Heartbeam Inc (BEAT) 2010 Q1 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet First Quarter 2010 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 actual results to vary. 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 Security [sic] 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 listen-only mode and the floor will be opened 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 good afternoon, everyone. Welcome to CardioNet first quarter 2010 investor call. I am Randy Thurman, Chairman, President, and CEO of CardioNet. With me this afternoon is Heather Getz, our Chief Financial Officer, and other members of our executive team.

I'll begin today's call with some comments about our overall strategy, progress in achieving our operational goals, and an overview of our first quarter performance. Heather will then provide some additional detail around our results and then we will take your questions. Today we will be discussing significant progress on a number of initiatives at CardioNet, as well as the FDA approval of our new MCOT platform. I want to caution, however, that in order for CardioNet to sustain its mission, we must continue to strive for greater cost efficiencies, the continued stabilization of commercial rtes, and obtain an appropriate reimbursement rate from Medicare. That being said, our operating results for the first quarter 2010 were strong and include significant sequential improvement in both operating margin and gross margin compared to the fourth quarter 2009. Patient volume in the quarter increased 23% to over 30,000 patient starts, which represents outstanding growth and demonstrates that the market for -- the market potential for MCOT continues to be robust. We will capitalize on this opportunity by continuing to execute on programs to drive MCOT adoption and utilization. This includes increasing utilization through the addition of a contracted sales organization, as previously discussed, as well as launching a new marketing campaign to educate physicians on the superior benefits of MCOT and aimed at converting the event market. In addition, we expect to introduce specialized reporting enhancements to further penetrate the cardiac thoracic surgery and neurology markets. Numerous clinical studies are underway, adding to the unparalleled clinical support for CardioNet's MCOT, which today stands at 30 published abstracts and peer-reviewed papers. We believe that these programs and the superiority of our technology will drive future growth. While pleased with our 23% patient volume in the first quarter, we are still striving for a higher overall growth rate in 2010. The first quarter is always impacted by patient deductibles and copays. However, the rate of patient drop-off this year was higher than previous years. Heather will discuss this in greater detail. Regardless, we are still striving for a sustainable uptrend in patient volumes based on the physician acceptance of MCOT, expanded utilization into new markets, new marketing and selling initiatives being implemented in the second half of 2010, adding the remaining large payers, and CardioNet's continued leadership in the industry.

The implementation of our productivity and cost improvement initiatives are well ahead of schedule. These actions resulted in significant savings in the quarter, including a meaningful improvement in both gross and operating margins compared to the fourth quarter of 2009. We will continue to seek further cost reduction initiatives in the future. I am confident that these efforts will allow us to achieve our goal of positive EBITDA in the second half of the year.

On the reimbursement front, we continue to work with CMS to gain an appropriate national rate for Medicare beneficiaries. We believe that we have a compelling case and continue to provide CMS with data that will allow them to appropriately price CardioNet's unique 24/7 service. Under the CMS process, we could have an indication of their decision in the June or July time frame when they publish their proposed ruling. We will receive the CMS final ruling in late fall for implementation in 2011.

CardioNet has over 200 million lives covered by MCOT, which includes 14 new payer contracts representing over 1.3 million lives secured in the first quarter. These new contracts were in line with current commercial rates, which remained stable for the fourth quarter of 2009. Based on CardioNet's strong clinical evidence, we were also successful in overturning coverage decisions with some payers who had previously treated MCOT as experimental or investigational. We are hopeful the remaining payers, which represent over 50 million additional patient lives, will follow and provide their constituents with access to the same level of medical care that over 200 million other Americans have access to today.

We received FDA clearance for our next-generation MCOT platform. This is a major milestone for CardioNet and positions us to launch by the end of 2010. This advanced platform utilizes our patented core technology enhanced by expanded reporting capabilities, an improved patient interface, and a smaller, lighter sensor. It has increased processing capabilities, more memory, and the ability to communicate with other wireless sensors. These capabilities will also provide a platform for CardioNet to advance into other monitoring markets and potentially internationally. In addition, we will be able to deliver these enhancements at a lower production cost in line with our previously-stated savings goals.

Our new technology platform addresses the challenges facing providers -- greater clinical benefit to patients, enhanced cost/benefit advantages to payers, and a lower cost of doing business in an ever more challenging reimbursement environment. Everyone in the healthcare system wins with CardioNet's technology. This is core to the Company's mission.

As you can see, we've made progress toward achieving and in some cases potentially exceeding our 2010 goals.

I'll now turn the call over to Heather to discuss our first quarter results. Heather?

Thank you, Randy, and good afternoon, everyone. As Randy highlighted, we had a strong first quarter. With revenue of $32 million and patient starts of over 30,000, we reported a 46% improvement in our adjusted net loss and a 220 basis points improvement in gross margin as compared to the fourth quarter of 2009. In addition, we further reduced our DSO by 9 days. These results clearly demonstrate our commitment to achieving future profitability.

I will now provide you more detail on these results.

As mentioned, revenue for the quarter was $32 million, a decline of 11% compared to the first quarter of 2009. Lower reimbursement rates and lower PDS revenue were partially offset by MCOT volume growth of 23%. Even though MCOT volume remained strong, as Randy indicated, we are closely monitoring patient drop-off trends. While we experience a higher drop-off at the beginning of every year, in 2010 we saw a measurably higher drop-off than we have historically. We believe this resulted primarily from two factors. First, we believe companies are increasing the level of patient responsibility through higher copays and deductibles, causing patients to defer or forego service. In addition, with the implementation of our electronic payer connectivity system, we are able to more easily identify patients with insurance that will not cover our service. While this reduces the number of patients we put on service, the result is better profitability through lower bad debt and cost of sales. We will continue to closely monitor these patient dynamics and their impact on volume growth.

Gross margin was 63% in the quarter, which represents a 220 basis points improvement compared to the fourth quarter gross margin of 61%. We are pleased by this sequential improvement, which largely resulted from reductions in our cost per patient and the stable reimbursement, which we continued to experience in the first quarter. While the cost per patient improved significantly, gross margin was down by 380 basis points as compared to the first quarter of 2009 as a result of the lower reimbursement rates.

Adjusted operating expense for the first quarter was $23.1 million, which was $2.5 million lower than the fourth quarter 2009 expense. This reduction resulted from productivity and cost reduction initiatives that were implemented in the quarter and represent an acceleration of our plans for $15 million in total cost savings.

We also experienced lower bad debt compared to the fourth quarter and expect to drive continued improvement throughout the year.

Adjusted operating expense was only 4% above prior year and we expect to produce lower operating expenses throughout the year as compared to 2009.

Adjusted operating income for the first quarter was a loss of $3 million, which compares to a loss of $5.4 million in the fourth quarter 2009 and operating income of $1.6 million in the first quarter of 2009. Included in our 2010 operating results are $3.1 million of savings, which are reflected in our cost of sales, selling, and general and administrative functions. The restructuring resulted in a one-time charge of $1.7 million in the quarter and we expect to incur an additional $1.8 million over the second and third quarters.

Cost improvements will continue to be implemented throughout the year and are expected to result in an additional $12 million in savings over the next 15 months. This will position us to return to positive EBITDA in the second half of the year.

Turning now to the balance sheet, we ended the first quarter with $45 million in cash and no debt. In the quarter, we had negative free cash flow of $4.4 million, which was in line with our projections and included the prepayment of certain items, as well as the restructuring that occurred in the first quarter.

As for accounts receivable and DSO, we continue to make progress in addressing our operational issues. For the quarter, DSO was 113 days, a 9-day improvement compared to the fourth quarter. Cash collections in the quarter were approximately $30 million, which was in line with our expectations. As we previously discussed, we expect to see continued improvement in our DSO and anticipate DSO in the low to mid 90s by year-end.

We remain focused on improving the Company's operating results and working toward future profitability. We made excellent progress during the first quarter and we believe we will continue to improve our DSO and drive cost reduction throughout 2010.

We obtained approval of our next-generation platform, which will be introduced later this year with a product cost of approximately 30% lower than the current device. These actions combined with our efforts to drive volume growth will position the Company for positive EBITDA in the second half of the year and future profitability.

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

Thank you, Heather. I'd now like to summarize what we've presented and then turn the call over to questions.

Again, we experienced 23% volume growth in the first quarter. Gross patient script volume was up sequentially from the prior quarter offset by patient drop-off higher than expected due to increased copays and deductibles. And we believe this is being experienced by other healthcare providers as well. Average selling prices have remained stable. With our cost cuts being ahead of plan, this yielded improved earnings. We're also seeing gross margin improvement. We've discussed today several new initiatives that we think are going to continue to drive demand for MCOT, including a new marketing program, approval of our new MCOT platform, and the kickoff of the partnership with our contract selling organization in the second half. We see sustainable demand in MCOT, EBITDA positive by year-end, and continued positive trends.

The FDA approval of our new platform and its planned launch by year-end drives greater clinical benefits to patients, improved cost/benefit, and a lower cost of goods to CardioNet.

To date CardioNet has provided MCOT service to nearly 325,000 patients and Medicare beneficiaries throughout the US. And there have been 30 clinical abstracts and papers published using CardioNet's MCOT platform.

As I mentioned in my opening comments, these are substantial accomplishments for our organization. And I'd like to compliment all of our employees. Nevertheless, in order for CardioNet to continue to succeed in our mission to physicians, patients, and Medicare beneficiaries, we must strive for greater efficiencies while stabilizing reimbursement and obtaining an appropriate national rate from CMS.

Given those expectations, we are optimistic about the future of CardioNet. Our balance sheet remained strong with over $45 million in cash and no debt, affording us the ability and flexibility needed to pursue these goals while still focusing on the future.

With the clinically-proven diagnostic superiority of CardioNet's MCOT, the expansion of our advanced reporting capabilities, and our exceptional customer service, we expect to expand our leadership in mobile cardiac outpatient telemetry and to explore new market segments for MCOT and expand our wireless healthcare platform into new technologies.

At this point, we will take your questions. Operator?

(Operator Instructions). Your first question comes from the line of Rick Wise with Leerink Swann. Please go ahead.

Good afternoon, Randy. How are you doing? Let me start with reimbursement. And I know it's challenging to talk about it, but can you give us any update on where you are with the I'm sure many initiatives underway to try to establish a national reimbursement code? Are you feeling more or less hopeful today than you did? Or any color would be welcome.

Rick, there are really three areas of equal focus when it comes to reimbursement at present. One is with Medicare or CMS and the other focus remains with two large commercial payers. We are working hand-in-glove with all three entities and are hopeful that given all of the demonstrated advantage of MCOT that A we will receive a national reimbursement rate from Medicare this year and B that we'll get the remaining large commercial payers under contract.

Let me characterize both situations. We've had a very long dialogue and interface and numerous meetings with the decision-makers at Medicare. CardioNet has retained the very best experts in the field going back to the middle of last year. Our dialogue with Medicare would indicate that maybe the single issue last year when the reimbursement rate was cut relates around CardioNet really being the first technology in the marketplace in wireless healthcare providing 24/7 monitoring and diagnosis and the fact that there really was no history of such technology for Medicare to rely upon. And, again, CardioNet was the innovator and the pioneer. And sometimes when you're the pioneer, you take a few early shots.

Those discussions resulted in an understanding between Medicare and ourselves that CardioNet with our advisors would develop methodologies for determining appropriate reimbursement in this emerging new field of wireless healthcare and 24/7 monitoring.

That was accomplished. And we stayed within kind of the existing broad definitions that Medicare uses to determine reimbursement. In January of this year, we were given substantial time by Medicare to make a presentation with regard to the appropriate methodologies for reimbursement. Coming out of that meeting, there was an understanding that as further clarification was required by Medicare that they would reach out to us for questions, clarifications, whatever. That continues to happen and from our perspective represents a very positive dialogue and process. Our efforts have been supported by the ACC, the industry association, et cetera.

That's all I can tell you. We are quite confident that a national reimbursement rate will be established this year to go into effect in 2011. I wouldn't even begin to suggest what the result of that will be. The process, though, could not be more professional.

With regard to the large commercial payers, a similar process kind of following their guidelines, numerous meetings and conferences between CardioNet and the decision-makers there. It's our understanding that technical reviews are scheduled with both remaining large payers in the immediate future. And, again, we believe the evidence that their constituents and patients should be covered under MCOT is pretty demonstrated by the acceptance of MCOT across the US. So.

Okay. Let me -- on another question, sales this quarter came in actually a couple of million better than we looked for, which is terrific from my perspective. But sales have been sort of stuck in this $32 million, $33 million range, third quarter, fourth quarter, and now first quarter.

Two-part question -- I know you're not in a guidance-giving mode, but do you think it's reasonable to think we could see sequential 2Q versus 1Q to 3Q, can we see that ratchet up as we see through 2010, one, and two, just on that deductible front, did you see any month-to-month trends regarding the copays, which I assume get - and deductibles as they get worked through or passed through, as you got into March, did it seem to be -- did you see some acceleration? Or in April so far, are you seeing acceleration there? Again, how should we think about that?

Well, both Heather and I can respond. On your first part of your question with regard to revenue, if you go back to Q3 of last year, that was when we were still seeing commercial rates decline as a result of the CMS decision, so achieving kind of flat revenues in that period of time was really driven by volume improvements. In the first quarter of this year, as you pointed out, I guess our revenue target beat expectations, or at least your forecast and others, Rick, somewhat. And I think it's pretty easy to conclude that on somewhat lower volume that we anticipated, we were still able to achieve or exceed revenue expectations. So obviously the conclusion there is that ASPs are remaining very stable and that the new payers we're bringing under contract are coming in in the range of this stabilized pricing if you will.

On the - and let me ask Heather if - would you like to add to that?

Yes, I mean, I would just say that as Randy indicated, we've seen the prices stabilize. And while we can't predict what they would do in the future, Rick, to answer your question, if they were to remain stable, we would be able to see an increase in our revenue. (Inaudible—multiple speakers).

-- there's several other factors that are going to drive revenue, most notably, of course, our initiatives to get a higher reimbursement rate with Medicare and then adding these 50 million-plus uncovered lives by two of the largest commercial payers. And let me go back to my comments in my narrative. We're also kicking off new selling and marketing initiatives. We are complementing our internal sales organization with a contract selling organization. And if we execute well against all of those initiatives, get the additional payers onboard, we should see, you know, the gross - the revenue begin to improve.

Okay. And my last question for the moment talking about the next-gen MCOT, it sounds like this approval came faster or certainly came faster than I expected. Maybe if you could just talk a little bit around what's necessary to launch the product at his point? Is it possible you could launch it a little earlier? And maybe Heather, you could touch on the - just broadly the P&L implications in terms of sort of on the cost side and what about the inventory that's out there and how do we think - how does that affect the second half of the year?

Thanks so much.

Yes, I'll address those and we'll move on to our next questioner. We've got quite a few, Rick.

Okay, sorry.

With regard to the approval of the new platform, obviously our regulatory and R&D organizations really did a superb job. That certainly speaks well for CardioNet. In terms of launching the new product, the next steps will be in the next month of so the new platform will go on real patients out there in kind of a limited number. We will continue to fine-tune the software and the algorithm and make sure it's all perfected before we go to a broader launch. Several other things have to happen. Obviously a substantial number of devices have to be manufactured, go through QA testing, et cetera. But all of that has already begun. And so we're in a good position on that.

Then there's a number of factors in terms of how quickly we replace the current technology with the new technology. Obviously there are write-offs associated with the old technology. That's not an overwhelming concern. There's cash flow commitments related to building out all of the new devices. Obviously that cash is something that we manage very closely. And then as we begin to expand the introduction of the new technology into the marketplace, there'll be a point in the foreseeable future when we accelerate the swap-out of the old technology for the new. The exact timing of that is kind of dependent on all - how all of these other factors take place.

With respect to the impact on the balance sheet and the P&L, as I mentioned, there's a write-off associated with the old technology. There's cash impact on building out the new technology. And then longer term and of great meaning to us is the 30%-plus lower production cost related to the new technology.

So, Heather, do you - would you like to add detail to that?

No, other than any - from a P&L impact in 2010, Rick, you shouldn't expect any significant savings in 2010 as we'll still be ramping up.

And I'll just come back, you asked one other question, Rick, and then we'll move on. You asked about what are we seeing currently with regard to copay trends. We are seeing those trends begin to improve back to historic norms, maybe at a little slower pace than you've seen in the past, because patients are just being required to pay more and more for their own healthcare. And there's no question that will be a long-term trend. But we are seeing the rates of drop-off begin to go closer back to what we've historically experienced.

Amit, I think you're next in line.

And your next question, Amit Bhalla from Citi.

Hi. This is Valerie Dixon for Amit. My first question is about drilling down into your gross margins. Just wondering, if the 63% you've experienced this quarter is going to be sustainable over the rest of the year and what specifically did you do differently to get the cost per patient down?

Oh, hi. This is Heather. So the gross margin percentage of 63% in the first quarter we do believe is sustainable. And as we see - and it was largely a result of the cost reduction initiatives and efficiencies that we put into place in the first quarter. We were able to accelerate those, so we did see a better-than-expected impact on gross margin. And what I would say is that looking forward through 2010, you can expect to see a continued increase in gross margin, but I would not say that overall for the year we would be able to get back to 2009 averages.

Okay, and just a follow-up question, how was your sales productivity in terms of your representatives?

Sales productivity per rep is not only something that we've always monitored, but an area of increased emphasis and attention at CardioNet. As you know, we went through a restructuring of our sales organization at the end of 2009 at the beginning of 2010. That is well behind us. We have now implemented, for example, a new sales commission plan, which is more geared to a balance of increased physician utilization and adding new practices. So that is one of the metrics that we hold our sales reps accountable to. But we've now penetrated even deeper to that and have far greater measurement of day-to-day productivity of our reps than we've ever had in the past. And I'm quite confident that the old clich you manage best what you measure best is going to apply here and that we'll see sustained improvement in per-rep productivity as we go forward. But, Valerie, it's a very important issue to CardioNet, which is a young and growing and changing company. And as our sales organization gains experience and matures, these measurement metrixes [sic] that you are alluding to become more and more important.

I'd also like to take advantage of the moment to say that post the restructuring of our sales organization, we have a very stable group of sales professionals. I've had virtually no turnover this year whatsoever. And that bodes very well for their increased experience and productivity in the future as well.

So thank you and we'll - I think Ryan Daniels is next in line for a question.

Yes, with William Blair & Company. Your line is open.

Hi guys. This is Andy O'Hara in for Ryan today. Just moving back to the volume really quick, do we think that volume will pick up enough by the end of the year hit your I believe 30% to 40% volume growth targets?

I think that because of the copay dynamics that we are seeing that the high end of that, the 40%, Andy, is a reach. The 30%-plus is something that we remain committed to and very focused on. And, again, that's going to be driven by a lot of initiatives or results that we expect to achieve between now and year-end. As I said before and as Valerie commented, measuring the productivity of our existing sales organization, the addition of the contracted selling organization, which will be fully functional for the full second half of the year. We're also expanding MCOT into the CTS and neurology markets, which early on is going very well. We've got this very exciting new marketing campaign, which we're going to kick off at the Heart Rhythm Society, really geared towards increasing average physician utilization of MCOT and really aimed at replacing the event marketplace. Then, of course, the launch of our C5 technology we think is going to create a lot of enthusiasm by the physician community. Add to that as I said before our efforts to contract the remaining large commercial payers, we have a lot of very positive initiatives that we believe the majority if not all should come to fruition here in the next month or two. And if all of those come to fruition, we believe that a full year volume growth in the range that we previously discussed is still achievable.

By the way, throughout this period of time, as Rick commented, we all have to keep an eye on this whole copay dynamic. Some of you on the phone, I'm sure you're talking to some of your other providers and I know we've heard from you that quite a few companies are experiencing this copay dynamic, too. But a good question, Andy. And hopefully all of those initiatives will drive that higher level of volume.

Excellent. And then I just wanted to follow up really quick on the sales partnership. Do you guys have any initial data from that? Are those sales reps getting pretty good traction? Or can you provide any color there?

The contract sales reps are being trained as we speak, Andy. We are training them just as if they were full-time employed account executives for CardioNet. That training should be complete here in the May and June time frame. We're actually training more contract sales reps that we anticipate we need so that out of the larger group we in the contracting company can select the very best. So that's going well.

All right, all right, and then just one final follow-up here, you guys had mentioned with the new C5 technology that potentially you're going to be able to communicate with other wireless sensors and really kind of expand your growth avenues. Do you guys have an update in terms of any potential technology acquisitions that may move you guys into a sort of adjacent space or any color there?

We're very excited about that opportunity and for the future of CardioNet. Today our expansion focus is in adjacent specialty markets like cardiac thoracic surgery and neurology. The new device will expand our ability to move into other markets, outpatient monitoring for hospitals, rehabilitation care, so there's a lot of market growth just given the current technology and the expansion of the capability with C5.

We also believe that the C5 market will -- excuse me, the new platform technology approved by the FDA, we call it C5 internally, is going to enhance our previously discussed interest in moving into the contract research and development segment. Its ability to communicate with other devices really opens the door to CardioNet collaborating in other therapeutic and diagnostic modalities as these devices are rapidly being developed, so a whole host of potential for the future that we're very excited about.

All right, great. That's helpful. Thanks guys.

Your next question comes from the line of Topher Orr with Thomas Weisel Partners. Please go ahead.

Thanks. So must of my questions have actually been answered. I just had a quick housekeeping item. For the stock comp, could you guys just run through where that is coming from in each of the various line items, G&A, R&D, that sort of thing?

It is actually all in G&A at this point. The - it was not material enough to break out into the other line items, so it's all running through G&A now.

Perfect. Okay. All right, thanks guys.

Thanks Topher.

Your next question comes from the line of Josh Jennings with Jefferies & Company. Please go ahead.

Thank you for taking my question. This is Anthony Petrone in for Josh Jennings. Thank you. A couple on volume just to go back to that for a moment, the restructuring last quarter with the sales force reductions, did - can you credit any of the volume reduction in the quarter or the slowdown in volume I should say to that reduction? And secondly with the contract research organization going forward, as those reps get up and running, what are the implications for gross margin as volume begins to flow through that channel?

Anthony, we don't believe that there was any material impact on volume as a result of the restructuring. You characterized it as a slowdown in volume. We still experienced 23% volume growth. I'm sure what you meant is --

The slowdown in the rate of growth, of course, not a slowdown in absolute sales.

Yes, exactly. But no, we're quite confident that the restructuring of our sales organization was handled extremely well by the leadership. And virtually all of the volume differential was driven by the copay issue.

On your second question, I'll defer to Heather on that.

Yes, as far as the contract sales organization and its impact on gross margins, that's been taken into consideration in my previous comments with the incremental increase that we expect to see throughout the year.

Okay. And just one follow-up if I may, I think, Heather, you mentioned the - an electronic connectivity service, that database, for the second reasoning in terms of volumes. Correct me if I'm wrong, but if indeed that is the case and you're now working on an internal database, as the sales force, it seems that there's a more focused approach in terms of sales and going after existing accounts or those patients that do have coverage. As the sales force adjusts to that approach, I mean, do you see any volume impacts, even for just say one or two additional quarters, and then an uptick thereafter?

Thanks again for taking my questions.

Okay, this is Heather. The electronic payer connectivity system, what that allows us to do is when a script is written for a patient, it allows us to identify up front before that patient goes on service whether or not they have coverage. While we can use that to target specific payers that we may not have coverage for strategically to go after those payers to obtain coverage, our sales force is already generally aware of which payers we do and do not have coverage for. So they do approach the appropriate docs and give them the appropriate information as to which patients we can take. Does that answer your question?

No, it does. Thank you.

Thanks Anthony. And give your best to Josh. Next?

Will do. Thanks.

Your next question comes from the line of Matt Dolan with Roth Capital Partners. Please go ahead.

Hey, guys, good afternoon. To follow up on the sales side of things, Randy, can you talk about the new - the newer portion of your sales force? Have you seen them contributing? If not, when do you start to see them producing some of this volume growth? And the second part of the question is outside of cardiology and electrophysiology, have you started to see any pickup from cardiovascular surgery or neurology yet? Or does that help you kind of accelerate this growth number in the back half of the year as well?

Yes, here we go. Actually you talked about new sales reps. We did all of our sales force expansion back in 2009. So at this point in time, Matt, they are really fully trained and experienced and productive. And so if you will there's no excuse. They're out there and should be at 100% utilization. And part of what we track going back to Valerie's earlier questions relate to per-physician increases in utilization of MCOT, et cetera. So that's all going well.

On the CTS and neurology side, it's early on, it's anecdotal, but yes, there's very good traction there. And those physician specialties we think will continue to add to our growth.

Okay, great. And then on the commercial payer side on these new negotiations with the two remaining large payers, are those discussions centering around [high marks] rate or is this a completely independent kind of case-by-case analysis that they are employing to determine their own contract with you?

Completely independent. And the first task there is just to get under contract. And then the negotiations happen very quickly thereafter. But the reimbursement rates there should be completely independent of our negotiations with CMS. And everybody I'm sure is aware that we were in there and arguing for a national rate at a higher level. And if anything, I think that's kind of a favorable dynamic for us.

Great, thanks.

Thanks.

Your next question comes from the line of Charley Jones with Barrington Research. Please proceed.

Thanks for taking my questions. Do you think that we could see a 25% increase in volume over a relatively short period of time, 18 months, 2 years, when those commercial payers do come on?

Well, those --

Or if they do come on?

Well, those commercial payers if they come on represent about 50 million new lives on a base of over 200 million new lives right now. So if my math is right, if everything flowed through to patient volume, that's about - that could be an uptick of about 12.5% volume just based on math. Obviously we would strive for that to be higher. But that's about what those new payers would represent in terms of potential.

Do you think they would come on pretty quickly? Or does that have to take time for some reason?

Well, here's - as I said before, our presentation of facts and data to those commercial payers was completed in the last couple of months. They have a pretty formalized process by which they approve new products and services. Our scheduled review with their technical committees, which was the last hurdle with both of the large commercial payers, is in the next 30 days. Following that, if their technical committees approve the adoption of CardioNet's MCOT, the contract negotiations then take about two to four weeks. So if we call today May 1, if everything went as well as it could for CardioNet, we would have them on right at the start of the second half.

That's actually more than I was looking for. I was more asking if once - if they do come online, is - will we see the patient increase pretty much immediately? Or does that take years to get those patients actually using MCOT?

Oh, okay, I understand it. They come on immediately. The physicians who cover their patients are immediately able to enroll or prescribe patients in MCOT. That happens immediately upon the signing of a contract.

And then finally for Heather, could you just share with us the cash outlay you would expect to switch out the old monitors?

Thanks.

So, Charley, it - at this point in time we do not have a plan in place to switch out all of the old monitors. What Randy was referring to is that as the C5s come on at some point in the future -- which we don't know when exactly that would be. It could be the end of 2011. It could be 2012 -- we would make a decision to completely replace the C3s. So I don't have a number for you at this point of what that number would be.

Okay, thanks again.

Your next question comes from the line of Bruce Wilcox with Cumberland Associates. Please proceed.

Hi guys. So the cost savings, I believe you said you expect to implement another $12 million over the next 15 months. Did I hear that correctly?

Yes, the remaining --

Remaining, yes, of the original 15 estimate.

Originally we had said 18 months and we're now three months into it?

Okay, all right, fair enough. And then you - in your caption on the P&L, the integration and restructuring and other charges, that $1.9 million figure included $1.7 million of the cost incurred to implement cost savings. Is that right? Did I hear that correctly earlier?

On the actual P&L, the restructuring line? Is that what you're referring to?

Yes, integration, restructuring, and other charges.

It includes the $1.7 million.

Right. And so what - and you expect another $1.8 million to flow through that caption for the balance of the year?

Correct. There could be some additional charges there potentially related to Biotel litigation, but additional restructuring charge will go through that line.

Okay. Looking beyond 2010, I mean, would you - could expect to continue to see kind of ongoing integration and restructuring charges? Or should that item taper off?

Oh, at this point in time, we're constantly looking for additional efficiencies, so there's always that possibility. We have nothing planned at this time.

Okay. And then you - the efficiencies achieved this quarter, I think you characterized it at $3.1 million.

Mm-hm.

And you said it was split between cost of goods and I kind of missed the rest of the other two categories you gave.

I'm sorry, it was actually across the board within our organization, so it was split between cost of sales, as well as our SG&A. And it was about 70% SG&A and 30% cost of sales.

All right, that's helpful. All right, that will do me for the time being. Thanks a lot.

Thanks Bruce. Next?

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

Bob Hopkins. Hi, thanks. Good afternoon. Can you hear me okay?

We can, Bob, yes.

Bob Hopkins. Okay, great. So I just wondered if you could remind us of specifically when we should expect information out of CMS. Is that a July process or is that a year-end process?

Half and half, Bob. In the June or July time frame, CMS issues their rulings, which basically describe the methodologies by which they are going to calculate and determine reimbursement for new technologies and services. Then right around the first week of November, they actually issue the exact dollar amount of reimbursement for those new technologies and services. Sometimes you can interpret in their rulings in midyear where reimbursement may go. Sometimes you can't. So we'll all be looking at that ruling very closely and see if it's suggestive of anything.

Bob Hopkins. So, okay, so a normal cycle process with Medicare. There wouldn't be anything that would happen outside of that normal annualized process that they go through.

I mean, we don't expect that, no.

Bob Hopkins. Okay. And then I apologize if I missed this previously, but going back a couple of - two or three quarters ago, you guys had made an announcement about having an advisor to help you through some strategic decisions. Is that still on - is that process still ongoing? Or could you just update us on where we are with that?

Yes, we announced a couple of months ago that the Board had retained Lazard Frres to advise us on a number of strategic initiatives. Lazard Frres still is working with CardioNet and the Board. And as always, we wouldn't choose to comment on any of those specifics.

Bob Hopkins. Okay. I was just curious if that's still an active relationship or whether that was terminated. It sounds like it's still ongoing.

It's an ongoing relationship.

Bob Hopkins. Okay. Great. That's it. The rest of my questions have been answered. Thanks so much.

Thank you.

And your last question comes from the line of Jose Haresco with Brean Murray. Please go ahead.

Thanks for taking the question, guys. Going back to the second generation MCOT device, over what time period should we expect the entire product line to be changed over? And perhaps somewhat related to that, over what period of time once the launch begins would you expect to see the gross margins improve?

The trade-out of internally what we call C3, which is really the third generation, and the newly approved platform, as we said, we will begin to introduce the new technology at the end of this year. As Heather commented, it would certainly be our goal to have the majority of that technology in the marketplace by the end of 2011. And the way these new technology rollouts work is you really kind of measure it as you go. If things are going as well as expected, if cash is as positive as we hope it would be and we determine that the write-offs of the new technology are acceptable, you would pick at any moment in time to accelerate the transition to the new technology. But if you just kind of want a rule of thumb from where we stand today, I think Heather's comment about the end of 2011 is appropriate. If everything goes as well as planned, we might choose to accelerate that. And I'll let Heather address the second part of the question with regard to how it might impact the P&L.

Well, from a standpoint of the gross margin percentage, as we indicated, the actual product cost is about 30% lower. So as we trade in, while it won't be a direct 30% improvement to our COGS, you will see that incrementally occur throughout 2011 as we phase in the product.

Thank you.

As there are no further questions, I would like to turn the call back to Randy Thurman for closing comments.

Thank you very much. And I'd like to thank everybody for participating in today's call. I think you can see that within CardioNet there are some really exciting dynamics going on. First and foremost, again, this organization, which really came through substantial adversity last year following the unexpected cut in Medicare reimbursement, has really responded. And I think that that not only speaks well for what they've accomplished, but speaks well for the capability of this organization going forward. And then you've heard that we have a number of variables that we continue to manage this year -- the reimbursement rate from Medicare, the contracting of the remaining large commercial payers, the launch of the contract selling organization in the second half, the implementation of an exciting new marketing program really geared towards increased physician utilization and replacing the event market. We've had this whole copay dynamic, which is new, but will be something I'm sure we'll all be looking at in healthcare for a number of years. But as you look out into CardioNet's future, we all remain very excited. We think there are sustainable uptrends in the demand for MCOT, not only from the core cardiology and EP marketplace, from the new markets that we're entering such as cardiac thoracic surgery and neurology, potentially the CRO marketplace in the future. And as we've said, the new platform just approved by the FDA expands the potential in all of those areas. CardioNet remains far and away the leader in the MCOT industry, the pioneer in wireless healthcare. And hopefully the results that we have achieved following last year's challenges now demonstrate to all of you the capability of this organization and its employees and the commitment to our mission of serving patients, of serving physician communities and Medicare beneficiaries.

Thank you very much.