Heartbeam Inc (BEAT) 2010 Q3 法說會逐字稿

Good afternoon. Thank you for joining us on the CardioNet third 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 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 the forms 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. The floor will be open for questions and comments following the presentation.

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

Thank you, operator. Good afternoon, everyone, and welcome to our third 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 comments on the quarter, and how our strategic intent for the business is evolving. Heather will discuss third quarter performance. I will then close our commentary with some additional remarks before we open the call for a brief question and answer session.

I believe the best way to characterize the third quarter is transitional. Specifically, we are continuing to make adjustments to the organization in order to most effectively operate in a challenging reimbursement environment. Operating performance for the quarter was hindered by a declining average selling price, and a continued drag on volume, resulting from macroeconomic conditions, and the deployment of 25% fewer salespeople as compared to the same period last year.

However, we did make significant progress in several important areas. First, we can not overestimate the importance of finally, after a protracted struggle receiving national pricing from CMS for the MCOT service. We believe the market will view this as further validation of the importance of this life-saving technology in the treatment of millions of at-risk patients. Unfortunately, CMS failed in their analysis to incorporate all of the true costs associated with MCOT, and as a result, set the price for the service well below what is justified, and at a point that most certainly does not reflect the true value being provided. Nonetheless, this is welcome progress, and we will continue to work to educate CMS in hopes that they will more appropriately price the service at some point in the future.

Next, as mentioned on last quarter's call, we started a process of selectively adding back sales and customer service resources in order to accelerate new patient starts. This is a process which takes time, but we have made significant progress in the quarter, and currently have a large class of new sales professionals in for training. We will begin to see the benefit of this investment in the coming quarters.

We also completed a strategic planning process to clarify our long-term objectives, and how we intend to shape the organization for the foreseeable future. This was an excellent process of self evaluation, as well as determination and analysis of market potential. The result was a commitment or reaffirmation of our intent to be the world leader in wireless medicine, and the delivery of health information by providing products and services which improve quality of life and reduce cost of care.

The message I want you to take from today's discussion is that in spite of recent challenges, we remain extremely optimistic about our industry, and about our Company's relative position within our industry. It has been said that the best way to predict your future is to create it. It is in that spirit, and in accordance with our strategic intent, that we've entered into two agreements designed to strengthen our portfolio, and product development flexibility.

The first is our agreement to purchase Biotel Incorporated for $11 million, which was announced earlier today. In connection with the merger agreement, we have also entered into a settlement agreement to dismiss the outstanding litigation between the two companies, which will be effective as of the close of the merger. This acquisition provides us with the opportunity to diversify our revenue through the clinical service and OEM manufacturing businesses. It provides us with broader product offering, and the natural cost benefits derived from vertical integration with the Holter and event monitoring businesses.

We also entered into a agreement with MedApps, a Scottsdale, Arizona based innovator of e-care solutions for the collection, transmission, and remote management of patient health data. We are extremely excited about this venture, and are looking to MedApps and its cutting edge development team to help accelerate our entry into additional markets, as well as to extend our platform utilizing MedApps cloud-care technology.

Additionally, with a developing strategy that is far more patient-centric, and one that puts greater emphasis on the information technology side of the business, we have made some key changes to the senior management team in order to improve our ability to execute this plan.

At this point, I would like to turn the call over to Heather.

Thank you, Joe. And good afternoon, everyone. Revenue for the quarter was $28 million, a decline of 18% compared to the third quarter of 2009. This decline is partially attributable to the current macroeconomic environment, which is impacting reimbursement for our service. We are facing increased pricing pressure as non-contracted payors reduced their payments for our service in the quarter, negatively impacting our average selling price. Despite this, as Joe discussed, we received good news last week from CMS with the release of a national rate for our CPT code, which eliminates some uncertainty around MCOT reimbursement, and which we believe will help us in future contract negotiations with commercial payors.

Our volume in the quarter was flat year-over-year due in part to the impact of the cost reductions we made earlier in the year. As we previously discussed, we recognize that we cut, in some areas, too many resources, and we have started to reinvest where appropriate. Our flat volume is also reflective of increasing co-pays and deductibles, which are driving overall health care procedure volumes lower.

Our adjusted operating expense for the quarter was 17% lower than the third quarter of 2009. This reduction highlights the positive impact of the restructuring program implemented earlier this year. That being said, we do expect our expense run rate to increase somewhat going forward, as a result of the reinvestments being made in the business.

Shifting gears to the Medicare review. Due to the significantly higher volume of claims for our CPT code that CardioNet was processing in comparison to our peer group, we were selected by HMS for a prepayment review. This allowed HMS to review our Medicare claims for reasonability and necessity prior to reimbursement. While we have since been removed from prepayment review, our Medicare payments during the quarter were impacted, causing a $7 million to $9 million reduction in our cash collections, and a 14 day increase in our DSO. We expect to begin receiving Medicare payments again in mid November.

As for our AR, while we have made progress with our billing and collections, excluding the impact of the Medicare review mentioned, our DSO would have been 104 days, down from 122 days at year-end. We're still not completely satisfied with the current state of this area. We continue to build stronger processes, and are working to create a department that can support the Company's future organic and strategic growth. We expect this will aid us in reducing our bad debt, and drive down our DSO. To this end, we have retained a revenue cycle specialist to assist us with these processes.

With the reduced collections due to the Medicare review, we used $6.5 million in cash from our operations in the quarter. Despite this, we continue to maintain $43 million in cash and investments, enabling us to make the necessary reinvestments in our business, acquire Biotel as we look to diversify our revenue, as well as partner with MedApps. We will continue to explore opportunities for strategic investment, both internally and externally, as we remain focused on achieving future profitability.

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 such, we're still not prepared to issue any guidance. The senior management team remains focused on the five priorities I outlined on the last call. The first, accelerating volume growth by adding back selling resources, is well underway, as I mentioned. We believe these additional reps, armed with a refined selling message, and the addition of a wireless event through the Biotel acquisition will have a positive impact on patient growth in the coming quarters.

Our second priority is to seek improved reimbursement for MCOT. Clearly the CMS decision to nationally price MCOT was a major step forward. Our challenge now is to leverage this progress with some of the large payors, who continue to deny coverage for MCOT, preventing millions of at-risk patients the benefit of this state-of-the-art technology.

The third is to continue to increase customer service performance levels. We made significant improvements in this area during the quarter, with gains in critical metrics such as time to service, and by adding proven customer service leadership. As I mentioned on our last call, if we expect sustainable growth as the telemetry market matures, it will require higher levels of patient and physician service.

The fourth is to reduce the overall cost structure. With initiatives underway to bring down our cost of sales, and to reduce our bad debt allowance by improving our billing and collection services, we are confident we will soon report further improvements to our overall cost structure.

And finally, as discussed on prior calls, we had expected to begin commercialization of the C-5, our next generation MCOT device by year-end. While we still plan to conduct alpha and beta testing this year, full commercial launch will not take place until early 2011, due to delays in the development process. We are all anxious to bring this product to market, and it will certainly reduce cost of sales, and provide a host of additional enhancements. However, we will deliver a market-ready product, and will not shortcut our development or quality program.

In light of these tactical investments that we are making by adding back selling and customer service resources, the additions to the management team, and the two important strategic investments I outlined, we are clearly taking aggressive steps to improve our competitive position. I understand the allure of predictability in business, however harmony can be overrated. Remember, a smooth sea never produced a skillful mariner. Look for CardioNet to churn the waters for some time to come.

Operator, we will now open the call to questions.

(Operator Instructions)

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

Hello, good afternoon everyone, this is Danielle in for Rick. Hi, just a few questions. First, on gross margins, they were significantly weaker than we looked for, there was a significant decline sequentially. I understand the part that is due to the volume. Is there anything else that's factored into the weak gross margins this quarter? And, then, how do we look at gross margins going forward, particularly as we head into 2011 with, hopefully, a now higher Medicare reimbursement rate? And, then, I have a follow-up after that.

Hi, Danielle, it's Heather. So, as you indicated, the volume did have some impact on the gross margin, but what had a more significant impact was the decline that we saw in the quarter on our AST. This was the major driver of the sequential change in our gross margin percentage. And, as we -- and, as I look forward, it's difficult to say it was one quarter with a lower than -- with a lower ASP. As we look forward, it's a little difficult to say what that will do at this time.

Okay, great. Thanks for that, and then, as far as ASP, commercial rates seem to have stayed fairly stable over the last few quarters. What's driving the incremental pressure now, and could the new $800 rate actually -- would that hurt you guys on the private payors side or help you? Can you talk about that a little bit? And, also, how it could help you potentially get UNH and Wellpoint, and when you expect a review from those two payors again.

Okay. Sure. In the quarter, what we saw is some increasing pressure from our non-contracted payors. We saw them reduce payments as we mentioned in the release, and we also saw some new contracts come on at slightly lower prices, but the more significant impact was the result of the pressure we saw from non-contracted payors. As far as looking forward, as we've indicated previously, commercial payors do tend to migrate down toward the Medicare rates. So, over time, we would expect that to occur.

And, the last piece of your question was whether or not it would help us in the contract negotiations with United and Anthem?

Yes, and then timing around that too, if you could.

This is Joe. It certainly can't hurt. Again, it's further validation of the clinical usefulness of product. It certainly can't hurt. In the past, both United and Wellpoint have asked for outcome data. We've attempted to work with them, sculpt those projects. Timing, United reviews on a quarterly basis; Wellpoint, a little bit more frequently. There's more flexibility in their review protocol, but I don't have anything to report. I can't tell you when and if. The only thing I can tell you this can't hurt, and we're working very hard with them

Okay, and one more quick question, if I could. This morning a competitor put out a press release discussing Medicare Advantage as a potential opportunity. I guess private payors have not been reimbursing for these patients. Can you talk a little bit about that and whether that's something that you see as an opportunity as well, and how big of a potential opportunity? Thanks so much.

Well, I'm not going to comment on somebody else's release. If you're asking me to comment on whether or not Medicare Advantage programs reimburse for the program, they should be, and in our case, we demand that they do. Commercial insurance payors don't have the right to modify Medicare coverage, and my understanding -- I can't remember the rule but I could find that out -- My understanding is that they're required to offer the same level of service, that is offered on a Medicare fee for service, so they should not be denying coverage for this.

Okay. Thanks so much.

Your next question comes from the from Amit Bhalla for Citi.

Hello, this is Valerie Dixon actually, in for Amit. Good evening. I was just wondering if you could just talk about each part of your strategy in turn, and how you expect it to impact going over into the next 12 months, first starting with your sales force buildout. How many new bodies make up the large numbers that are in training right now, and then talk about how accretive or dilutive the Biotel agreement is and then talk about your next gen device launch and then your strategy for the commercial payors. If you could just parse out those four pieces of your strategy.

You -- hold on a second. Sales force -- say them again?

Sales force, number one. Number two, the acquisition and the agreement with MedApps. Number three, the C-5 NextGen device, and number four ,your strategy around the commercial payors.

Yes, I'm not going to probably give you much more than I gave you in the commentary. Sales force, we had about 93 to 94 active heads in the quarter against the budget of about 103 or 104. So, we ran a little light for the quarter. They had a little bit of turnover. We have filled those positions and added on top of that.

The plan is to incrementally add selling resources where appropriate, given market opportunity, so that we can start to claw back to a performance level that we had prior to last year's cut. As you recall, close to the 33% rate reduction for Medicare the organization had to severely cut expenses and the sales force -- the size of the sales organization was dramatically reduced. Strong correlation between the number of salespeople we have in the field and the number of new patient starts we have. So, that's kind of the no-brainer of the business.

As we add back salespeople, we certainly believe you're going to see incremental new starts. Beyond that, I'm not prepared to tell you how many and when we're going to add, because it depends what kind of marginal return on that investment we see.

The Biotel acquisition, I talked about -- it gives us diversification, in that they have a small but opportunistic contract research piece of the business, OEM manufacturing. It brings wireless event so we can expand our product offering, allows us to do more for the commission office, some benefits naturally of vertical integration, and then clearly we settle some litigation, some lawsuits and counter suits we have between the two organizations, which is always a distraction of management attention. So, I think it's a great acquisition for us.

C-5, again, we expected to see that this year, but we're running into some delays in development, and it looks like that's going to push into -- I would say full commercial launch is going to push into early 2011, which is not the end of the world. We didn't expect to see much of a financial impact from that this year anyhow, but typical kind of R&D-type of delays that we're experiencing. What else?

I think the prior question answered the commercial payors' strategy, but just looking at the Biotel agreement. Last year, when this agreement was announced, you said it would be [$0.01] dilutive. Are you expecting it to be dilutive this go around?

I mean if you -- this is Heather. If you look at 2011, in the first year we could expect it to be relatively neutral in 2011, before taking into account one-time costs.

Okay. Great and then just one more follow-up for you, Heather. Total revenue was $32 million. What was the MCOT's specific revenue in the quarter?

The PDS revenue was about 11% of the overall.

All right, thank you.

Your next question comes from Matt Dolan from ROTH Capital Partners, please proceed.

Hello, guys, good afternoon. Thanks for taking the call. Joe, I know you've been out in the field a fair amount since you arrived, maybe you could help us on the patient volume side of things. Maybe you could help dissect some of the variables in play. And, any of the changes you've seen related to the quantity of the sales force, which I'm assuming is a decent portion of it. Did you see a Summer slowdown? Are you losing accounts to competition? Just help us understand what your outlook is from a volume prospective here, as compared to what you put up in the September quarter. Thanks.

Sure, Matt. Tough to break it down into individual components, but you hit on I think most of them and I'll add one more. Certainly the size of the sales force. Direct correlation between the number of feet on the street we have and the new patient starts that we're bringing into the company. Third quarter there's typically a seasonal drop. You run through summer months and we'll see a flattening to slowdown in the business. So, that's not surprising. The other thing that we cannot overlook is just the kind of economic pressure in the marketplace, both at the patient level and at the physician level.

Physicians are struggling to make money and, as you know, they make money on alternate events, so that line of treatment is often used probably more frequently than maybe it should be, let's just say, and I think that adds to it. And then there's patients out there that are making decisions based on the money they have in their pocket. There's co-pay deductible. Insurance companies have been trending over the last few years to put a greater burden on the employer, as you know, and the employers have pushed a lot of that back to the patients, so just kind of general macroeconomic conditions and dynamics with insurance companies.

All of that, I think, has tended to slow down just the size or the trends in the industry, the growth in the industry. We certainly don't think we're losing much business, big chunks of businesses to competitors. If we do, we're taking it from them at just a faster rate. I don't know of any competitor that's bragging about big growth this quarter. I think it's just a combination of all of the variables that we're seeing in play right now.

So, I guess the question also had a timing component to it. I know you're ramping the sales force, as we speak. Do you feel that quarter three should theoretically be a trough, and, as we move into 2011, start to have comps that look back onto what was a tough 2010?

Yes, sure, the more time you give me, the better off I'll feel about it, but realistically speaking new sales reps don't produce for the first one or two quarters. So, I think you've got it pretty spot on.

Okay. And, just looking at the Biotel and MedApps deals, considering that you've returned a negative EBITDA P&L here, maybe help us with understanding why it's time to begin making acquisitions again and how should we think about these deals, in terms of the added costs and when they might start contributing to the top line.

Yes, and as far as like why timing? A big thing for us is certainty or at least relative certainty around reimbursement. Look, we're not thrilled about the CMS price level, but at least it parts the clouds for us somewhat, and we've been trying to clean up the business and streamline, lean the business to compete more effectively as we move forward. So, look, the nice thing is we all know that this is a very attractive business. It passes the grownup test that we're adding a lot of value to the health industry by taking out a ton of long-term cost of care. So, we're on the right side of the equation if you will and we talk about where health care is going.

So, we feel very bullish on the industry. It's just how to position the company to grow faster, and certainly scale will help us in order to leverage our operating infrastructure so we see those returns, or see income at some point in the future. I'm not concerned. We're throwing off good cash, in spite of the hold we had on our claims this month. I'm not concerned about the ability to leverage this business model. I think it's a very, very viable business model.

Okay. And, then, just, finally on pricing. It looks like revenue per patient this quarter came in even below what the mix would be under the new regime, so I'm assuming revenue per patient -- is that a one-time event, or what are the moving parts there as we think about modeling 2011?

What do you mean by "under the new regime?" Under the Medicare? Just for clarification.

Under the $800 estimated Medicare reimbursement number, if we assume some type of premium from private pay, and use your existing mix. The number at least we come up with is a premium to the revenue per patient we saw in Q3.

I can comment on from a standpoint of, as I mentioned earlier, was that we did see some pressure from our non-contracted payors, which we have some that pay us more. We have some that pay us less and the mix of those payors overall brought down our ASP in the quarter. So, it's hard to say at this point in time, if that is a trend or if it is an event within the third quarter.

Okay. Fair enough. Thanks guys.

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

Hello, guys, it's Andy O'Hara in for Ryan today. Just a couple of quick questions. In terms of the sales force, can you guys give us an update on the CSO reps that you guys have been using, have they been getting any traction? And, then, on top of that, are you guys still targeting the 120 full-time reps by year-end?

The CSO group -- still kind of early to say. It looks to us as though we're starting to see a return on that investment. They're starting to become effective, but, again, that was a slow ramp-up as with any sales organization, even internal sales organizations, but they are doing a nice job augmenting the efforts of the people in the field. I don't believe 120 reps by the end of this year to be candid. I think we'll probably be in that 110 range, but that's not a bad place to start 2011.

Okay, excellent. And, then, with regard to the commercial pricing pressure. What percentage or kind of ballpark for me if you can of the commercial payors are on the non-contracted basis?

We don't provide that breakout of our payors.

Okay. Excellent. And, then, just one final question here with manufacturing costs with the C5 coming down. You guys had said probably around 33%. Do you expect CMS to potentially lower its reimbursement rate for the service, kind of given that, right now, it's based on $21,575 I believe was in the text.

No, I don't expect it to do that.

One of the things you have to keep in mind is that they look at things in the past. So, when the review in three, four years, they'll look back. So, they don't look forward to what they expect the price to go down to. It hasn't happened yet.

All right. Thanks a lot guys.

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

Hello, thanks for taking the call. You may have covered this, but with regard to the cash flow in the quarter, Heather, should I understand that had it not been for the Medicare review that cost you $7 million to $9 million in collections and that you would have been cash flow break even?

We would have been break-even to up in the quarter had we not been under that review with our expectation was there.

Fine, my other questions have been answered. Thanks very much.

Okay. Thank you.

Your next question comes from the line of Josh Jennings from Jefferies. Please proceed.

Hello, thanks. Anthony for Josh. Just a couple on reimbursement and on new product initiatives. If you could give us a breakdown of contracted and non-contracted payors, what percent are above and below the recently-issued CMS rate of $800, and, on new product initiatives, can you speak to anything on using MCOT for home sleep testing market? I think that was the initiative announced a few quarters ago, or at least was toyed with, and any pending studies across neurology, perhaps for post-stroke monitoring. And, then, in addition to that anything, of course within cardiovascular applications either post heart attack, post atrial fibrillation, anything along those lines. Thanks.

None of that information you just asked are we prepared to make public. I hate to be so short but none of it we can make public. Candidly, you're asking about payor mix questions that we don't make public. Studies that we have plans for that we're in negotiations with people to conduct, that, for competitive reasons, we're not going to share that.

Okay. That's fine. I'll get back in queue. Thanks.

Thanks.

At this time, I show no further questions in queue I would like to turn the call back over to Mr. Joseph Capper for any closing remarks.

Thank you, Operator. I want to thank you all of you for your time tonight, your continued interest in CardioNet. We look forward to speaking to at the next call. Thanks, have a great night.

Ladies and gentlemen, if you joined the conference late today, you may listen to the conference on digital replay, which will be available from November 8th to November 24th, 2010, at telephone number 888-286-8010 or number 617-801-6888, and you can use the pass code 20335277.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect. Have a great day.