let me add some comments with respect to CardioNet's progress. Overall, year-to-date and during the quarter, we made solid operational progress. There continues to be extremely strong demand for MCOT in the medical community.

Patient starts are up nearly 60% for the first half and there is an increase of 42% of physician practices that have adopted CardioNet's technology. The expansion of our sales force coupled with its increase in physician practices and the rapid adoption of MCOT suggest continued growth for quite some time.

During the second quarter, we continued to add high-quality, experienced individuals to our selling organization and we now have 141 experienced account executives. Year-to-date we have added 53 executives or a 60% increase from year-end 2008.

This nearly completes the planned expansion of this group for 2009 as part of our overall strategy to increase market share. We are extremely pleased that we were able to expand our team with such seasoned, highly respected account executives, substantially ahead of our own internal schedule, which will allow our sales team to be fully deployed in the second half of 2009.

At the same time, CardioNet has led the industry in clinical research. As a result we introduced SomNet technology in June of this year and to date nearly 1,000 physician practices have enrolled. Our unquestioned clinical leadership has also contributed to competitive wins in such prestigious institutions as the Scripps Research Institute, [Global Lended] Medical Center, Henry Ford Hospital and the Hospital of the University of Pennsylvania.

Additionally, a major research institute has partnered with CardioNet for a pivotal trial that can demonstrate the expandages of CardioNet's MCOT into neurology. These successes are also a tribute to our hospital account executives that we deployed only last quarter and validate our strategy of expanding MCOT into adjacent markets and therapies such as hospitals, cardiac thoracic surgery and potentially neurology.

We believe the strategy of leveraging MCOT will provide a higher return on investment in prematurely venturing into new technologies or other therapeutic fields and risking loss of focus on the exceptional opportunity at hand.

Research and development has obviously been a strength, of CardioNet as we are recognized as the pioneers in wireless cardiac arrhythmia monitoring and diagnosis. In addition to newly introduced applications in 2009, our EMR intercom activity initiatives will allow our customers to have paperless records of their patients' data that can easily be transferred to ensure our patients' data is readily available in any medical setting.

Further innovations and applications are planned for the second half of 2009 and throughout 2010. But I'll comment more on that in a minute. With that I'll turn the call over to Marty for his financial review after which I'll make some concluding remarks and take their questions. Marty?

Thank you, Randy, and good afternoon, everyone. Now that Randy has commented on our operations I will review our financial results for the second quarter and first half of 2009. I want to remind everyone that unless mentioned otherwise all of my comments will refer to financial results on a non-GAAP basis. There is a reconciliation included in the press release that we issued earlier that describes in detail how we have calculated these non-GAAP figures.

As Randy indicated, in the second quarter revenue increased by $9 million or 30.4% to $38.3 million compared to $29.3 million in the second quarter of 2008. Driving the growth were MCOT system revenues of $33.9 million, up from $24.3 million in Q2 of 2008 for an increase of 39.6%. Revenue from MCOT system continues to grow as a percent of revenue representing 89% of revenue in the second quarter compared to 83% of revenue in the second quarter of last year. For the first-half comparison, revenue increased by $19.2 million or 35% to $74 million compared to $54.8 million in the second half of 2008. Our payer mix in the quarter was 37% Medicare and 63% commercial.

Gross profit in the second quarter increased to $26.3 million or 68.7% of revenue compared to gross profit of $19.5 million or 66.5% of revenue in the second quarter of 2008. This improvement of 220 basis points was primarily due to increased operational efficiencies, cost reductions negotiated with our largest suppliers and as well as lower negotiated shipping costs. The same factors drove first half gross profit up 300 basis points.

Turning to operating income, in the second quarter we achieved our eighth consecutive quarter of profitability with $2.3 million in adjusted operating income. This compares unfavorably to the $3.1 million in adjusted income in the second quarter of 2008. This decline is in line with our expectations as we continue to invest in our sales force and new product development.

For the first half of the year adjusted operating increased to $4 million or 5.3% of revenue compared to $3.8 million or 6.9% of revenue in the same period last year. In our second quarter, 2009, GAAP operating expense is $201,000 of nonrecurring charges primarily due to the since terminated merger agreement with Biotel. Included in last year's second quarter GAAP operating expense is $610,000 of nonrecurring charges related to integration and restructuring activities.

Adjusted net income, excluding nonrecurring charges, increased to $2.7 million or $0.11 per diluted share in the second quarter compared to adjusted net income of $2 million or $0.08 per diluted share in the second quarter of 2008.

Net income for the second quarter of 2009 includes a favorable impact of $0.05 per diluted share due to the expected utilization of now operating loss carry forwards. Adjusted net income for the first half of the year increased to $3.8 million or $0.16 per diluted share compared to $2.4 million or $0.11 per diluted share for the same period last year.

Excluding the favorable impact from the expected [Anawell] utilization, first half 2009 adjusted net income would have been $2.4 million or $0.10 per diluted share. Our year-to-date effective tax rate was 8.6%. With respect to share account, the adjusted EPS of $0.11 per diluted share in the first half of 2008 was calculated using diluted weighted average shares of $21.3 million as opposed to 13.4 million shares that you see in our earnings release.

Now, to touch briefly on the balance sheet and cash flow; at the end of the quarter, cash and cash equivalents were $44.6 million. In the quarter we had negative free cash flow of $6 million, which was in line with our expectations and consisted of cash use and operations equal to $200,000 and capital spending of $5.8 million.

The reduction in cash was driven primarily by our increased investment in our sales and marketing organization. The majority of the capital spending was for additional devices in support of our growth. Net accounts receivable were $52.9 million compared to $39.4 million at the end of 2008. We continue to make progress in addressing the receivables issue and early indicators of this progress are as follows.

Second quarter collections were 24% higher than collections in Q1. Regarding our accounts receivable aging, total gross receivables in the zero to three-month category are down 9% versus Q1. Despite increasing revenues receivables due from our four largest payers have decreased by 6% versus the Q1 balances.

And finally, our billings per week in the last eight weeks have been approximately 50% more than our average weekly patient starts. Our confidence in resolving the receivables matter is also strengthened by the fact that 71% of our net accounts receivable is due from Medicare and contracted payers. Our level of confidence is very high in our ability to collect these receivables.

As you know, we are dealing with a legacy problem. As we previously reported in the second quarter we hired an executive with more than 20 years experience in healthcare reimbursement and she has hired into the organization individuals who are experienced in reimbursement. So as you can see, the organization is now off to a great start.

In conclusion, our financial indicators show that the business is improving measurably. In the first half revenue is up 35% and gross profit is up 42% clearly indicating the fundamental strength of demand by physicians and our ability to manage manufacturing and material costs.

Operating expenses, excluding adjusting items are up 46% in the same period driven by the substantial increase in the sales organization and continued investment in RND. We believe we have opportunities to leverage our expense base in the future. We expect our sales organization to achieve higher levels of productivity and drive higher patient starts.

Currently our RND spending is directed towards developing the next generation MCOT, a more advanced system with a lower cost structure that we expect will lead to higher profitability. And lastly, in G&A we expect improvement in our bad debt expense as we begin to see the benefits of the improvements we are currently making. These factors all bode well for future opportunities to leverage the company's platform. Thank you. I will now turn the call back to Randy for some closing comments.

Thank you, Marty. Let me lay out CardioNet's foreseeable future. The industry currently faces a major challenge, working with CMS to determine and appropriate value for our technology. We believe in an effective, fact based negotiation will result in an acceptable outcome.

We are encouraged by the level of understanding and professionalism Highmark and CMS are bringing to the process. Holter and event monitoring will be cut by up to 40% next year. Fortunately, this accounts for only 11% of CardioNet's revenue, or about a third or less of the industry average.

And if those reductions go into affect, CardioNet will absorb that decrease. CardioNet's MCOT is revolutionary technology that brings overwhelming cost benefit advantages to patients, physicians and payers. Cardiologists, electrophysiologists and now major institutions are adopting CardioNet MCOT at a rapid pace as demonstrated by the recent results. This will not change.

CardioNet has the largest sales force in wireless medicine in the world that will become fully productive by year-end and fully deployed nationwide in 2010. We are already experiencing success in our segment expansion strategy into hospitals and cardiac thoracic surgery and will expand into other markets in 2010.

Our success in clinical research puts us years ahead of the competition and has resulted in competitive wins in some of America's most prestigious institutions. More will follow. More specifically, 2010 will be characterized by continued volume growth driven by nearly 150 fully effective sales reps, an increase in contracted commercial payers and growth from new associated margins.

It will also be driven or characterized by higher gross margins from lower cost of goods, greater volumes and the introduction of advanced, new technology. Twenty ten will also be characterized by reduced operating expense as a percent of sales, higher operating income and improved cash flow from operations as a result of absorbing the incremental investment from 2009's increased sales organization, lower DSOs and bad debt and streamlining the legacy organization from our startup years.

Based on an acceptable outcome to the reimbursement negotiations, I fully expect to get back to business as usual and continue building CardioNet into a great company in the emerging wireless healthcare industry in driving long-term shareholder value that delivers unprecedented cost benefit advantages to physicians and payers alike and most importantly drives improved patient care. Your questions?

(Operator instructions)

Your first question comes from the line of Rick Wise with Leerink Swann.

Good afternoon. Can you hear me?

Yes, Rick.

Good. Thanks. A couple things, looking and talking about the reimbursement issues, I guess, could be a few questions. You're sounding hopeful that, you know, that perhaps this, that you can successfully challenge this decision. Is there any precedent to this kind of event happening that it could be overturned or changed?

And you talked a little later in your prepared comments about an acceptable, you're sure it's sounds like, whatever your language is, you're hopeful, confident, whatever, that you can reach an acceptable outcome. What do you think is an acceptable outcome? Or how should we think about what that might be?

Right. On the first part of your question, we're not aware of any dissimilar decisions that have precipitously kind of provider's reimbursement by 33% without warning and virtually overnight. And I think that's where it starts. I think there probably were some reasons that weren't necessarily fully vetted that drove that decision.

I think Highmark and CMS in particular appreciate the position that that decision puts the industry in. They have certainly expressed a willingness to work with us. And they are already doing that. This decision has drawn the attention of industry professionals in cardiology, in electrophysiology. It's drawn the attention of the political community that is so interested in innovation and the potential of wireless medicine.

So there is a lot of goodwill being brought to the table by Highmark, by CMS, by the physicians who treat the patients every day who have found MCOT to be an extraordinary advance. And clearly everyone involved in the industry, you know, shares a common belief that if the proper facts are considered that a more appropriate reimbursement rate can be achieved.

Now I also said in my comments, Rick, that there's no certainty of any outcome of this. So to the extent that I sound, you know, optimistic about this it's because I happen to have believed from the beginning that the facts will drive an appropriate outcome here. And I happen to think that it was just from this judgement, not anybody's calculated intent that drove the current decision. I think, you know, once we bring forth the proper facts it will drive a more appropriate outcome.

The second question to your second, answer to your question about what is an appropriate outcome, that is, you know, a very difficult question to answer. There have been independent consulting companies who understand the appropriate methodology for determining reimbursement who have run the models that come up with a higher level of reimbursement than we are receiving currently.

There are other factors in place such as the proposed reimbursement to cardiology physician reimbursement rates that are a factor in how our reimbursement gets determined. That factor is subject to current, I think, dispute by the cardiology community and could either be implemented in full or be implemented in part or be implemented not at all. So there's a lot of moving pieces here. And I, you know, we don't have the perfect crystal ball now to suggest what the likely outcome will be.

As I said in my remarks, the moment I know, Rick, I will call a conference call with all of our shareholders, potential investors and analysts and articulate whatever decision is made, whatever direction is taken and whatever impact that has on CardioNet.

Okay, and just one last larger picture question. There's been a great deal of concern that if there's no change in the reimbursement rate that's as, you know, as we know it today that your business model may have to change. Is that the right way to think about it? Are you in the process of rethinking your approach to driving CardioNet over the next several years? And maybe just expand on how that might relate to the ending of the Biotel deal and why, you know, what's next in general. Thank you.

Just so I'm sure I have the context of your question properly, Rick, you're saying if the 33% reduction were to --

Be staying in effect.

Stay in effect and become permanent. That's what I thought you asked. Well, let me answer the last question first. The Biotel decision had nothing to do with this. Prior to closing we believe that Biotel had not met all the material obligations in the agreement and did not go forward to close. We have a great respect for what the folks do at Biotel. It could be in the future if they address some of those material concerns that we would revisit it. So it had nothing to do with the reimbursement, you know, environment. There were certainly aspects of their business that we were very much looking forward to incorporating into CardioNet.

Now your real question of, what happens if the 33% reduction becomes permanent; that has, I believe, very serious ramifications for the industry. But let me speak specifically to CardioNet. The first thing one would have to assume is that over time proportionately the commercial reimbursement would come down as well.

This would force CardioNet into an unprofitable situation. Even if we assume the price elasticity and that lower prices might drive somewhat higher volumes, that 33% loss in reimbursement goes right to the bottom line.

And if you stand back and say how far can you restructure the company to absorb that, at this moment? I don't see an outcome that leaves CardioNet as a viable independent company. Without question the MCOT technology is going to succeed for many, many years to come.

Now what are we doing early in anticipation of any outcome of that? We are, we've already taken some measures within CardioNet to reduce our levels of discretionary spending this year. We've eliminated some external consulting. We've eliminated, you know, discretionary travel. We've taken all number of steps.

One of the things that we have to do regardless at CardioNet is look at the legacy infrastructure that we inherited. CardioNet, unlike other competitors, was built around the MCOT technology. So our infrastructure was built solely to support MCOT. We then subsequently went out and acquired the PDSHeart business which is in the holter and event monitoring business and we operate that business from a customer service, from a selling, from a monitoring and a reporting perspective essentially as an independent company.

That being said, one of the reasons when you look at our SG&A as a percent of revenue, maybe it being somewhat higher than competitive standards, that's that legacy infrastructure. Getting directly to your question, regardless of where we go in the future we have to streamline that infrastructure and we've already taken steps to do that. We closed one of the three PDS monitoring centers in the last month. So we will, regardless of the outcome here, continue to seek a streamlining of our infrastructure and a reduction of discretionary expense.

Now if we get, as I described earlier, an acceptable outcome to reimbursement, those steps are going to make us even a more successful organization going forward. If, as you propose, the $754 reimbursement, or the 33% reduction became permanent, we don't have enough infrastructure to realign here and cost to cut to end up with a company that invests in RND, in wireless medicine such as we are, to invest in clinical research leading the industry.

And one of the great concerns is that anyone who is really following the healthcare reform debate understands is that one of the potential impacts of healthcare reform is to undermine innovation in the US medical technology industry. If this change stays in place, CardioNet may be one of the first victims of that cost-only approach to healthcare.

Now you've known me for decades, Rick. You know that I'm thinking beyond that and I am. But any speculation beyond that is inappropriate at this time. As I said before, I'm planning on success and do believe that the facts will ultimately drive an appropriate reimbursement decision and that we will get CardioNet back on the same track it was on previously.

Appreciate that. Thanks so much, Randy.

Your next question comes from the line Amit Bhalla with Citi.

Hi. Good afternoon. A question I want to start with on the commercial reimbursement side, you have added a couple new payers during the quarter. Can you give us a sense of where their coming in on rates? Are they coming in line with where Medicare or Highmark are looking at now?

And secondly, have you gotten any notification from any new commercial payers about rate changes? And my second question is regarding you mentioned some streamlining of head counts in respect to some of your monitoring centers. Can you maybe quantify where that, how many head count changes have already taken place? Thanks.

Sure. Thanks, Amit. I guess I should start out by apologizing for the last earnings statement when I cut you off short, so hopefully that's behind us.

Your first question with regard to the new commercial payers, yes, we've had great success year-to-date adding 20-some commercial payers with over 5 million covered lives. The pace of that, you know, will continue throughout the remainder of the year.

The average reimbursement there would be what I would call, continue to characterize as appropriate and again if we were to receive from Medicare an appropriate level of reimbursement, the level of reimbursement that we are contracting with commercial payers would be in line with that and allow us to get back to business as usual.

For obvious reasons we can't be more specific in terms of the, you know, the actual reimbursement rates but they're appropriate.

Okay, and the other question on commercial rate was, any other commercial payers been giving any notifications about changing their rates and then the question about the headcount streamlining.

Yes, okay, I'm sorry. At this moment we have gotten no indication from, you know, the re-up process with any commercial payers of a material reduction. We did earlier in the year from several of the larger payers realize material reductions but at the moment that is not happening.

With regard to the headcount reductions, we currently have in round numbers 850 employees and I think to date we've reduced headcount by about 5% and any further plans have not been determined at the moment. You know, when and if we go beyond that, you know, we'll let everybody know.

Randy, has Highmark responded to your requests to suspend the September 1 decrease? Thanks.

No.

Okay, thanks.

Your next question comes from the line of Bob Hopkins with Bank of America.

Hi, it's Ellie Kohan sitting in for Bob. Can you guys hear me alright?

How are you?

Good thanks. Just to clarify that last question, do you have any sense from Highmark when they might respond to that request to suspend the proposed rate cut?

No, Ellie, we do not. As I did say in my prepared remarks, there is a process underway now and further schedule of meetings and dates have been confirmed. But it frankly wouldn't, I wouldn't expect Highmark to respond to that request until all of the data gathering that we've committed to do and submit to CMS and Highmark has been done and that subsequent meeting has been held.

If that, if they are going to respect our request and suspend that decision, my own belief would be, this is just my own belief, that it would follow that scheduled meeting later this month.

Great, thank you and just one more to follow up here. Randy, earlier you were, you know, kind of alluding that if this proposed rate cut as implemented that, you know, it would be difficult to continue to run the business profitably and be able to reinvest for growth.

So could you help us think about, you know, at what level of reimbursement you could continue to operate the business profitably and to grow? Thank you.

You know, Eli, we are running a lot of models here at different levels between the proposed reduction and our current level of experience. Our approach with CMS and with Highmark is going to be driven by, you know, the facts, the cost of providing our product and our service.

One of the major issues under discussion is what is the appropriate number of days for patients to be monitored because that factors into their ultimate calculation. As I mentioned before, there are other moving parts such as the cardiac physician reimbursement schedule.

So there's a lot of moving pieces. For CardioNet to succeed against the mission that we've always set for ourselves of being a leader in wireless medicine; we need to continue to invest in research and development and we need to continue to support the extraordinary success that we've had in clinical research.

At some level of reimbursement, you no longer can afford to do those things. You become a selling organization. You can't invest in innovations. So, you know, you risk becoming the proverbial buggy whip.

I believe that we're dealing with some extraordinary professionals that are going to ultimately make this decision, that while some of those qualitative issues don't necessarily factor into their calculations, are appreciated by a lot of people who have a stake in this decision, the physician community, cardiologists and electro-physiologists.

The political constituents who are very tuned into healthcare reform and its impact on innovation, Congressman Joe Sestak, US Congressman, probably the next Senator from Pennsylvania, has really devoted an extraordinary amount of time with CardioNet to understand the value of wireless medicine and the potential positive impacts from our research and development and the innovation and has garnered the support of other political leaders who are I think really only now grasping the ramification of this decision and who have enthusiastically supported a constructive process between Highmark, CMS and the wireless cardiac arrhythmia monitoring industry.

So I am, my optimism comes from the fact that I think we are in an extraordinarily professional process that will respect all of the factors that go into this decision and will come out with a good number.

Beyond that, I don't have a crystal ball and can't give you a number. As I said before, when we know, within minutes, you'll know.

Thank you.

Your next question comes from the line of Steve Halper with Thomas Weisel Partners.

Yes, hi, Randy. You talked about characterizing 2010 that gross margins could be higher. Does that assume, does that reflect, you know, the rate cut if it stays in place?

No, no. If that rate cut stays in place, that would obviously substantially affect that. That outlook on gross profit for 2009 would really assume a blended average selling price of what we, you know, have in our model for the end of this year.

Okay and then, you know, just, you know, based on what you've learned so far, you know, from the process that Highmark might have, you know, gone through or might have gone through, what are some of the misjudgments that you talked about, you know, that you feel, you know, they made there?

Well, first of all, I'm sure they wouldn't characterize it as misjudgments and it's, you know, I'm trying to pick an appropriate terminology. Now truth of the matter is, we don't know in detail what went into their decision. We know what, you know, comments were made, you know, following the decision from our meetings with CMS and Highmark subsequent to the decision.

You know, we've picked up on some of the things that they're focused on. So our speculation is, one, that somewhere along the line we improperly got listed under this hospital outpatient payment system where CardioNet has never sold into that market. We've never marketed to that market. We've never said that we intend to be a part of that market.

One of the things and this is my speculation is that, you know, wireless medicine is brand new and there was not a category that we neatly fit into and that administratively someone put us in this HOPPS category and not so coincidentally the average reimbursement in that category is about $750, probably not coincidental.

And we just think that that may have been administratively a decision that, you know, was not the best judgment but may have been driven by the fact that there wasn't a wireless medicine category such as MCOT.

The other issue that we know to be in debate is the average number of days that patients should be on MCOT. And we think that there may have been a judgment made at Highmark that that is far less than what our historical experience has been, you know, with patients.

And that number is a significant swing factor in the pricing decision. And here's where leading cardiologists and electrophysiologists have really jumped in, in support of CardioNet. And the key on that factor is what is needed, you know, per patient and per circumstance. And there are a lot of publications from industry leaders that state that this is consistently more than seven or even ten days. And I could go on.

But, you know, the utilization CardioNet MCOT has brought so much value to the doctors not only in diagnosing atrial fibrillation but, for example, in tie training patients on drug therapy. The fact that a patient may have an AFib on our system in day three does not in any way, shape or form argue that their service on MCOT should cease at day three. In fact, cardiologists want to see what happens, you know, over day ten and day 14 and whether that is replicated.

I could go on and go about that. But I think that the two things that may have driven this decision were this categorization under HOPPS and a assumption that the average days of use could be significantly less than what cardiologists believe it will be.

The other factor I think is what I alluded to several times in my comments. And that is we are all living in a cost-only focused healthcare environment. And it's not just the MCOT industry. It is other players in the industry whose reimbursement rates are being driven down.

What's missing in our case and where we need to make a better argument long-term is that the cost benefit advantages of CardioNet far outweigh the per-case reimbursement for one patient. But those are the factors that I think drove the decision.

Thanks.

(Operator Instructions)

Your next question comes from the line of Ellie Kohan of Bank of America.

Hello?

Bob, you there?

This is Randy.

Bob. Yes.

Ellie?

Yes.

Ellie, this is Randy. The operator said you had another question.

No, I'm sorry. I don't have another question. Thank you.

Okay. Now, Ellie, are you there?

Yes, I'm here.

Anybody else in the queue?

I'm showing we don't, sir.

Well, listen. Thank you very much, everybody. You know, let me just summarize by saying once again, you know, we're currently in this situation with Medicare reimbursement that clearly, you know, has had a major impact on the valuation of your company and our company. Rest assured that we are working tirelessly at getting an appropriate outcome to this Medicare reimbursement decision.

Beyond that, as I articulated before, the fundamental operations and the success of MCOT could not be better. And the outlook on this company with an appropriate outcome on the reimbursement issue is as great as it ever was. And we look forward to getting to that point and communicating with all of you as soon as we have greater certainty. Thank you very much.

Thank you for your participation in today's conference. If you joined the conference late today you may listen to the conference on digital replay which will be available from August 5 to August 12, 2009 on 888-286-8010 or 617-801-6888 with pass code 13365384. Again, that is 13365384.

Thank you for your participation in today's conference. This concludes your presentation. And you may now disconnect. Have a great day.