Heartbeam Inc (BEAT) 2010 Q4 法說會逐字稿

Good afternoon, thank you for joining us for the CardioNet, Inc. fourth quarter and full-year 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 & 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 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 & Exchange Commission, including our latest periodic reports on Form 10-K or 10-Q. We assume no duty to update these statements. (Operator Instructions).

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

Thank you, operator, and good afternoon, everyone, and welcome to our fourth quarter and full-year conference call. As mentioned I am Joe Capper, President and CEO of CardioNet. I'm joined by Heather Getz, our CFO. I will begin with some highlights on the quarter and full-year performance. Heather will discuss our operating results. I will then share some thoughts on our focus for 2011,before we open the call for a brief question-and-answer session.

Simply put, the fourth quarter was much improved over the third quarter in many ways, especially as it pertains to the five key areas of focus I outlined on our previous two calls. As such, we believe the Company is in great shape as we transition from 2010 to 2011. In the quarter, patient volume was up over the third quarter. Revenue was up $1.2 million sequentially. Cash finished at $45 million, compared to $43 million at the end of the third quarter, and that was after completing the $10 million acquisition of Biotel, which we closed on December 21.

So why was cash so strong? Primarily because we cleared the backlog of Medicare receivables, and implemented improvements to our collection, resulting in a 47 day drop in DSL. During the quarter, we also added ten additional sales executive and MCOT was added to the federal supply schedule, giving us access to over nine million lives, predominantly in the VA system. Make no mistake, 2010 was a challenging year, and in many ways the Company is still reshaping itself in order to effectively compete in this environment of lower reimbursement. However, we are making excellent progress.

During 2010, we had several significant accomplishments, drastically improving the foundation of the business. We received national pricing for Medicare for the MCOT service, thereby removing a great deal of uncertainty. In addition to being added to the federal supply schedule, we signed 58 new payer agreements, covering over 12 million lives. The acquired Biotel and in so doing, added holter and event manufacturing capability, a small CRO business from which to build upon, a wireless event product, and removed a lingering lawsuit between the Companies. We successfully implemented $15 million of annualized cost savings on the heels of an $8 million cost reduction in late 2009.

In spite of these significant reductions, we still managed to grow year-over-year patient volume. We added key new leadership in operations, customer service, and accounts receivable. The Federal court granted our motion to dismiss the class action lawsuit filed against the Company in August, 2009. We finished 2010 having monitored over 400,000 patients since the release of MCOT, more than validating the value of this life-saving technology. And again, we drastically reduced our DSO, allowing us to finish the year with $45 million in cash and investments, and no outstanding debt, putting us in position to invest in our growth. This is meaningful progress. At this point I would like to turn the call over to Heather to review our operating results.

Thank you, Joe, and good afternoon, everyone. While volume was up year-over-year, our full-year revenue declined 15% to $120 million versus the prior year, due to the annualization of the 2009 Medicare rate reduction as well as declining reimbursement from our non-contracted payers. Revenue for the quarter was $29 million, a reduction of 14% compared to the fourth quarter of 2009, which was also attributable to the lower non-contracted reimbursement. However, as Joe mentioned the fourth quarter revenue increased sequentially from the third quarter, providing evidence of the positive impact of our recent investments.

Despite the reimbursement challenges we have faced over the past 18 months, we have been able to maintain fairly stable margins. Our margins for the fourth quarter was 58% and for the full year, 60%. We were able to maintain these levels due to the efficiencies of [paying] as a result of our restructuring in early 2010 as well as our ongoing efforts to reduce our cost of sales.

Year-over-year, our cost of sales per patient has declined 7% which was in addition to an 18% decline in 2009. As Joe discussed we are focused on reducing cost of sales through efficiencies and process improvement while maintaining a level of service that our patients have come to expect from CardioNet.

Our adjusted operating expense for the year was 13% lower than 2009, and for the quarter, was 23% lower. This reduction is a result of the $23 million in cost reductions implemented in the latter part of 2009 and early 2010. Over the past 18 months, we have successfully created a more cost-efficient operating structure, and we will continue to look for additional opportunities to streamline the business. That being said, with these ongoing investments in sales and service, we do expect some increase of expense in 2011.

While our 2010 full-year adjusted EPS declined to a $0.53 loss from a $0.25 loss in 2009, with our sequential improvement in revenue and reduced expenses, our adjusted EPS for the fourth quarter improved almost 100% compared to the fourth quarter of 2009. We are pleased with these results.

As for the balance sheet, we have now collected substantially all of the cash that has been delayed as part of the Medicare review. In addition, we are continuing to see the benefits of recent changes made in the billings and collections area, as we continue to drive down our AR and DSO. At the end of the quarter, our DSO declined to 78 days, the lowest level in the history of CardioNet. With our improved results, and the successful completion of the Medicare review, we generated $14.2 million in cash from operations in the quarter.

This enabled us to end the year with $45 million in cash and investments, a reduction of only $4 million from 2009 despite $10 million used for the Biotel acquisition as well as the continued pricing pressure we have experienced. We will continue to look for opportunities to leverage our cash as we look to grow organically and explore new products and services.

Before I turn the call back over to Joe I do have a couple of housekeeping items. First, due to the timing of the Biotel acquisition there was no impact on our statement of operations. On the other hand our balance sheet has been updated to include the necessary purchase accounting entries and the purchase price is reflected on the cash flow statement under investing activities. For 2011, we expect Biotel to add $8 million to $10 million in revenue and a couple of pennies to our EPS.

Second, in November we announced that CMS established a national rate for the MCOT service and that by utilizing the formulas and [inputs] in place at that time, we estimated the price to be approximately $800. We also disclosed that the ultimate price could be as low as $560, depending on the outcome of Congressional action and the resulting final input. Recently the inputs were finalized, resulting in a regional price of $739, which is 2% lower than our 2010 rate of $754. Thank you. I will now turn the call back to Joe.

Thank you, Heather. As I look to 2011, our approach will be fairly consistent. Management will continue to focus on the same five objectives that have been driving our improved performance. The first is to accelerate volume growth.

As I mentioned, we added ten additional sales territories during the fourth quarter. We will continue to add sales reps on a selected basis if it makes sense to do so. We will also continue to evaluate acquisition opportunities that will augment this growth or provide complementary products and services to the Company.

It is clear we need increased volume to leverage our cost structure and drive the Company to improve profitability. Given our internal operating trend and our balance sheet, nobody in our space is better positioned for success. Our second objective is to continue to press for greater reimbursement coverage for the MCOT service. While we have been adding new contracts, and now have access to over 200 million covered lives, our challenge and opportunity is to convince the remaining non-contracted commercial players of the benefits of this life-saving technology. We're also working on ways to more effectively pull through business once the contracting process is complete.

Third, we continue to see improvements in the critical indicators of our customer service function. It certainly sounds basic to make a statement like "we are commitment committed to high levels of customer care", however institutionalizing the behaviors conducive to world-class customer care is where the rubber meets the road.

The Organization is committed to ensuring we have the right leadership, systems and processes to make this a reality. It is imperative we get this right, especially as more and more healthcare related decisions and purchases migrate to the consumer or patient level.

Fourth, as discussed on prior calls, we had expected to begin the commercialization of the C-5, our next general MCOT device, by the end of 2010. While I am disappointed that we did not meet this objective, we remain committed and excited to bringing this enhanced product to market later this year, and when we do, the C-5 will add several new features and help reduce cost of sales.

Last, but certainly not least, the management team will remain focused on finding ways to reduce our overall cost structure. While allfacets of the business are constantly under review,we are particularly focused on reducing cost of sales with the launch of C-5 and other initiatives, as well as further driving down our bad debt expense with improved collections. These two areas offer the most opportunity and do not inhibit our ability to market our products. This focus will drive top line growth, make us leaner and faster, and put us in to position to deploy some cash in order to accelerate our plans and move more rapidly toward improved profitability.

Operator, we'll now open the call to questions.

Thank you. (Operator Instructions). Your first question comes from the line of Ryan Daniels, William Blair and Company.

Hi, yes, this is Andy O'Hara in for Ryan today. First of all, what was the total MCOT volume during the fourth quarter?

We're not providing the absolute number of volume for the quarter. We -- on a year-to-date basis, it is up year-over-year, and up sequentially versus the third quarter.

Okay. Okay. And then --

Andy it is Joe. As you recall, when I came on board, I pulled volume back, and I did it for a couple of different reasons. One was with all of the moving parts in this business, it seemed to me like I needed to gain greater understanding of predictability before we started putting any guidance out at all. And I didn't really know if that was the right variable to have out in terms of guidance.

Sure.

And so we didn't put it out, and because we didn't put it out, we're not comfortable reporting it. Here is why. Sometimes we're going to make decisions in the business to maybe not take volume that in the past was bad volume and was putting a drag on our earnings. That's kind of the evolution that we have been living through in the last quarter or so, especially in light of the lower reimbursement. Some tougher decisions that are being made.

Right. Okay. And then moving on to the reimbursement with the $739 rate. Is that kind of your expected blended average after the adjustments?

Blended average for?

Just across your Medicare customers?

Oh, for Medicare, yes. That's going to be the rate for 2011.

Okay. You had mentioned you guys added about ten sales reps in the fourth quarter. Do you have any idea where that is going to go for 2011? Kind of help us out with our models here?

Yes. I don't. And here is why. We took a bunch of sales reps out of the organization and went through those cost reductions we talked about.

Right.

About a third of the sales force, and so what we're trying to do is find out what the optimal level was for the productivity that we had or the volume we had. We think we saw the bottom of that and we then started to add back some reps. It takes a couple of quarters before new headcount really starts to become productive in the field, and I need to see what kind of return that's going to be. Unfortunately, again, given the new profitability paradigm of the business, I don't have the luxury of just throwing a bunch of reps out in the field and waiting for a year to see if they are productive. It costs you an awful lot of money. I think the more prudent approach is to continue to evaluate the business, add reps as we see [the turn] and where there's opportunity.

Okay. That's helpful.

I wish I could tell you each rep was going to produce X amount of patients, and I'm going to have so many new reps -- I can't model it for you that way yet.

Sure. Sure. Okay. And then just one more quick one. In the fourth quarter, and I guess so far here in the first quarter. Have you guys seen the same kind of pressure in terms of deferrals due to copays and deductibles?

Yes, it's particularly in the first quarter.

Yes. Yes.

I'm sure you have both [of them], but it's particularly bad in the first quarter.

Is that roughly equivalent to what you guys saw in the first quarter last year, or how does that look?

So far it is. It's about the same.

All right. Okay. Thanks a lot, guys.

Thanks, Andy.

Your next question comes from the line of [Amit Mala] from Citi.

Hi, good evening. It's actually Valerie in for Amit. First question is on pricing. This quarter again you described pricing pressure from your non-contracted payers. First, can you break out what percentage of your business is from non-contracted payers, and second how much of a reduction are you experiencing?

Valerie, we don't break out specifically what our non-contracted payers, what percentage they are, but we have seen, as compared to the first half, pressure from them, where they reduce payment. In the fourth quarter, we have actually seen some relief from that. If you recall in the third quarter conference call, we actually talked about some of it was potentially timing because we recognize our non-contracted on a cash basis. So we did see some improvement in the fourth quarter, but it's not back to where it was earlier in the year.

Okay. Great. And then on patient volumes, how would you characterize the trends currently? I know you don't want to give a number, but are they stabilizing now and we should think of third quarter as kind of the trough, or is that sales force that you are currently ramping up, starting to help the trends turn positive?

Yes, I expect it to be positive. I expect more positive growth in 2011 than I had over 2000 and -- 2011 over 2010 versus 2010 over 2009. I expect slightly higher growth. I think you are right. I think it sort of flattened out in the middle two quarters. We saw a slight uptick, nothing to get too excited about. We saw a slight uptick though in the fourth quarter which was a positive trend, a positive indicator. And again, with the new headcount. First it was a little tougher because of the deductibles and things like that we talked about, you have a slightly higher dropoff rate. But I feel like we felt the bottom -- we touched the bottom, and we're now going to start working our way back up.

Sure, and then one last one if I can. Heather, can you remind us of the impact of the prepayment review. I was really surprised at the drop-off in the DSOs and wondering if we should expect it to stay at that level? I'm just trying to understand all of the moving parts there.

Sure.

Thanks.

In the third quarter you recall we estimated that the prepayment review had about a $7 million to $9 million impact on our cash. So we did collect the majority of that in the fourth quarter. Some of the stuff hanging out there relates more to the patient copay portion, but we collected substantially all of it, and as Joe indicated as well, we have made some changes and improvements in our collection processes that helped pull in some additional cash.

Thanks a lot, guys.

Your next question comes from the line of Matt Bowen of Roth Capital Partners.

Hi guys, good afternoon. First question, Heather, can you help us just break out PDSR from MCOT?

Sure. In the fourth quarter, PDS was around 12% to 13% of -- our event holter pacer was about 12% to 13% of the overall revenue.

Okay. Okay. Great. And on -- a follow-up on the pricing. You said you saw some improvement in the fourth quarter, which makes sense now. Can you tell us where you are, at least in your opinion at this point, on a cumulative basis with the adjustments you and we have been expecting, both on a contracted side as well as for the non-contracted side. Maybe help us with that (inaudible - audio difficulties) through the rest of the year?

What we have -- (inaudible) but what we have budgeted internally is a continuous decline in ASP. We think that -- and we're feeling pressure from our commercial payers. It's hard to say when we'll feel the impact of it, but our guess is based on conversations we have had with both, we'll feel it throughout the course of the year. And so if you just figure, throughout the course of the year, we'll taper down evenly, and then have a -- settle in at a commercial rate, still above Medicare. Medicare what it is, you can kind of find out where the payer's piece is going to end up.

Okay. On the volume side you have talked a lot about growth for the year, and the impact of resetting deductibles in Q1. Maybe help us understand what the macro effect of the changes to the actual physician reimbursement have had on the overall MCOT opportunity. Is that something where certain accounts simply won't start prescribing in the near future because of the reimbursement picture directly to the physician, or how does that kind of -- how do you think about that relative to your growth outlook?

Matt, what we saw was in 2000 --- I guess 2009 into 2010, they did experience a reduction in their reimbursement. But doctors were -- and we didn't see a drop-off from those doctors so, they are prescribing the service because of the clinical efficacy of the product, not because of what they are getting reimbursed.

Okay. And last one. On the business-development side, Joe, just can you help frame that. Is this something that's a top priority for the Company, or is it opportunistic, and are these revenue-generating opportunities, or could they be dilutive? Thanks.

The last part, revenue generating or dilutive. I think definitely revenue generating. From an earnings standpoint, I can't really talk to you about whether or not they are dilutive or not, because we didn't done them. If I look at the approach we're taking, yes, it is a high priority for the Company. It makes sense for us to look for opportunities that will augment our volume growth. So in and around the states that we're in, and I would say then opportunities that are tangential or parallel to the states that we're in that will allow us to leverage certain core competencies that are already built out within the Company so we can build out other revenue sources, other payer sources, other opportunities for the organization. A little bit of diversification, discussing terms of revenue sources and things like that. That's kind of at a macro level what we're looking at. And not going too far from the core right now.

Okay. Thanks, guys.

Thanks, Matt.

Your next question comes from the line of Josh Jennings with CardioNet.

Oh, great, thanks --

You are working for us now, John?

Yes, thanks for letting me join the team. I guess just to start off through the non-contracted private payers that sort of had [negative] technology assessments in the past, can you talk about any discussions you have had with Wellpoint and United or other payers that are aren't currently reimbursing, sort of your outlook for potential progress with them? And what you think about CMS making a national coverage decision and having success there?

I think -- look, I'm very optimistic that United, Wellpoint and others will at some point see the light that they are actually depriving literally millions of their beneficiaries access to, without a doubt, a life-saving technology. Here to date, they have been reluctant to reimburse for the product, and I have my own personal opinions on why, and I won't get in to that. I'm optimistic that they will see the light at some point in the future, especially given the fact that CMS has given even greater credibility and credence to the service by setting national pricing.

Okay. And just on -- through the development of clinical data behind MCOT, are there any plans for any clinical trials for outpatient monitoring, post defib ablation, post MI care, anything along those lines to sort of help support reimbursement levels?

We constantly have several that are ongoing, and others that we're planning to start. It's not good form for us to actually make public which ones they are. There are certain institutions we'll work with that will publish based on the research that they do. So our agreement with them is we typically don't talk about them until they're ready for publishing. However, it -- look, here is the message. We are extremely excited about the cardiac monitoring business even in the lower-reimbursement environment. We don't like the fact that Medicare cut the rate where it is, but we are extremely excited about it. And we're going to continue to invest in it. And yes, we are going to continue to invest in it with resources like clinical studies. We think they are very important and they help us sell and resell what this service does for the patient base out there. So it's ongoing, and we're going to continue to do it.

Great. And just in terms of the competitive landscape, are there any other private players we need to worry about nationally? Someone like E-cardio, that is potentially developing an MCOT device that could encroach on your market share?

We take all of our competitors seriously. We try to monitor where they are in progress of developing new products. We can tell you that we are very comfortable that we are the technology leader. We're not complacent in that. We're looking for ways to make it cheaper to bring to market and make it effective over time. We're looking for ways to improve our algorithms constantly to make the product even better. We are aware that other people are bring products to market. But we're not cocky, but we're comfortable that we will remain the technology leader. And to the earlier question that you posed, there's nobody else producing clinical studies in this marketplace besides CardioNet. In fact competitors cite CardioNet clinical studies in their brochures. So this is the leader in the industry. And we believe the industry is going to be here, and this Company will be the leader in the industry.

Just on the clinical data, can we expect any published data this year or in 2012? Can you give any timing guidelines around some of that data that you guys are procuring?

Yes, we do. We hope to have something by the end of the year, at least.

Okay. And just lastly, just can you give us an update on Biotel integration and just sort of outlook of contribution from Biotel in 2011. Thanks a lot.

Yes. Heather's mentioned contribution, I think -- What were the numbers, Heather?

$8 million to $10 million on the revenue and a couple pennies to our EPS.

In generally, we think culturally, the integration is going phenomenally well. Mechanically it's going phenomenally well. It wasn't a huge company. It wasn't exactly like what we do. It offers as I outlined, additional opportunities for us. Extremely complementary, and great people. That's always a nice state when you merge cultures and you are merging with some really good folks.

Thanks again.

Your next question comes from the line of Danielle Antalffy of Leerink.

Hi, good afternoon guys, how are you?

Hi, Danielle.

I had some trouble logging on, so I missed the initial comments. I apologize if I'm making you repeat anything. But could you clarify C-5 timing and the reasons for the delay? What increases your confidence that it could come in 2011? And then following up on that, what could be the impact of launch on sales margins? Is this a market expander, is this a share taker? Any color there would be great.

It's a shame you missed the comments, they were spectacular. No. With regard to C-5, yes, we're disappointed. We expected it out, at least start alpha/beta, late last year. We'll start alpha/beta the first part of the year, and we'll get full commercial launch probably by mid year is what the expectation is right now. Nothing monumental that slowed it down. I have been around med device for a long time, and these things tend to always find ways to get delayed, and usually around software glitches and things like that. We have some excellent folks out there working through these, we're not going to short cut or circumvent the verification and validation process. It's going to be a very tight product when we bring it to market. But unfortunately it is taking a little bit longer than we had anticipated. As far as what it does to financials, I'll let Heather talk about that.

Yes, Danielle, in 2011, there won't be a significant impact. What it does provide for us is on the shelf capability which could potentially be a volume expander. But due to the timing of the release, we don't expect a significant impact on the financials in 2011. As -- both on the sales line as well as on the cost line. It will be more impactful in 2012.

Okay. Great. And then just following up more broadly speaking, what gets volumes going here again? Is it a matter of the macroeconomic environment? Is it something like the C-5? Is it better reimbursement, is convincing doctors with clinical data? I mean, what do we need to see here?

It's yes to everything. And I have been here, Danielle, for six months now. And when I came on board I heard every reason why. A dog ate it, it was everything. In my personal opinion the only thing that I could definitely put my finger on is we gutted the Company. We took out a third of the resources. We cut customer service, we cut here, we cut here, because we were in survival mode. We had to do it. We found sort of a new operating level within the Company. It's not hyper growth like it was in the past, but it is going to be growth. I think a little bit of all of that. What we're going to add back some of our resources, we going to look for alliances with other companies, we're going to look for acquisitions, and I need more volume on this operating structure.

Okay. Great. Thanks so much.

Thanks, Danielle.

Ladies and gentlemen, that concludes the Q&A session. I would like to now turn the call back over to management.

Thank you, everybody. In summary, again, we're coming off of a strong fourth quarter. With volume up, revenue up, cash up, DSOs down and ten more sales people in the field. We clearly made a lot of progress in 2010 and more importantly we're poised to have a much better 2011. In fact, our start to the year, thus far has been better than expected, and we're in a much better position to invest in our growth. Thank you for your support. We'll talk to you next quarter.

Ladies and gentlemen that concludes the presentation. Thank you for participation. You may now disconnect.