Heartbeam Inc (BEAT) 2010 Q2 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet second 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 risk, 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 filing 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 be opened for question and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Joseph Capper. Sir, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to our second quarter conference call. I'm Joe Capper, President and CEO of CardioNet. I'm joined by Heather Getz, our CFO. I will begin with some brief comments on why I decided to join CardioNet. I will then turn the call over to Heather to discuss our second quarter performance. Finally, I will discuss the top priorities that I and the rest of the management team will be focusing our efforts on in the near term. We will then have a brief question-and-answer session.

Before I begin my formal comments, I would like to take this opportunity to thank Randy Thurman, the Board and the CardioNet executive team for making this a smooth transition. I appreciate Randy's dedication to the business and believe we share the same enthusiasm for the long-term potential of CardioNet. I look forward to working with this talented group of individuals going forward.

So why CardioNet? I've been asked this a number of times since my arrival. Among the many aspects that attracted me to CardioNet, there were four that really guided my decision-making process. The first was the people. I was impressed by the quality of people I met during the interview process. Clearly, the better team you can feel, the higher your chances of success. This team has been working through some fairly significant challenges, most notably the unexpected 33% reduction in Medicare reimbursement. Not many management teams are strong enough to quickly make the necessary adjustments this team has made to the business.

Second was the technology. Wireless medicine offers tremendous opportunity for improving human health and driving cost out of the healthcare continuum. CardioNet is at the heart of wireless health. Our clinically proven technology with 30 published peer-reviewed papers and abstracts is validated by the more than 350,000 patients that have been monitored to date. Nobody can match our technology.

When I was in the field last week visiting customers, a cardiologists stopped us in the hallway of her practice to tell us how the use of MCOT had just saved a patient's life. MCOT detected a significant pause at two in the morning. Within 24 hours, her patient had a pacemaker. Our technology helped save this patient's life. If that doesn't excite you, then I'm not sure what will.

The third reason was the Board. Every member of the Board is committed to the long-term success of our business. This is not a quarterly dinner club; they are all actively engaged and take their responsibilities quite seriously. Rest assured, this Company is guided by a thoughtful and spirited group of Directors.

And last was our balance sheet. With no debt and over $50 million in cash and investments, we are in an excellent position to leverage the Company's strength for future opportunities within wireless medicine. For these and many other reasons, I'm extremely excited to have the opportunity to join the pioneer and innovative leader in wireless cardiac monitoring.

Shifting gears to our second quarter results, our overall performance was mixed. Volume growth slowed to 12% year-over-year. However, bottom line results exceeded our expectations and represented an 87% improvement compared to the first quarter. We have executed on all of our cost reduction initiatives and have reached the run rate needed to achieve our objective of $15 million in savings. We became EBITDA positive in the quarter, generated free cash flow and further reduced our DSO.

I will now turn the call over to Heather to provide some additional detail around these results.

Thank you, Joe, and good afternoon, everyone. Revenue for the quarter was $32 million, a decline of 17% compared to the second quarter of 2009. The positive impact of the 12% MCOT volume growth was offset by lower Medicare and commercial reimbursement. While still positive, our volume growth was lower than our projections due to several factors, including the impact of some of our cost reduction initiatives, which Joe will discuss later; the higher patient co-pays and deductibles, and increased competition from small regional players.

Specifically, in reference to the patient co-pays and deductibles, we've seen some improvement in the number of patients deferring service over the first quarter. But the number remains higher than what we experienced historically. As more companies have moved toward cost-sharing arrangements for healthcare, it is possible the higher level of patients deferring service may be the new norm.

Moving to gross margin, compared to the first quarter, gross margin remained flat at 63%. In anticipation of the fourth quarter launch of our next-generation device, we performed maintenance in order to avoid acquiring additional quantities of our current device. With the lower-than-anticipated volume, the additional savings from our initiatives were offset by this maintenance, which is expenses incurred, causing margins to remain flat.

Adjusted operating expense for the quarter was $20.5 million, which was $3.4 million or 14% lower than the second quarter 2009 and 11% lower than the first quarter expense. These reductions resulted in an adjusted operating loss of $400,000, an 87% improvement over the first quarter.

Included in our second quarter results are $3.7 million of savings from our recent initiatives. We are now at the run rate of savings needed to achieve the $15 million as promised. The restructuring resulted in a one-time charge of $1.1 million in the quarter and we expect to incur an additional $800,000 in the third quarter. As a result of the reduction, we became EBITDA positive in the second quarter ahead of our previously provided expectation of sometime in the second half of 2010.

We generated $5.6 million in cash from our operations in the quarter and had free cash flow of $4.4 million. With $50 million in cash and investments, we can invest in the tools and the resources needed to drive growth and improve productivity.

Looking at accounts receivable, we continue to make progress in our billing and collections area, as evidenced by our declining DSO, which was 104 days for the second quarter, an 18-day decline versus year-end. Cash collections grew 12% to approximately $33 million compared to the first quarter.

Our bad debt expense declined both sequentially as well as compared to the second quarter of 2009. As we previously discussed, we anticipate that our DSO will be in the low-to-mid 90s by year-end. While we have made significant progress, this area continues to be a focal point for the Company. With this continued focus, we believe there is an opportunity to be well below a 90-day DSO in 2011.

Despite our reimbursement challenges, we remain committed to achieving future profitability. In the last 9 months, we have successfully executed on $23 million of cost reductions. With the completion of these initiatives, we can now turn our focus to identifying opportunities for investments to drive volume and improve our operations.

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

Thanks, Heather. As you can see, the Company has a lot to be proud of, but a number of challenges still remain. As a result, the most practical approach is to withdraw volume guidance until we have a better understanding of the current business dynamics. My approach in the initial three to four months of this new assignment will be similar to the approach I've taken in the past. I will assess the core competencies of the Company, analyze the customer needs and market trends, augment the team if necessary, and move to refine our strategic intent in ways that most effectively grow our business and improve our competitive position.

I have directed the senior team to continue its focus on the following five priorities. First, accelerate volume growth. At this time last year, CardioNet received the devastating news of the seemingly arbitrary 33% cut to its Medicare reimbursement and went into survival mode. We removed $23 million of expense from the Company. Sales was one of the most impacted areas with a reduction in size of approximately 25%. It is only logical to conclude that this reduction has had some impact on our volume growth. Now that we're in a stable position, we can begin to selectively add back resources where we believe the greatest opportunities exist.

Second, improved MCOT reimbursement, especially with CMS. As you know, we have had significant challenges lately gaining adequate levels of reimbursement for our life-saving MCOT service. While frustrating for CardioNet and the many physicians who depend on this superior service to diagnose at-risk patients, this is not an uncommon challenge for cutting-edge products.

Recently, CMS made public in their proposed rule their decision not to grant MCOT a national price, but instead to leave it carrier priced. Obviously, this was a huge disappointment for the Company and potentially quite troubling for thousands of Medicare beneficiaries who need access to this life-saving technology. After the release of the proposed rule, we along with representatives from other affected companies met with CMS and gained some insight about the inputs used in their analysis.

It is my belief that the folks at CMS are trying to do the right thing and set an appropriate reimbursement level for MCOT. However, because MCOT does not fit into existing methods for setting reimbursement of diagnostic products, we believe they are making certain assumptions in or about the service and therefore generating inaccurate results. We will continue to push a dialog with CMS and provide any information necessary to improve their analysis. We are hopeful they will reconsider their position prior to publishing the final rule later this year. Additionally, CMS' decision not to establish a national price for MCOT may lead to confusion among commercial carriers -- commercial payors on how to value our service.

Third, continue to increase customer service performance levels. It is imperative that we build the foundation for a world-class customer service organization. We have a clear competitive advantage in terms of product technology. If we expect sustainable growth as the telemetry market matures, it will require higher levels of patient and physician service than we are providing today.

Fourth, further reduce the overall cost structure. The Company has done an excellent job bringing down operating expenses and instilling a culture of financial discipline. However, we need to look for opportunities to realize additional efficiencies, particularly in our cost of sales. In addition, as Heather indicated, we remain focused on improving our billing and collection efforts, which will further reduce bad debt expense. We believe there may be potential for improvement in both of these areas and have focused resources to assess the opportunities.

Finally, launch our next-generation MCOT device, C5. As previously discussed, we expect to launch C5 later this year. This product will reduce cost of sales and provide a host of additional enhancements. Provided we stay focused on these priorities, we should navigate the second half of 2010 in good shape. Clearly, we have our fair share of challenges. However, given our financial strength, superior technology and world-class leadership team, I like our chances.

Operator, we will now open the call for questions.

(Operator Instructions). And your first question comes from the line of Rick Wise with Leerink Swann. Please proceed.

Good morning or I should say, good afternoon and look forward to meeting you in person at some point. If I could start off with the reimbursement side of things, it sounds like you still have some hope, Joe, that CMS might yet reach a favorable decision. I know it's awkward to talk about your strategy, but how do you help them during this common period? I guess, [thinking it has to] go beyond a lot of simple lobbying, how do you help them get the information or the analysis that they need to make a more favorable national decision?

Let me say that, first of all, that I'm probably the eternal optimist. I'm new to this problem, but I have lived through similar problems in the past. It's a challenge when you're trying to get adequate reimbursement for newer technology like the MCOT. I personally met with them a few weeks ago, I think a week after I came on board, to try to get a better feel for it. The best I can tell you is it looks like you're trying to fit a square peg in a round hole. They don't have a good formula to plug us into, so they're using traditional methodology for trying to set adequate reimbursement, it's just not working.

We provided them a lot of information and I don't think there is -- they have a lack of information right now. I think it's interpretation of data and use of various inputs in their current equation. We've also at their request provided them alternative methods for setting proper reimbursement for the technology. And so far, they haven't taken to that idea. So we're going to keep pushing. We're trying to meet with them again here in a few weeks. We'll provide comments at the course of the comment period later this month and we'll continue to maintain a dialogue with them. I understand it's a challenge from their end and I don't think they're bad folks, it's just -- right now, we're coming up on the low end of this.

Yes. You talked about increased competition from small regional competitors, is this the sales cutback and they're just filling a vacuum or a void and just, as you selectively add back, that should subside, or is it something more complicated?

Too early for me to tell you with 100% certainty. The sales organization has provided feedback that there is increased competitive activity, more on a regional basis, regional local basis. Late last year and early this year, there were some new entrants. From what I can tell, they are small, they really lack scalability. Obviously, there is a longtime ramp in this business.

I think on the positive side, it kind of validates demand for remote monitoring to more people to get in. On the downside, it's just more people that we have to push back. And from what I can tell in talking to physicians over the last week, we seem to be the best -- or not seem to be, we're clearly the best from a clinical and efficacy standpoint, from a reporting standpoint. So as this business matures, more people are going to want a piece of it because this is where the action is and we can handle that.

All right. And just last for the moment, you talked about -- highlighted the potential or the need for further cost reductions and emphasized COGS as a priority. C5 obviously is expected to be a significant to have a significant lower cost of goods, or cost of manufacture, how much of the expected cost reductions come from the C5 and does that flow of the bottom line or do you reinvest in sales or something else and that's why you're able to get that extra investment? Just any perspective will be welcome. Thanks.

So on the -- my perspective is we have to continue to push cost of sales down, cost of goods, cost of manufacturing down. Look, we're in a third-party reimbursement environment. So we hope to be successful in the near-term setting adequate reimbursement levels for our product, but I think it will be silly for us not to realize the environment we're working in and we're going to be challenged forever to maintain profitability or to maintain adequate profitability.

So part of that equation is driving down cost of sales. Part of it is getting our operating expense structure under control. At one point, we'll be leveraging it as we scale our business. So cost of sales is a logical place for us to look. We are going to get a pretty nice improvement with C5, but C6, C7, C8 give us more. We don't plan on stopping development of next-generation products.

On the bad debt side, to me, that was just logical. I think that we're still going through a growth period. Not uncommon for growth companies to run a little bit higher on the bad debt side of the house, but we're at a point now where we have to clean it up a little bit more than we already have and I think it's an opportunity for us to show improved profitability. Heather, anything I forgot, anything you want to add to that?

Yes. Just Rick, I think you've heard us say before on the C5 side, depreciation is about 15% of our overall cost of service and we're expecting about a 30% reduction in that from the C5 when it's fully deployed. And no additional cost reductions that we're are looking at in addition to that, it's not just the C5.

Got you. Thanks so much.

And your next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed.

Hi, guys. Good afternoon. Welcome, Joe.

Thank you.

Maybe a follow-up to one of Rick's questions. I can appreciate your -- the withdrawal of your growth guidance, but why don't you maybe just go through the three factors you've cited that's pressuring patient volumes, one is patient deferrals which you talked about in the last call and it sounds like although still present are softening a bit. The cost-cutting on the sales side having an effect of slowing growth, it looks like you're going to take care of that with maybe some increased sales hedge in this contract selling organization which leaves us with competition which sounds regionally based and maybe that second point takes care of that. So can you just give us a feel for absolute volume from here? I mean is this -- can we build off of the volume you've put up in the second quarter? Maybe just help kind of bracket growth, now that we have no guidance to go off of.

Yes, Matt, I apologize for that. I cannot really give you guidance today. I'm relatively new to this and the worst thing I could do really is to make you a promise and come back and apologize for not hitting it down the road. I need a little bit more time to kind of assess the business. Let sort of the dust settle, see where the organization is, how much of this is as a result of cutting, so it is necessarily because we were in a crisis mode. How much of this is as a result of that so that I can add back, how much of it is increased competition, how much of it is because of other dynamics like higher co-pays and deferrals on the insurance side. It's kind of -- I'd be taking too much of a guess to comfortably give you an assessment on growth.

I can tell you that what I have seen so far, there still remains a huge appetite for the service and the technology. We are the best at providing it clearly, even though there is some regional activity, I'm not -- I wouldn't say I'm not concerned, we're always concerned with competition, but I don't see anything that scares me, I should say. I don't think there's anybody out there that can scale and build like we can. So I like our position, I like the market dynamics; it's just too early for me given the variables to give you a good growth number.

Fair enough. So maybe another way, could you tell us how on a monthly basis that the quarter tracked relative to your expectations? Did you start to see improvements within the quarter or--?

Probably not comfortable even answering that right now, I apologize. I'll give you a better idea next time around.

Okay. So maybe moving to reimbursement, I think in the press release, you mentioned you -- that a lack of national pricing is creating some confusion among commercial payors. Are you referring to those that don't currently have a contracted agreement with CardioNet for MCOT or is this something that you think we should think about in terms of [impressioning] your reimbursement rates for existing commercial contracts?

Part of that statement is may -- I believe I said may cause some confusion, which is logical. Unfortunately, a lot of commercial payors do tend to trend provides Medicare prices. One of our arguments in Medicare is, look, you're not reimbursing us at an adequate level and other people may take a cue from you and that's troublesome for us. So we haven't seen it yet, we've had good dialogue with our commercial partners, we feel pretty good about our position. But long term, it's imperative that we get this thing straightened out. I was not referring necessarily to people who haven't contracted with us yet, I was more referring to sort of the long-term trends that could evolve from this.

Okay. And then finally, on your sales force expansion plans, can you help us quantify those at all today?

I got about a -- at the end of the quarter, I think I have 111 resources out there. Right now, I'm in the process of ramping that up to about 121. I'll see how that takes. If it makes sense, I'll continue to add resources. Right now, as you know, from the financials, we're sort of teetering around that breakeven point. That's -- our intent is to maintain this thing in a growth mode. Obviously we're coming out a tough situation, we think we're -- we've leveled out, we can start to look at how we accelerate growth again. That's our intent. Not to sit on cash but to invest in this business and grow it.

Great, thank you, guys.

And your next question comes from the line Amit Bhalla with Citi. Please proceed.

Hi, Joe. It's actually Valerie Dixon subbing in for Amit.

How are you?

Good. And the question is -- actually you're looking at the Company with a fresh set of eyes and wondering as we get down the road, if CMS doesn't come through in a decision in November, how are you seeing your options?

Well, look, I don't want to accept the premise of the question that CMS will not come through. I remain confident that these folks will see the light. And we'll help them -- help educate them in a better way on how to properly set this reimbursement. If it doesn't happen, we're going to have to make additional adjustments. Like any other business that's constrained, we're going to have to make additional adjustments. It will be terribly, terribly unfortunate for thousands and thousands of Medicare beneficiaries that need access to this product. I was asked the other day, what do you mean you don't have access to it?

The way we get words in Medicare beneficiaries about this life-saving technology is by detailing the service and it's not something that we could just put in the mail and mail to a cardiologist. We need to detail the service to them and tell them all about the product and how it works and then have them describe it to their patients. We don't go directly to consumer, as you know. So if I cut resources like I just had to, it limits my ability to get the message to cardiologists, electrophysiologists and the like, and then have them prescribe this to save lives. So that's the downside. If Medicare doesn't straighten this out, there are thousands and thousands of Medicare beneficiaries that will not benefit from this.

Okay, thank you. And just one other question on the C5 device. Last quarter, we talked there is a lot of excitement around it, and there is some sense about what the new interactive the technology might bring. Can you provide some additional updates on the development of that product? I know you just said that you're planning to launch at the end of the year. Can you give more information on this call or will you have more in the third quarter call?

Probably too soon for me to do that. I apologize -- it's -- the best I can tell you is still on track for end of year.

Okay, thank you.

And your next question comes from the line of Ryan Daniels with William Blair & Company. Please proceed.

Hi guys, this is Andy O'Hara in for Ryan today. Just a quick question on the CMS decision. What we understand the 754 Highmark rate is based on an average of six days using the device and not reimbursing past diagnosis sort of on average for these patients? Is this one of the main deviations in CMS' analysis versus the methodology you proposed or can you sort of help us understand what the big disconnect there is?

Yes, hi, Andy, this is Heather. So the premise that HMS used to reduce the rate at 754, they actually provided three different reasons, none of which we believe were valid, including the six-data diagnosis. Our patients on average are on service 14 days. So there is no validity to the six-day diagnosis. From a CMS standpoint, it's completely unrelated. They have the methodology, which they use to value services and that methodology, the traditional valuation is around services provided in a physician's office, and that's the problem. They are having difficulty getting their arms around the fact that we're a 24-hour, 7-day a week monitoring service and how to fit our cost into that traditional model. We're working with them on that, it's not the six-day issue.

Sure, sure. Okay, that's helpful. And then, another question here, on the recent United coverage decision, one of the major critiques there is a lack of evidence showing that MCOT improves patient outcomes, you got some of these studies happening now or planning that sort of address this concern and potentially going beyond that comparing the device to auto trigger loop monitors?

Yes, well, we're maintaining dialog with them and we're trying to work with them to give them the evidence they need to understand what this -- what the outcome is. We're diagnostic product, we're diagnostic tools. So, providing the outcomes data that they're looking for is a little bit challenging for us.

Right.

But we're willing to work with them, we're willing to try to figure it out. Look, here is the bottom line. They've already determined that monitoring for cardiac conditions is a good thing. We've already proven that we will detect more of the problems. We monitor for a longer period of time. By definition, we're going to detect more of the abnormalities. So logic says this is a better technology. There is plenty of evidence to prove that. Now, you can extrapolate a model from there what the cost savings are. Tracking patients in an ethical way to an outcome study is challenging.

Okay, all right. That's helpful. Then, just one final question. I know you guys have recently been tracking some sales rep metrics a little bit closer. Can you comment on physician utilization? Are existing physician customers increasing their MCOT prescriptions or do you have a good sense there?

I don't think we make that information public. Am I correct?

Yes. I mean, we haven't given specific physician utilization. We do track it and we're positive about the information, but we don't actually give price utilization numbers.

Hopefully, you can appreciate that for competitive reasons.

All right. Thanks a lot, guys.

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

Hey, Joe, nice to meet you on the phone. A couple of clarifying questions. The sales force, the 111, is that inclusive of your CSO sales people? And the increase to 121, is that primarily with CSOs or is it mix?

None of that is CSO, CSO is separate. So the 111 does not include and the ramp-up would not include as well.

Okay. And what is -- how many CSO people are in the field now?

Well, it's an inside group and I believe we have 12 full-time dedicated headcount right now.

Okay. And is that number about where you expect it to be or is -- would that number be likely to increase as well?

It depends. We've been at it about a month. We've got some very good early feedbacks, but I don't have good metrics on it yet to determine whether or not something I'm going to invest in it yet.

Okay, all right. Fair enough. And then, a question maybe for Heather, what do you guesstimate your capital expenditure requirements will be for the C5? I'm just thinking about net cash flow in the back half of the year. You got DSOs presumptively down, that's positive, but just can you give us in the ballpark as to what your investments in the new devices may look like?

Yes, I mean, it's our expectation that in Q3 and four, we will probably put out somewhere in the range of $4 million to $5 million for devices.

Per quarter or total?

Total.

Okay, all right. Fair enough. And where are we in the $15 million savings? I'm assuming that's not a forward number from here.

So in the second quarter, we hit the run rate. So we have executed on all the initiatives, we're at 3.7 which --

Times four gets you to $15 million, I got you.

The $15 million.

Okay. So we can use -- is it fair then to use for the time being the various elements of your operating costs as kind of a baseline? I mean I know they will change, I don't know how, but this is relatively normal other than the things you identified as kind of non-recurring. Are we -- is this a pretty good baseline level to be thinking about the future from?

Yes, I mean I think this is the base, but as we indicated, there is going to be areas where we could potentially add investing and other areas, which may come down.

Okay. Fair enough. Well, lastly, my mother in North San Diego County was just written a 21-day script for an MCOT device, so I am counting on you guys.

Great.

That's great news.

I hope it is. Yes. All right, thanks very much and Joe, welcome aboard and look forward to staying in touch.

Thank you very much.

Thanks, Bruce.

And your next question comes from the line of Anthony Petrone with Jefferies. Please proceed.

Thanks, congratulations, Joe. Just going back to some of the MCOT alternatives here if indeed you do pursue a completely different strategy, there has been [you see] talks of using it for clinical trial monitoring, disease management in congestive heart failure different aspects. Has the Company looked into any of those alternatives at this point or is it completely singularly focused right now? And just November what happens with CMS and we'll take it one step at a time.

No, I think probably the former rather than the latter. We -- clearly the Company has been internally focused, has gone through a bit of a workout post that cut. But we're always looking at different strategic opportunities, ways to leverage the technology, the call center, and the expertise. So I think the short answer is yes. We continue to look, we have a fairly robust sort of business, a corporate development process and we're excited about some of the things that we see out there.

In terms of something that hasn't been brought up in a while, I just -- this just goes back to '07, the PDS conversion rates, and [I think] that was strategy pursued and looking to get that exposure to hold during an event. Can you have an update there just on where actually that is and how much would you classify as an attempt to continue to convert PDS patients using [either hold to an event] or to the MCOT? Is there any room for kind of conversion rates on that end?

Yes, I think -- this is Heather. So from a conversion standpoint, we are actually looking at the entire event market at this point. We are not singularly focused on the businesses that we bought or the practices that we've obtained as a result of PDS. There still is some business out there that is [hold to an event] about 10% of our revenues as a result of those devices. But we look at the entire market, which is about a $1.5 million events per year.

And have you seen any changes in trends there, I mean, recently with CMS making some of these commercial announcements or --?

No.

Okay, thanks.

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Capper for closing remarks.

Thank you, operator. Folks, I appreciate your time this afternoon. I truly appreciate your continued interest in the Company. I look forward to working with you all. I believe this as a tremendous business. Hopefully, you feel the same way and are excited about being here. Thanks, everybody. Have a great night.

If you've joined the conference late today, you may listen to the conference on digital replay, which will be available from July 28 to August 13, 2010 at 1888-286-8010 or 617-801-6888 with the pass code 52900588. Thank you. You may now disconnect. Have a great day.