Heartbeam Inc (BEAT) 2009 Q4 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet fourth quarter and full-year 2009 earnings conference call.

Certain statements during the conference call, and the question-and-answer period to follow, may relate to future events and expectations, and and as such shall 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, 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 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 in a listen-only mode, and the floor will be open for questions and comments following the presentation.

It's now my pleasure to turn the floor over to your host, Mr. Randy Thurman. Sir, you may begin.

Thank you very much and good afternoon, everyone.

Welcome to CardioNet fourth quarter and year-end 2009 investor call. I am Randy Thurman, Chairman, President and CEO of CardioNet. With me this afternoon is Heather Getz, our Chief Financial Officer; Anna McNamara, Senior Vice President of Clinical Operations; and Phil Leone, Senior Vice President of Managed Care.

Before I begin, I would like to take this opportunity to introduce all of you to Heather Getz, our new Chief Financial Officer. I have had the pleasure of working with Heather for many years, and of course Heather was CardioNet's VP of Finance through most of last year. Heather brings a wealth of excellent experience to CardioNet, and has been working very closely with all levels of the organization to understand the dynamics of the business and the market. We are fortunate to have her as part of our executive management team.

Heather replaces Marty Galvan, who has left to pursue opportunities. Marty and I began working together over 20 years ago, and I thank Marty for his contributions to CardioNet, his friendship, and I wish him the best in his future endeavors.

I will begin today's call with some comments about CardioNet. Heather will then provide some additional detail around our results, and then we will take your questions.

In 2009, CardioNet achieved a number of milestones while addressing unexpected and significant adversity. And CardioNet goes into 2010 committed to our mission of improving the quality of human life by being a leader in wireless medicine. We also go into 2010 with a clear set of objectives that address the challenges faced last year. I will elaborate on those objectives shortly.

To understand CardioNet's potential, it's important to first understand the accomplishments made by the Company to commercialize technology in the emerging wireless healthcare industry. CardioNet has surpassed 300,000 patients served by our MCOT technology, the pioneer in mobile cardiac outpatient telemetry. Early investors committed millions to the development of MCOT technology, and to the development of the Company, and its employees have meaningfully advanced the monitoring and diagnosis of cardiac patients. Along the way, CardioNet has also developed an infrastructure, or platform as we call it, that includes patient and physician customer services, clinical research to support our technology, and what is likely the largest professional sales organization dedicated to a wireless healthcare application.

Feedback from patients and physicians tells us that we perform the platform tasks superbly well and better than the perceived competition. We have received countless testimonials from physicians and patients elaborating on the significant benefits of CardioNet's MCOT, and much of this feedback recounts patients who have long been undiagnosed until MCOT identified the underlying cause of the patient's disease. Some of these testimonials attribute life-saving outcomes to CardioNet.

Few early-stage medical technology companies realize the growth that CardioNet has experienced. In 2009, patient volume grew nearly 50% over the prior year, and we're now forecasting another 30% to 40% volume growth in 2010. There can be little question that this type of growth speaks to not only the clinical benefits of CardioNet's technology, but the cost benefit advantages as well. We believe that not only does MCOT significantly improve time to diagnosis, and yield better clinical outcomes, but the cost benefit advantages to the healthcare system are measurable as well.

A multi-center perspective randomized study published in a peer-reviewed journal demonstrated that CardioNet MCOT is nearly three times' superior at detecting clinical significant arrhythmias. Atrial fibrillation is the most prevalent form of cardiac arrhythmia, and the leading cause of stroke. However, once diagnosed, atrial fibrillation can be managed or treated and, therefore, significantly reduce the incidence of stroke. Another advantage of MCOT is that patients lead their normal lives while being monitored 24/7 by CardioNet. In certain patients, this avoids hospitalization or monitoring at a far higher cost.

These represent but a few of the examples of the significant cost benefit that MCOT brings to the healthcare system. Yet despite these facts, in July 2009, Highmark unexpectedly reduced MCOT's medical reimbursement by a third. This action alone, as well as the corresponding reduction in reimbursement by commercial payers, resulted in CardioNet becoming unprofitable in spite of the 50% growth in patient volume. CardioNet has worked diligently with a Medicare contractor, and now with CMS, to provide all of the information required to obtaining a national reimbursement rate above the reduced level.

At the same time, CardioNet has responded significantly by reducing costs, and will continue to do so. These actions, along with evaluating strategic options, are being done to create the greatest potential for all stakeholders. In addressing the unexpected challenges faced in 2009, we began to respond immediately and prepare the Company for 2010 and beyond. We implemented immediate cost reduction initiatives that yielded $8 million in annualized savings. We have identified an additional $15 million in cost reductions that will be implemented over the next 18 months.

Development began on an advanced MCOT platform that will deliver enhanced clinical capabilities at approximately 30% lower product costs; to be launched, we believe, by the end of this year. We have engaged CMS in a very constructive process that could lead to a national reimbursement rate. We have fine-tuned the selling organization following the dramatic growth in AEs, that is account executives, in 2009, and we go into 2010 with our selling resources being fully trained and aligned against the highest growth opportunities.

With regard to the sales force, after expanding by approximately 50% in 2009, we saw the potential for optimization between our field territories and the specialty sales force. We consolidated territories, from 124 to the current 106; and we are partnering with a major national contract selling organization. CardioNet will now have 120 dedicated full-time employees that are fully-trained sales professionals, plus the resources of this partnered outside selling organization. Whereas in 2009, the 79 newly-hired account executives were learning the business and only partially productive, we go into 2010 with the internal sales force being fully productive and complemented by the resources of our selling partner. The market potential for CardioNet's MCOT remains largely in front of us.

I will now turn the call over to Heather to discuss our fourth quarter and full-year results. Heather?

Thank you, Randy, and good afternoon, everyone.

As I transition into the role of Chief Financial Officer, I look forward to getting to know our analysts and institutional investors. I am very excited about the opportunity we have to continue driving the adoption of MCOT, while also positioning CardioNet as an efficient and cost-effective company.

I am assuming everyone has had the opportunity to read our earnings release; and as such, I will focus on more qualitative remarks. Beginning with revenue. Despite the unexpected decline in Medicare reimbursement of 33%, revenue for the full-year 2009 increased by 17%, and for the fourth quarter of 2009 declined by only 3% as compared to 2008. Driving these results was MCOT volume, which was up significantly with 50% growth for the full-year and 44% growth for the quarter; both higher than previously forecasted. For both the fourth quarter and the full-year, the benefit of the MCOT volume growth was offset by lower PDS volumes, the aforementioned reduction in Medicare reimbursement that went into effect in September, as well as the decline in commercial reimbursement that we experienced during the year.

Turning to gross margins, despite reducing our cost per patient in 2009, gross margin percentage declined by 850 basis points in the fourth quarter, and 150 basis points for the full-year 2009 versus 2008. The primary driver of these declines was the reduction in Medicare and commercial reimbursement. Operating income for the fourth quarter and full-year 2009 on an adjusted basis was a loss of $5.4 million and $6 million respectively. This compares to adjusted operating income in the fourth quarter and full-year 2008 of $6.5 million and $14.6 million respectively. We were able to partially mitigate the operating losses caused by the decline in reimbursement with a cost-reduction program we implemented in the third quarter of 2009, which resulted in $8 million of annualized savings, and is reflected in our Q4 2009 run rate.

I will now move to the balance sheet. We ended 2009 with $49 million in cash, and no debt. In the fourth quarter, we had positive free cash flow of $6 million, primarily due to the collection of receivables; and for the full-year 2009 we had negative free cash flow of $12 million, largely resulting from capital spending for infrastructure and additional devices to support our growth. As for accounts receivable and DSO, we have made significant progress in addressing operational issues. Compared to the third quarter, net accounts receivable for the fourth quarter declined by almost $9 million, and our DSO declined by 16 days to 122 days. We have seen positive trends in our cash receipts, with fourth quarter collections of $36 million. This is 16% higher than Q3, and the highest in the Company's history.

With our operational improvements, we have reduced our time to build to three days, allowing us to collect our receivables faster. We have also been successful in settling older receivables with our contracted payers, and while it's still early in the process, we are seeing positive results from the collection agency that we have engaged to focus on some of our receivables. We will continue to focus on this area in order to further streamline our operations.

Looking forward to 2010, as we stated in our release, until we experience a period of stability and gain more predictability, we will not provide specific revenue and earnings guidance; however, I would like to provide some directional comments. In 2010, we expect MCOT volume growth of 30% to 40%. We will have the full-year impact of the lower commercial reimbursement we experienced in 2009, as well as on the reduced Medicare rate. On the expense side, we have begun implementation of a company-wide cost-reduction program that we announced in December, which will result in $15 million of additional expense savings over the next 18 months. As a result, our overall cost per patient will decline in 2010 on an already lower base.

In addition, as 2010 progresses, we expect to see modest gains in our gross margin percentage as compared to the fourth quarter of 2009. We expect to have a one-time charge, predominantly in the first half of 2010, of approximately $3 million related to the cost savings initiatives. In addition, we will also realize approximately $4 million of option expense savings in 2010, largely due to the voluntary forfeiture of options by certain executive officers in the fourth quarter of 2009. The combination of these savings will enable us to be EBITDA positive in the second half of 2010. We also expect continued declines in our DSO as we further improve our processes. We do expect to have negative free cash flow in 2010, largely as a result of capital expenditures for devices to support the robust growth, and as we introduce our new MCOT platform.

Despite the challenges we faced in 2009, we expect to see continued growth in volumes, and have positioned ourselves to enter 2010 and, in particular, 2011, with a more efficient cost structure. We will execute on an additional $15 million of cost reductions, and continue to look for more opportunities. As I mentioned before, CardioNet has nearly $50 million in cash and no debt; factors which give us considerable flexibility as we build value for all stakeholders. We're looking forward to growing our business more efficiently and cost-effectively.

Thank you. I will now turn the call back to Randy.

Thank you, Heather.

CardioNet is the unquestioned innovator in bringing MCOT technology to the market, and continues to lead, as demonstrated by the intellectual property rights granted to us, and the unprecedented number of publications and abstracts testifying to the clinical efficacy of CardioNet's MCOT. We believe that wireless medicine will be one of the greatest innovations in healthcare in the next generation, and that CardioNet is a pioneer in that revolution. As is often the case with pioneers, you face adversity while you continue the relentless pursuit of your vision.

Our country faces many questions about healthcare reform. The challenge is not just how to cut cost and expand coverage. True healthcare reform will be achieved through innovation. and bringing technology to physicians, patients and medicare beneficiaries, which more accurately and rapidly diagnoses illness and disease, prevents more costly forms of diagnosis, and prevents patients from progressing to more serious and costly diseases, while allowing patients the opportunity to lead their normal lives while being diagnosed or treated. CardioNet does much of that and more.

As we said in today's release, we're optimistic about the future of CardioNet. We responded to the 2009 reimbursement challenges by streamlining our operations, with $23 million in cost reduction and productivity initiatives. Also, we believe that the Company will continue to experience strong volume growth. We have engaged CMS in a constructive dialogue, which we hope will lead to a national reimbursement rate above the current level. As Heather just said, we have almost $50 million in cash and no debt, affording us the ability and flexibility needed to pursue our goals while investing for the future. With our diagnostic superiority, our advanced reporting capabilities and exceptional service, we expect to expand our leadership in mobile cardiac outpatient telemetry.

Lastly, I would like to compliment the nearly 800 employees of CardioNet, and our management team. Any young company with new technology would be challenged by 50% volume growth in a single year. This kind of growth touches every function in a company. On the front line are our sales organization, who drives the growth; customer service, which supported a dramatic increase in physician practices; and customer care, who ensures that Medicare beneficiaries and patients receive first-class attention. But behind the front lines are distribution, research and development, and manufacturing, who must proactively prepare and support such growth.

In the midst of this growth, CardioNet employees also launched new applications to our current technology, and began development on an advanced MCOT platform; extraordinary accomplishments by any standards. But our employees also accomplished all of this and more in the midst of a bombshell dropping in their laps, in the form of an unexpected 33% decrease in Medicare reimbursement.

It is true that real leadership is only tested in the face of adversity. It is easy to look talented when everything goes well. In the face of unexpected adversity in 2009, CardioNet and its employees showed their real talent and leadership, and the Company's true potential.

At this point, we will take your questions.

(Operator Instructions)

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

Good morning -- actually, good afternoon. Let me start with gross margins, if I could, Randy. Are you saying that the full impact of reimbursement was the only factor in -- affecting gross margins? Were there any other issues? You know, manufacturing or competitive issues, pricing issues?

Hi, Rick, this is Heather. In 2009 from a gross margin percentage standpoint, we had a number actually of cost-reduction initiatives that favorably impacted our cost of sales, and had we not executed on those efficiencies our gross margin percentage actually would have gone down even further. So from a negative perspective, the majority of the impact on the gross margin percentage was as a result of the price declines.

And did -- I understand that commercial reimbursement rates were also under pressure. Has that stabilized, or -- how can we be confident that we won't see more pressure on that side?

Rick, in the later half of the year, we have seen commercial rates stabilize, and we cannot say what will happen next year; what we can say is as of now, we have seen them stabilize.

Okay. Your volume growth projection for 2010, the 30% to 40%, if I'm remembering correctly, is lower than what you all had thought, the 40% I thought you had all mentioned on the last conference call. Why the reduction? Or if you could help us understand what went into that guidance reduction?

Rick, in terms of actual forecasted patient starts, it's not a change. The middle range we're now saying is 35% is the same patient starts, 154,000, previously forecast. We ended -- actually, very good news -- 2009 with higher actual volume than previously forecast, so that merely is a change in the percentage. The high end of the range that we're now quoting of 40% could be achieved if we get the remaining large commercial payers under contract by midyear.

On the lower end, it takes into account some patient dynamics that we are closely monitoring, specifically many insurers have increased co-pays or deductibles, or changed kind of the mix of co-pay and deductible, and we're seeing patients defer service the first six weeks of this year at a higher rate than we have seen in previous years. We suspect this co-pay dynamic, and in this economy, probably is being experienced by other companies as well That may sort itself out. As I said, we only have six weeks of data. But again, the forecasted number of patient starts at 154,000 is the same number we have given. Again, if we're successful this year, getting some of the commercial payers on board, we could see even a higher number.

Okay. I'll ask one more question now, and maybe I will get a chance to ask some others later. Heather, on DSO, obviously you've made some solid progress, which is good to see, this quarter. Can you give us any of your maybe even aspirational hopes of where we could be when we're talking this time next year? And take each of those elements you talked about. Is there more room in time to build? Is the older -- settling the older contracts, how quickly you can make progress there, the collections? Maybe give us a little more detail on where and how you might get there in 2010. Thanks.

Sure. So I will just start with the DSO. As we look forward in 2010, as you indicated we made significant progress in the fourth quarter as it pertains to DSO and our cash collections, and what I would expect is that we will continue throughout the year to see improvements in our DSO. Right now, what we're thinking is that we will end the year in the low to mid-90s. Given the fact we only have one quarter behind us, we would like to see some more quarters before we give any further information on that.

As it pertains to the operational improvements, again, we continue to focus on this area of the Company, and when you're dealing with the insurance companies, it does take time to work through these issues. Does that answer your question, Rick?

Your next question comes from the line of Amit Bhalla. Please proceed.

Good afternoon. I had a couple of questions in terms of the sales force. I just want to make sure I heard it correctly. So I think, Randy, you said that you ended the quarter at 120 dedicated sales reps, is that correct?

Yes, the average -- if you look in 2009, the average AEs on board for the full year was about 114.

Okay. But 114 is the full-year number; the quarter was 120, correct?

No. That is not correct. We currently have 121 full-time dedicated sales professionals in CardioNet, as we sit here today.

That was not the ending fourth quarter number?

The ending fourth quarter number of account executives was 124.

124. Okay, got it. And then you mentioned this partnership -- a selling partner, but you didn't give us much detail in there. Could you tell us a little bit more about that? How many resources does that bring you? Are they dedicated to your product? And how do the economics work with this selling partner?

Yes, Amit, it's a good question. This is a great opportunity for us. With the realignment of our internal sales organization, we have moved these 121 dedicated internal resources to the highest-return opportunities, the territories where we believe we can get the greatest penetration and growth, and the physician accounts which we think can drive the highest volume, as well as kind of the untapped territories, if you will, where we feel that there remains great potential to add new physician accounts.

The contracted partner that we have brought on is going to complement those efforts, targeting, if you will, physician practices that are kind of sub-critical mass from a volume potential for us. They will also be targeting competitive accounts for us. So it's a very complementary relationship, where our dedicated internal resources, kind of in summary, are against the highest-return opportunities. On the other hand, we know the growth potential for MCOT technology is so substantial that we didn't want to leave unaddressed the remaining opportunity, and that is why we've brought on a contracted partner.

So how many people do they, how many feet does that add to your existing 121 reps?

We will start out with a relatively manageable number. Remember, we're going to be training them as if they were CardioNet reps, and then as we demonstrate their productivity, we will add. Now let me just tell you that they are all full-time dedicated to CardioNet. They aren't sharing their time elsewhere. At the present time, because of kind of contractual terms, we're not prepared to give a specific number for kind of contractual and competitive reasons, but the approach is going to be to start out with a manageable number, and as we show success, grow that over time.

Okay. And just a quick follow-up. Heather, you can give us the dollar amount of bad debt expense in the fourth quarter? And then Randy, can you give us an update on the Biotel litigation? Thanks.

Sure. We had $6 million of bad debt expense in the fourth quarter.

And Biotel?

The Biotel litigation is churning. I think the next step is going to be depositions in the next couple of months, and I can't predict an outcome. There has really been no -- nothing material to report on it recently. These -- as you know very well, these kind of legal actions take time. And as I said, the next step is to take depositions. i think that will be in the next two months.

Thank you.

Your next question comes from the line of Ryan Daniels with William Blair & Co. Please proceed.

Hey, guys, it's Andy O'Hara in for Ryan today. A couple of quick questions here. In terms of the update on your discussions with CMS, can you talk a little bit about the data requirements they're looking for potentially in establishing a national rate?

Yes, that is a good question. Since the unexpected decision by Highmark to cut our reimbursement, CardioNet has really led the industry in developing a working relationship with CMS, that could lead to a national reimbursement. We believe the decision to cut MCOT reimbursement was not correct, based on the prescribed methodologies used by Medicare reimbursement. Part of the issue stems from the fact that CardioNet's MCOT technology was really the first technology with 24/7 attendant monitoring service; that has different cost implications than your typical physician office services, or the OPPF code, where CardioNet was, we believe, inappropriately designated.

Uh-huh.

In addition, CardioNet provides both a device and a service, Andy, to your -- to address how this is going to work.

Yes.

Which also makes us unique. You know, we're not a pure play device company, we don't sell devices; we supply devices, we develop devices, and provide a service. And so this has commenced.

As part of the process, CardioNet has retained really outstanding experts who are experienced in developing reimbursement models used by Medicare. Of course, you know, there is no guarantee of an outcome, but as we've stated previously, the unexpected cut in reimbursement by Highmark seems to be related to this OPPF hospital code.

Uh-huh.

CardioNet's technology has never been developed for the hospital, never been used in a hospital environment and, in fact, we have never been paid for a patient who used MCOT within the hospital environment. So it just looks to us to have been a mistake.

In our subsequent discussions with CMS, and from their comments in the interim final rule, it became apparent, as I just said, that our 24/7 fully-staffed monitoring of patients was a new challenge, and CMS didn't want to take that on, didn't have the time necessarily to take effect this year. So in essence, there was no precedent in Medicare reimbursement for a CardioNet MCOT technology. Now CMS, and this is important, I think, has asked CardioNet, with these experts that we have retained, to develop and propose methodologies that account for 24/7 monitoring.

Okay.

We're currently working with these expert advisors, and are going to be presenting this data to CMS in the very near future.

Okay. So this is -- so this is a methodology that you guys are developing together; it was not a situation where CMS said, you know, present this data to us and we'll consider it?

This -- as I just explained, you know, in our conversations with CMS, this whole issue of no precedent for 24/7 --

Right.

24/7 monitoring was the issue. CMS and CardioNet agreed that we, CardioNet, would work request with some independent experts to develop a proposed methodology or methodologies that, if adopted by CMS, could be used in reimbursing MCOT.

Okay.

That process is active, literally as we sit here, and we would expect this to be a, you know, continuing process with CMS early this year.

Okay, great. That is helpful. And then one more quick question here. Do you guys have any update on the remaining large commercial payers that you're hoping to bring on board this year?

We're in dialogue with these large commercial payers. At least in some cases, the review meetings have been scheduled.

Uh-huh.

As we have stated before, in our targeted growth this year, we have not included any volume from the large commercial payers. Obviously, we're putting every effort imaginable into contracting with them and, if we're successful, that could provide an upside to our business.

Okay, great. Thanks a lot, guys.

The next question comes from the line of Sara Michelmore with Cowen and Company. Please proceed. Miss Michelmore, your line is open. Please proceed.

Yes, thank you for taking the question. Randy, with some of the changes and optimization in the commercial organization, I was just hoping you could give us some color on -- kind of your thoughts on sales morale and things like that? Obviously, one of the risks whenever you go through one of the transitions like this, is that you may have sales turnover. So I'm just wondering if you can kind of give us your thoughts on that, thanks.

Absolutely, Sara. Your premise, I think, is an accurate one. You go through this kind of change, it can create turnover, could create morale issues with your sales organization. I can tell you that that is not the case at CardioNet. First of all, we have an outstanding leadership team in our sales organization that -- the area Vice Presidents have been with the Company a long time. Our new Senior Vice President of Sales that we brought on a year ago is an outstanding leader. These changes that we undertook were very well thought through.

The other thing I will tell you is whenever you kind of rationalize a sales organization, the people who are let go are your less productive ones, and that is what happened. On the flip side of that, the reps that are with us have assumed expanded responsibility, expanded territory, expanded compensation potential, obviously, driven by their results.

The other thing I would say is that our account executives are out there really selling, you know, state-of-the-art technology, promoting and dealing with cardiologists and electrophysiologists, and love what they're doing. They're also in the middle of a business, Sara, that is growing 50%; so they know the opportunity is there for them to produce and to make a considerable amount of money. We have experienced, since the end of last year, virtually no turnover amongst the account executives remaining with us after the restructuring, and I literally think we have experienced no unwanted turnover.

About a week ago, I had the three area Vice Presidents in here, had a meeting with them, asked them the exact same questions that you're asking, and was convinced that as a Company, we're doing the right things, and our leadership is. So right now, I am pretty confident that this kind of change is not going to result in any noticeable disruption.

Okay, that is really helpful. And then, you know, just curious now that this Medicare change has gone through, it doesn't affect only yourselves, it affects your competition as well, and I'm just wondering if you have seen any changes in the competitive landscape, good or bad, since this transition has occurred?

Honestly, Sara, you know, we don't really face significant competition. Not all MCOT technology is created equal, and CardioNet is the only company that has done substantial clinical research to support all of our claims, independent research has been done to show CardioNet's MCOT technology to be superior. The feedback that we get from our physician customers tells us that our customer service, our patient service, our reporting technologies are superior to others who, you know, claim to be in the same business. And we know that our success rates when we go into competitive situations, is significant. We also know in the last year, based on the clinical research and the superiority of our service and reporting, that we took away some significant customers from others that are in the business.

I commented a few minutes ago about the area Vice Presidents who came in last week, and I had a meeting with them, and I actually posed the same question to them. And they said, Randy, the companies that people may perceive to be our competitors are not our competitors. What they are seeing are, in their own words, some mom-and-pop operations show up regionally that sometimes will go in and convince a physician to make a change; but in a significant number of those cases, even when a change is made, we win that business back when that perceived competitor can't meet the same levels of patient and physician service that we do. You put the question in the context of the reduced reimbursement rate from Medicare; I wouldn't change my answer given that as a factor, either.

Okay. And then maybe just one last one. We're heading into conference season, medical meeting season, and I'm just wondering if there is anything that you would highlight that, data-wise, the Company is presenting or doing at ACC or HRS this year? Thanks.

We'll be present at both. At this point in time, we're not prepared to kind of pre-announce any news that we would introduce at those. You know, the most significant new technology that we are working on this year is the new MCOT platform, which we have spoken about before; whether or not we're prepared at ACC or HRS to start talking about that, probably not.

Great, thank you so much for taking my questions.

Thank you, Sara.

Your next question comes from the line of Matt Dolan with ROTH Capital Partners. Please proceed.

Hi, everybody, good evening. Heather, maybe if you could just start on the P&L, and just looking at operating expenses; can you walk us through the timing some of your cost cuts? You mentioned gross margin should be sustainable and improve from Q4. What should we expect for R&D, and sales and marketing, relative to what we saw in the fourth quarter?

As it relates to the specifics around the cost cutting, other than saying we have begun the implementation of those reductions, I can't give you specifics as to which lines they'll be affecting, and at what point in time.

Okay. And then, Randy, a follow-up on your reimbursement discussions with CMS. Do you get the sense that MCOT reimbursement will develop through the typical Medicare timeline for establishing rates? You know, late summer into November, based on the feedback you have had from them? Or do you expect to find kind of a unique conclusion to the analysis that you're presenting?

As much, Matt, as we would like it to be a unique solution, I think there is every reason to believe that it will follow the normal cycle.

Okay. Then on your guidance and your outlook for volume growth in 2010, have you factored in any real traction from your contract selling organization you've that added?

Only on the upside part of it. Again, the traction that we get in part is that it allows our internally-dedicated account executives to focus their time on the most productive and highest-return accounts; so you would expect. So we have factored that in. But in terms of real incremental revenue beyond that, it would be more on the upside of our range.

Okay. Then finally, just on the strategic review we talked about on the last call, can you give us any insight into your expectations for timing? Is there a definitive plan to complete this program, or is this something that proceeds indefinitely or opportunistically, however you want to look at it?

The CardioNet Board and the management are fully committed to pursuing everything that could maximize shareholder value; that, I assure you. Regarding the strategic engagement, you know, until and unless there is something material to disclose, it's really not appropriate for us to make any more comments.

Okay, fair enough. Thanks, guys.

(Operator Instructions)

Your next question is a follow-up from Amit Bhalla with Citi. Please proceed.

Just housekeeping. Heather, can you quantify the performance of the PDS products in the quarter? And then what was the actual revenue from the CardioNet systems in the quarter? Thanks.

Sure. So from a revenue perspective, the PDS revenue in the full-year 2009 is about 10% of our overall revenue.

What was it in the quarter? How much was it down year-over-year?

In 2008, the PDS as a percentage was around 17% of our overall revenue.

Okay. And just the fourth quarter CardioNet system number, to compare to the third quarter number of about $29.5 million; what was that?

It was around $30 million.

Okay, thanks.

Yes.

Ladies and gentlemen, that concludes the Q&A portion of today's conference. I would now like to turn the call over to Mr. Randy Thurman for closing remarks.

Thank you very much, everybody, for attending the CardioNet year-end 2009 and fourth quarter conference call.

As I have mentioned in my comments, this organization really performed extraordinarily well in 2009, in the face of unexpected adversity. As we go into 2010, the management team has addressed that adversity in any number of ways. We're very confident about the volume projections that we have put out, supported by a really fine-tuned selling organization. We have also commenced a very constructive process with CMS that could, while there is no guarantee, lead to a national reimbursement rate. Regardless, the Company has undertaken significant cost and productivity improvement initiatives that, in total, will yield $23 million over time.

So, I think you can feel certain that the CardioNet management team really stood up to the leadership challenge in 2009. As I've said before, we are committed to doing whatever it takes to generate value for all of our stakeholders and shareholders in 2010 and beyond.

Thank you very much.

Ladies and gentlemen, if you joined the conference late today, you may listen to the conference on digital replay, which will be available from February 17th to March 4th, 2010 on (888) 286-8010 or (617) 801-6888, with the passcode 31396761. Once again, the replay will be available from February 17th to March 4th, 2010 on (888) 286-8010 or (617) 801-6888, with the passcode 31396761.

Thank you. You may now disconnect. Have a great day.