Heartbeam Inc (BEAT) 2011 Q2 法說會逐字稿

Thank you for joining us for the CardioNet second quarter 2011 earnings conference call.

Certain statements during the conference call, and a 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 reports 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. 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.

Well folks, what a day. I appreciate you taking your time to spend with us these evening, given all that has transpired, today. Again, I'm Joe Capper, President and CEO of CardioNet. I will provide commentary on the second quarter and on the progress we are making on our five key objectives.

As always, I'm joined by Heather Getz, our CFO, who will provide detail on our operating results. We will also allow time for a brief question and answer session.

It is my pleasure to report on another quarter of solid operating results. Clearly economic conditions and healthcare reimbursement trends have created a challenging market in which to operate. However, we have remained disciplined in our execution of a concise, five-point strategic plan designed to improve operational efficiency and achieve long-term profitability.

During the quarter, aggregate patient volume for all three services, MCOT, Event, and Holter was up sequentially. However, we did experience a mix-shift among services, which I will discuss in more detail, later. Revenue was down slightly to $32 million caused primarily by a decline in our average selling price for MCOT, as commercial payers migrate to lower rates. Adjusted for the drop in average selling price, revenue for the quarter, was essentially flat compared to Q1. EBITDA was positive for the second consecutive quarter. This is the first time we have done this in two years.

Year-to-date EBITDA was $2.1 million. Adjusted for certain one-time integration and restructuring related expenses, year-to-date EBITDA would have been $4.6 million. In comparison, we recorded an EBITDA loss of $1.2 million through the first two quarters of 2010. We generated $2 million of cash during the quarter, ending with a balance of $45 million in cash and investments. And, we completed the integration of Biotel, which is exceeding our expectations. And will have a positive contribution to our earnings for the year.

Before I comment on our objectives, I would ask that Heather provide more detail on those results. Heather?

Thank you, Joe. And good afternoon everyone.

Revenue for the quarter was $32 million, essentially flat to the prior year quarter and a 7% decline sequentially. While we are seeing increases in our Event and Holter revenue, our MCOT revenue is being negatively impacted due to pricing pressure from commercial payers. We anticipated that these rate reductions would occur, once we received a national rate for Medicare, as many payers delayed renegotiating our contracts pending the outcome of our discussions with CMS.

Importantly, the increase in our Event and Holter revenue is associated with the continued interest from physicians in our MCOT technology. Because we have implemented a more strict benefit verification criteria for MCOT, some MCOT patient referrals are being shifted to these alternative monitors. We expect that, over time, as we gain broader payer coverage for MCOT, we will be able to service more of these patients with MCOT.

Joe will provide more detail on these efforts.

On a year-over-year basis, our MCOT volume is slightly lower. Which we are addressing with increased investment in sales and marketing efforts. As we have discussed in the past, during the 2010 restructuring, we eliminated a significant portion of our sales force, which we believe negatively impacted our growth. We have added back resources, but have not yet returned to pre-restructuring volume levels. Substantially offsetting the year-over-year MCOT revenue decline is the inclusion of $3.6 million of OEM and clinical research revenue from Biotel. Which we acquired in December. We believe Biotel provides us with additional future growth potential and support for our on-going revenue diversification efforts.

Our gross margin was 4 percentage points lower than the second quarter last year. With two-thirds of the decrease coming from the lower MCOT reimbursement and the remainder from the addition of the lower margin Biotel business. Sequentially, our gross margin is down due to the lower reimbursement. We expect to see continued pressure on margins over time as more commercial payers re-negotiate at lower rates. We will launch our next-generation C5 during the second half of the year, and continue to streamline our processes. Both of which will help offset the pricing pressure and provide a tailwind for improved gross margins.

It is important to note, however, that there will be little to no gross margin benefit from the C5 until 2012, as we will be gradually phasing-in devices over-time. Our adjusted operating expense was lower year-over-year, largely due to a reduction in bad debt expense of $1.6 million, as we continue to strengthen our billing and collection processes. This reduction was partially offset by increased spending on our sales and marketing organization as we add back selling resources to address areas of opportunity. Sequentially, our adjusted operating expense was lower, due to reduced R&D expense as we get closer to commercialization of our next-generation C-5 device and lower selling expense, due to seasonality of expenditures.

Turning to the balance sheet. We ended the second quarter with $45 million in cash and investments, essentially flat to year-end and an increase of $2 million versus the first quarter. For the year, we expect to be free cash flow neutral despite increased M&A related expenses and capital expenditures with the launch of C5. Our strong balance sheet not only affords us the opportunity to invest strategically, but also positions us to withstand the current turbulence in the economy.

As for AR and DSO, while we experienced a decrease in our Accounts Receivable balance, compared to the first quarter our DSO increased to 85 days at the end of the quarter.

As I mentioned on our last call we expected some disruption in our billing and collections area, as we implemented new processes and procedures. These process improvements, coupled with the decrease in net patient revenue, has caused the increase in our DSO. We believe the increase to be temporary. And we anticipate that by year end our DSO will decline. Overall, we are pleased with our continued progress on many fronts.

As you can see, we have had another solid quarter -- as we continue our efforts to streamline our operations and become more efficient. We are pleased with our progress to date, but still have work to do in order to achieve profitability. Particularly, given the challenging healthcare environment in which we operate. Regardless, we will remain focused on our five key objectives, which Joe will walk you through. Joe?

Thank you, Heather.

As I've done on previous calls, I will now provide an update on the key areas that the team has concentrated on. Our primary focus is to accelerate volume growth. This objective has evolved somewhat, and would now more accurately be described as to accelerate good volume growth. As I mentioned on our last call, we instituted a new enrollment policy, whereby, we have become more selective as to when, and if, we put a patient on the MCOT service. To reiterate, if it is clear that the patient's insurance company is not going to pay for MCOT, the patient is offered the option to self-pay, the choice to use an event recorder, or to simply not go on service.

As a result, we have experienced a mix-shift with slightly lower MCOT volume, and an increase in event volume. Which has had a positive impact on operating margin. As mentioned, total volume for all three services was up in the quarter, which indicates positive demand for our products. Again, in today's reimbursement environment, we simply cannot take the risk of non-payment for services we provide.

Second, we continue our focus on gaining broader reimbursement coverage for MCOT technology. We made progress in the quarter with the signing of 15 new payer contracts. We remain optimistic that insurance companies that are still denying their beneficiaries access to this life-saving technology, most notably United and Anthem, will soon abandon these restrictive policies. We are currently evaluating studies, which we believe will be instrumental in providing further support and evidence of our technology. We have also utilized a Payer Advisory Board to assist the Company in gaining coverage. And we are engaging in a grass-roots campaign with our prescribing physicians, patients, and various industry groups to advocate on behalf of MCOT.

Third, we continue our quest to build a -- world-class customer service culture. I've mentioned customer service on every call since joining CardioNet, and I'm proud of the progress we are making. We have instituted programs which are far more patient-centric and metric driven. And we are seeing the positive impact of these changes. With increased satisfaction levels amongst -- employees and patients.

Fourth, we expect to begin to commercialize C5 our next-generation MCOT device later in the year. Among other attributes, this device will enable us to have units on the shelves in physicians' offices shortening the time to activation. It will decrease manufacturing costs by about a third. And it will provide us with international capability.

And finally, we continue to look for ways to reduce our overall cost structure. Additionally, we are actively looking at opportunities to accelerate progress toward our goals through acquisition or investments.

Clearly, the organization has proven a disciplined attached management. And an ability to rapidly integrate acquired assets. We have spent -- significant time recently evaluating an array of opportunities, that would improve our position in the cardiac monitoring market and would leverage our infrastructure into adjacent markets.

Before I open the call for questions, I think it is important to note how far we have come. As most of you know, I joined CardioNet, a little more than a year ago. It was apparent when I came onboard that the Company still needed a lot of work.

As such, I spent a disproportionate amount my time internally focused, and over the last year we have made significant improvements. We have developed a plan for success and have been sticking to it. We enhanced the leadership team with experienced professionals, whose skill sets are more relevant to our current challenges. We have made dramatic improvements in the way we interact with our customers. And in the process, have become a far more patient-oriented organization. We successfully worked through a Medicare pre-payment review, and have had a steady dialogue with CMS resulting in the setting of a national price for MCOT.

We cleared two major lawsuits against the Company. We improved our billing and collection processes, shaving several points off our bad debt expense. We improved market awareness of MCOT. We acquired and integrated Biotel. We continued to take cost out of the Company where appropriate. And most importantly, we improved profitability despite lower reimbursement rates.

Folks, this is a Company that has persevered in the face of seemingly insurmountable challenges. Not only have we persevered, we have excelled. With $45 million of cash, no debt, a strong management team, this Company is now well-positioned to grow, diversify, acquire, and prosper.

With that said, I will now open the call to questions. Operator, we are ready for our first question.

(Operator Instructions)

Your first question is coming from the line of Mr. Rick Wise with Leerink Swan. You may proceed, Sir.

Hello, good afternoon guys. This is Danielle in for Rick. How are you?

Hi Danielle.

I just wanted to follow up Joe, actually on the last point you made about -- cash usage and potential acquisitions. Can you give any more color there on what types of areas you'd be looking at? Are you talking about potentially more -- cardiac monitoring companies? Or are you talking about different technologies altogether? Any more color there would be -- great.

Yes. Sure Danielle. I'm probably going to ramble for a few minutes here on this one. So, I'll probably get a dirty look from Heather.

A couple of different areas we've been looking at. We've been very active lately, and you're right we have a tremendous asset. That clearly the market has not given us the value for. And more importantly, it's an asset that we can deploy to grow the Company. We are looking at opportunities to expand our current business portfolio, and that's one area that we are focused on. Call it -- industry consolidation, for lack of a better term.

The second area that we spent some time is, is our opportunity to leverage our current technology and infrastructure into very similar product categories, or adjacent markets.

And then, the third area we are looking at, is -- are there other product segments, disease states that lend themselves to the use of wireless technology and remote monitoring. And in those cases, I would expect us to partner and/or invest in technologies, then commercialize those technologies in a disruptive way. I would not look for us to -- lobby the government for new CPT codes. I would say the safer way to view that would be, how do you use wireless and remote monitoring to drive improved quality, improve care, and lower costs in existing therapies or existing product categories.

Okay, that's great. That's super helpful. Thank you.

And then, as far as timing for these opportunities. I mean, is this something that when you talk about it, you're talking about it more longer-term? I know you say you've been more active recently, but as far as something potentially getting done, is this something that could happen before the end of the year? Or are you more talking about -- hey -- over the next two -- years or whatever?

The sooner the better.

Okay. Great.

And then, just following up on the commercial payer-issue. Can you give any update as far as potential timing for United and Anthem? I mean, I know you are in discussions with them constantly. But could we see something before year end? Or is this something that is more likely to happen next year, or even further out? Thanks so much.

Danielle, that's a tough question. And I think we've gotten ourselves a little jammed-up in the past by talking so much about our efforts there. I just want -- the message I want you guys to get today, is we are working on it very diligently. We have new, creative ways to sell to them, to market to them. We are willing to make additional investments or bring those two large payers on-board. I am going to stay away from predicting when they will change their policy. The message I think is important that you get is, we're working on it. It's a high focus for us. But I'm not going to set a near-term expectation for us.

Okay. Understood. Thanks so much, guys.

You're welcome.

Your next question is coming from the line of Mr. Brian Weinstein with William Blair & Co. You may proceed.

Hello guys. This is Andy O'Hara in for Brian today. A couple quick questions here. In terms of the volume shift from MCOT to the Event and Holter monitors, can you just quantify that at all?

No, we can't. I don't think we are making that public. I would say, I wouldn't look at it as a dramatic shift. Think of it this way.

Before we changed our policies, I think we talked about this in the past. I'm not putting out anything new. Before we changed our policy, approximately 15% of our business -- 15% to 20% of our business was what we referred to as non-contracted. A large portion of the non-contracted business, we never got paid on.

Right.

It wasn't because we weren't trying. We were trying. We were out of network. Just a more difficult process to get paid for a therapy that's not covered. The change in policy was we're just not enrolling patients indiscriminately on the front-end, and hoping to collect on the back-end.

So, you can imagine that probably caused about a 10% shift. I'm just going to leave it at that, I'm going to stay away from the numbers.

Okay. All right, that's helpful. Can you just give us a little more color -- on the C5 roll-out? So, specifically, what's the timeline for swapping out the devices? And then, I guess, secondary, will all of the devices be deployed directly from the doctor's office? Or will it kind of be a hybrid of that, then the way it is now?

Andy, this is Heather. So, what we discussed in the past is that, at least initially, we would deploy the devices to meet increased demand and to fulfill some of what we're calling on-the-shelf type -- orders. So, it is going to be a hybrid of those still shipping out of our warehouse and putting devices on the shelf. This way, if a doctor's office believes it's beneficial for them to hand the device to the patient walking out the door, as opposed to having it shipped to them, we will do that. So, it's a combination of the two.

Okay. And then, in terms of the timeline for swapping out all of the devices?

Again -- at least initially, we are going to roll them out with demand -- increased demand in volume. As well as -- we might need a few more devices if we are going to be putting them on the shelf. So, we don't have a defined timeline. If we see that the demand is high and it makes sense, at some point, we could decide to swap them all out. But, as of now, we will just expect to do it over time.

Okay. That's helpful. And then, one last quick one. How many sales reps do you guys currently have?

We have 107 territories, at any given time a few of those will be vacant, and then we have a management structure on top of that.

Okay. And then, in terms of your CSO reps, where does that stand right now?

Customer service reps?

No, the contract sales [organization].

Oh, contract sales people -- that's a smaller group. Maybe four or five people doing that.

Okay, perfect. Thanks, guys.

Your next question is coming from the line of Matt Dolan with ROTH Capital Partners. You may proceed.

Hello guys. Good afternoon. Thanks.

First question is on -- it sounds like you won't break out MCOT from Holter and Event. Can you -- in two parts, maybe give us your best feel for where you are, as it relates to reductions in commercial payment rates relative to what we saw in Q2? And then secondly, as you get more selective in terms of profitable patient volume, how far along in that process are we, again, as it compares to Q2?

So Matt, I mean we will give our revenue split-out, which we've given in the past. And, in the quarter, it's a year-to-date, it's about 76% MCOT, 14% to 15% Event-Holter, and the remainder is Biotel.

Okay. Great. Can we stick with those two questions then? Where are you on price reductions and patient selectivity?

So --what you mean by patient selectivity?

Selecting only profitable patients. Is that fully in process in terms of the volume we are seeing today? Or is there more patient cuts to come that would explain further volume reductions?

No, you saw a full quarter of that.

Okay.

That policy went into place late first quarter as far as percent adds up -- we are not putting that out.

Sure. Okay. On the restructuring charge -- and you talked about managing costs appropriately, is there a new program in place? Or is this more of the program we quantified last year.

No, it's more the program that was quantified last year. And then, there's some new savings, primarily in the area of bad-debt expense. And then, the restructuring charge, you're seeing is mostly related to Biotel.

Okay. And then, a follow-up on the strategic question earlier, I know you talked a little bit about categorizing what technology you might look at. Any thoughts, or brackets around the size or the financial impact, meaning, is this something that must be accretive in your eyes? Or are you willing to spend some cash for something that might require an investment?

Yes. That's a good question, Matt. And, I've looked at both. My personal opinion is, I have a strong bias toward generating earnings for the Company. I don't think I have the luxury of being too venturous in investments. That's my bias.

Now, if there's something that we evaluate as a management team, and we take to the Board, and we say -- gee this is as great as sliced bread. And we should put some of our capital at risk, we will evaluate that. But, my bias is toward generating revenue and earnings for the Company.

Okay. And, then, finally, maybe an update on the competitive front. Are you seeing any of this MCOT softness? Is that -- are you losing share or is this just a lot of variables that you've continued to give us information on?

Yes, we have no indication that we are losing share. There are some new small players in the marketplace, the larger players are essentially the same folks. There's not great industry -- reports. From what we can tell, relative share has not changed very much.

There did seem to be a softness in market in the quarter. And you can read other analyst reports in other healthcare segments. Procedures seem to be down. Deductibles are higher. Unemployment rate could be contributing to this.

Quantifying how much of that is causing impact on volume, is always difficult to do. The good news for us is, overall, the Company has tremendous acceptance in the physicians office as indicated by overall volume increase. And, again, we induced some of that mix-shift.

The technology is second to none. It is not slipping, nobody is coming out with anything better. And soon, we will have a product that will obsolete our own -- product in the market place. So we feel pretty good about where we are relative to the competition. I don't want to -- you to think we are complacent, we are looking at everything in the marketplace, but there's nothing that really scares the heck out of us right now.

Thank you.

Thank you.

(Operator Instructions)

At this time there are no further questions in queue. I would now like to turn the call back to Mr. Joseph Capper for closing remarks.

Thank you.

In summary we're coming off another solid quarter. Again, patient volume across all services was up. EBITDA was positive for the second consecutive quarter. Cash was up another $2 million from Q1. And the Biotel integration is complete.

So we think we had a very solid quarter. We look forward to talking to you all at the end of next quarter. Thank you. And have a great evening.

If you joined the conference late today, you may listen to the conference on digital replay which will be available from August 8 to August 16. And you can reach that on phone number 888-286-8010, or 617-801-6888. With a passcode 16650278. Once again, thank you for joining the call. And you have a good day.

Thanks, Operator.