Heartbeam Inc (BEAT) 2012 Q2 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet Second Quarter 2012 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 differ materially 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 Form 10-K or 10-Q. We assume no duty to update these statements.

At this time all participants have been placed in a listen-only mode. The floor will be open for questions and comments following the presentation. It is now pleasure to turn the floor over to your host, Mr. Joseph Capper. Sir, you may begin.

Thank you, Operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. My comments for today's call are structured around two major topics. First I will comment on our current cardiac monitoring business, specifically how we did in the quarter and what we were focused on to accelerate our growth.

Heather will provide details on our operating results. I will then provide brief comments on the Department of Justice's investigations followed by commentary on steps we have taken to significantly develop a research services business in an effort to provide a second growth engine for the Company. The most notable note being the strategic acquisition of CardioCORE which we announced on Monday and is expected to close later this month.

We will also allow time for a brief question-and-answer session.

As you are aware, nearly all of our revenue to date, including the second quarter of 2012 has come from activities related to our current healthcare services business in which we provide cardiac monitoring services for patients and doctors.

Beginning on our next call we will start to report on performance in two distinct areas of the business -- healthcare services and research services. As a reminder, and as mentioned on previous calls, the three broad strategic objectives we have been pursuing in order to improve the business are -- number one, further solidify our leadership position in the current cardiac monitoring business to a variety of tactical initiatives; two, diversify the uses of our current technology into adjacent markets; and three, identify one or more diagnostic markets that would benefit from the application of our wireless platform.

To date we have made significant progress on the first two objectives which I will talk about in a moment. And we have begun the developmental work on the third, which to be clear, is a longer-term objective.

When you take a moment to think about it, this represents outstanding work by the management team in the face of incredible adversity. Looking back to when I took control of the Company seven quarters ago in the third quarter of 2010, the Company was not in a very good place. The Company was dealing with a litany of challenges, was in need of significant turnaround work, and had no strategic growth plan.

We soon developed a well-thought out course of action aimed first at improving our core business and then diversifying to improve the health and future prospects of the Company. We have been following that plan and clearing many obstacles along the way. As a result, today the Company is a far more stable platform providing us with the confidence necessary to make further investments in the business.

With regard to the current cardiac monitoring business, I am pleased to announce that the second quarter of 2012 represented another solid quarter for the Company. Total volume for all three service lines -- MCOT, Event, and Holter was up 4% in the quarter. Revenue grew modestly for the second consecutive quarter to $27.4 million, up approximately $400,000 over the previous quarter

Adjusted EBITDA in the quarter grew by $2.1 million from a $400,000 loss in the first quarter to a $1.7 million gain in the second, finishing the first half of the year slightly better than our expectations. During the quarter we moved forward with the full market release of our latest generation MCOT device, C5, which we now refer to as MCOT OS.

As you may recall, one of the benefits of the new product is its ability to be dispensed remotely from a doctor's office. The system is now on the shelf in over 500 physician practices and is outperforming expectations. Additionally, we expect to be in position in the very near future to speak to you about a few new products which we plan to introduce, designed to complement our current cardiac monitoring portfolio.

During the quarter we became fully operational in West Coast Monitoring Center. We recently received our new Medicare provider number for this location, clearing the way for us to start billing our health claims. To clarify, when we opened the facility and applied for a provider number we held our Medicare claims pending at review of acceptance of our application. Heather will cover this in more detail in a few minutes. But the bottom line is we billed AR waiting for this clearance.

We now have the clearance and are in the process of submitting claims which totaled $6.8 million at the end of the quarter. This is a very important point. We ended the second quarter with $34.1 million in cash. In addition to the $34.1 million we billed, the $6.8 million in Medicare AR, by design, as I just explained. Had we not held the Medicare claims we would have generated cash in the quarter. This is only a matter of timing. It's important to emphasize this point and the Company's proven ability to manage the balance sheet given the investment we are now making.

At this point I'll hand the call over to Heather to provide more detail on our results.

Thank you, Joe, and good afternoon, everyone. Revenue in the second quarter revenue was $27.4 million, a $400,000 increase compared to the first quarter 2012 due to volume increases related to the full quarter impact of ECG Scanning. Compared to the second quarter 2011, revenue was down despite higher overall volumes. This reduction is largely due to a lower average reimbursement as we continue to see volume mix shift from MCOT toward Event and Holter which carry lower ASPs.

Despite the impact of the mix shift, our gross margin as a percentage of revenue increased both sequentially and year-over-year. These increases resulted from the cost reductions implemented at the end of 2011 which contributed over two percentage points to our margins during the second quarter.

In addition, the previously discussed extension of the useful life of our MCOT devices had a positive impact on the year-over-year comparison. We expect to see improvement in our margin as we continue to streamline our operations and make process improvements.

So, sequentially in year-over-year our adjusted operating expense declined despite a full quarter of ECG expense. The sequential reduction was due to the normalization of expense after incurring certain expenses in Q1 that typically occur in the beginning of the year.

Compared to Q2 2011, our adjusted operating expenses declined due to our Q4 cost reductions as well as lower overall headcount related expense. We are on track to achieve the $7.5 million of annualized of cost reductions that we discussed at year-end.

Due to our ability to control expenses and operational efficiencies we generated $1.7 million in positive EBITDA during the quarter. This compares to a $400,000 EBITDA loss for Q1 2012 and positive EBITDA of $1.9 million for Q2 2011.

Looking forward, we expect to be EBITDA positive for 2012 despite planned investment in selling and marketing resources.

Now turning to the balance sheet. As Joe discussed we ended the quarter with $34.1 million in cash and investment. As I forecasted on our Q1 call, our cash was impacted by our holding of Medicare claims as we waited for Medicare approval of our San Francisco facility which we have now received. We expect to collect the nearly $7 million on claims that were outstanding as of June 30 by the end of the third quarter.

Again, as I mentioned on our last call, this situation is temporary and we do not expect any obstacles in collecting on these claims for which we have already provided service.

The bottom line is the company is not burning cash in its operations. As Joe also laid out, we simply had a timing issue with the billing of Medicare claims. Had we been able to bill Medicare we would have actually generated cash in the quarter. Considering this, we had an excellent quarter in terms of cash management.

Looking ahead when we take into account that we may use up to $23.5 million for the CardioCORE acquisition, we expect to end the year with approximately $20 million in cash.

As for DSO, it did increase with the Medicare delay to 88 days. Had we been able to bill for Medicare our DSO would have been under 70 days. We expect to see a decline by the end of the third quarter and expect to finish 2012 well below the 2011 ending DSO of 75 days.

Finally, before I turn the call back to Joe, due to the timing of the CardioCORE acquisition there was impact on our financial statements for the quarter. For the second half of 2012 we expect CardioCORE to add approximately $6 million to $7 million in revenue and be accreted to adjusted earnings.

We do expect to incur some costs related to the integration of the operations which we expect to funded through CardioCORE's cash flow.

Looking to 2013, with the FDA's increased focus on cardiac safety and the ability to leverage our strength in cardiac monitoring, we expect to see faster growth in our research division versus our core healthcare services business due to the market environment and relative size of the two business segments.

In summary, we are pleased with our second quarter results and are excited about our future growth potential with the addition of CardioCORE. We will continue to control our costs and manage our cash appropriately as we remain focused on achieving our strategic objectives. Thank you. I will now turn the call back over to Joe.

Thank you, Heather. Before I move onto the emerging research services business and the acquisition of CardioCORE, I want to spend a few minutes providing an update on the Department of Justice investigation.

To date, we have been fairly tight-lipped on the subject, providing any high level updates along the way. I appreciate that this has been frustrating. Unfortunately that is the nature of the process. Here's a summary of what I know about the investigation. First, it is important to note that CardioNet was not the original target of the Department of Justice.

We have learned through publicly available information that our CID resulted from a whistle-blower action brought against a competitor, LifeWatch, in late 2009. LifeWatch has since agreed to a financial settlement and consented to comply with the terms of a five-year comprehensive corporate integrity agreement.

When we received the CID in August 2011 we made this face public immediately. Within ten days I personally met with representatives from the Department of Justice and presented what we believe was a set of very compelling statistics and facts about our business.

Since receiving the CID we have fully cooperated with the Department of Justice providing hundreds of thousands of pages of requested documentation. Our next step is a face-to-face meeting scheduled for September 2012 to discuss the government's status relating to its investigation.

It is hard to gauge how long this investigation might last. However, given the number of people the government has spoken to, including current and former customers and employees, we hope the bulk of the process is behind us. In any case, we will continue to work towards an expeditious resolution to this matter.

Based on our observations, ongoing dialogue with the Department of Justice, and after reviewing the press release following LifeWatch's settlement, we believe significant cultural differences existed between CardioNet and LifeWatch. However, it is premature to discuss the detail or impact of those differences at this time. We will update you in the future as appropriate.

Turning now to the developing research services business. At some point during each of our last several earnings calls I mentioned our intent to diversify into adjacent markets. As I mentioned earlier, nearly all of our revenue has come from providing cardiac monitoring services in the healthcare setting, and a disproportionate amount has come from MCOT alone which has endured well-documented reimbursement challenges.

As such, it stands to reason that any strategic growth plan will incorporate initiatives designed to mitigate this revenue concentration and reimbursement risk. We have analyzed a variety of different new businesses and growth opportunities. After careful evaluation including the process of matching market opportunities against our core competencies, and therefore our ability to execute, we have decided that our first major diversification investment will be in the research services business. Specifically we're making a relatively large investment to acquire CardioCORE, a research services company with a concentration in cardiac safety studies.

With this acquisition CardioNet becomes a more complete cardiac monitoring company, servicing the needs of patients and doctors in the healthcare setting as well as the needs of device and pharmaceutical sponsors in a research setting.

This investment makes a lot of sense at this point for several reasons. First, it is important to reiterate that we have been in the research business since December 2010 when we acquired Biotel. We had the luxury of test driving and learning the business prior to making any significant investment.

We quickly realized there existed an inherent opportunity for top line synergy given the crossover points between the two businesses. Our next step was to hire an experienced business development person dedicated to research services. As a result of our efforts during the quarter we were awarded a fairly significant agreement with a top tier pharmaceutical company to provide cardiac safety services in support of a $1 billion drug.

We are in the process of implementing this program as we speak and expect it will generate $1 million to $2 million of revenue over the next 12 months. Due to the FDA's increasing focus on cardiac safety during drug and device trials, the growth prospects of our research services business should remain strong for the foreseeable future.

We also believe we may have an opportunity to apply CardioNet's proprietary wireless technologies in ways that could uniquely add value in a research environment, making this endeavor that much more exciting.

The CRO market is estimated to be approximately $20 billion in annual revenue and growing at approximately 15% per year. The industry is believed to be highly fragmented with over 1,000 sellers globally. However, a significant portion of the market is controlled by a relatively small number of larger CROs. Cardiac safety is just one of the many services provided in this market and requires a high degree of specialization. The cardiac safety market alone is estimated at approximately $1 billion annually.

Driven by the demand for standardization and high quality reporting, the trend in this market is towards centralization of analysis. CardioCORE, along with a few other competitors, has been at the forefront of centralization and stands to benefit the most as the trend continues. About one-third of the market is believed to be centralized at this point.

With 45 employees, CardioCORE is headquartered outside of Washington, DC, and has offices in San Francisco and London. The Company also has an exclusive partnership with a sales agency in Japan to help develop business in Asia. As mentioned in the release, CardioCORE is on pace to generate approximately $19 million to $20 million of revenue in 2012, representing a compounded annual growth rate since 2006 of 31%. The Company will generate approximately $3.5 million to $4 million of EBITDA for the full year, 2012, and will be accretive to earnings in the first year.

We believe these numbers rank the Company third among cardiac core labs behind E-Research which was recently acquired in a take private transaction and Biomedical Systems, another private company. CardioCORE's many customers include eight of the top 25 pharmaceutical companies and they are a preferred provider for three of the top ten.

Aside from combining our existing research services business with the CardioCORE operations and some obvious administrative synergies, there will not be a lot of heavy operational integration. The business will run as a division of CardioNet and will report in through Mike Geldart who joined the executive team last month in anticipation of this transaction.

This structure eliminates any risk that the acquisition will divert attention from our existing healthcare services business.

Again, while there will inevitably be some cost-side synergy, our focus is primarily on building an additional growth engine for the company and leveraging any opportunities for top line synergy across both businesses.

With all that said, we will now pause and open the call to questions. Operator, we're ready for our first question.

(Operator Instructions). And your fist question is from the line of Matt Dolan with ROTH Capital Partners. Please go ahead.

Hey guys, this is Chris Lewis on the line for Matt. Thanks for taking the questions. Can you first just provide a breakout of MCOT revenue versus your acquired businesses?

So the breakout for the quarter, Chris? Or do you want annually?

For the quarter.

Okay, yes, for the quarter we were about 68% MCOT, 20% EHP, and 10% product.

Okay, great. And then you mentioned overall patient volume was up, I think you said 4%. Can you discuss what you saw with MCOT volume specifically during the quarter?

Yes. It was not up. It was relatively flat. What we saw was kind of a mix change. We're seeing a little bit more on the Event/Holter side than we are on the MCOT side. Not a dramatic swing, but that's the mix change.

Okay. I guess just as a follow up that, can you kind of describe the process and progress of the full launch of C5 and I guess the Company's ability to leverage the MCOT business with the new customer accounts from the ECG acquisition. I guess from the last call it would have seemed the MCOT volume would have been up quarter-over-quarter. So, I guess if you can just address that, that would be great.

Yes. It's slower than I would have liked. There's -- there's a matter of getting people trained on the ECG side, switching them over from an existing product, and then having them introduce a new product to their accounts. So there's a little bit of headwind from that standpoint. We didn't get out of the gate as fast as we would like. And that's more a function of what I just discussed, not a function of C5.

C5 is actually performing very well and we have been introducing it to many of our existing and new accounts primarily the benefit being that we can dispense it off the shelf.

But even that is taking a little bit longer than we would have liked. We still see some kind of challenges in the marketplace. We think office visits are still soft. We're hearing a lot of noise about co-pays being higher and people opting for a less expensive procedure due to co-pays, things like that.

So, it's a little bit of a challenge, but we're making progress.

Okay, great. And then just one more. Can you quantify the benefit in incremental revenue from the West Coast facility during the first half of the year, and I guess what you expect for the remainder of the year now that you have IDTF designation?

Yes. In the quarter we spent a lot of time moving most of our [elder] care business to California. We got fully ramped up at some point during the quarter. We anticipate that we will run most of our Medicare business out of our West Coast Monitoring Center for the rest of the year.

That doesn't have any impact on growth. It's more our ability to service certain payers on the west coast and Medicare.

Great. Thank you.

(Operator Instructions). We have a question from the line of Alex Silverman with Special Situations. Please go ahead.

Given all the moving parts with the costs coming out of the business, can you give us a sense where you are in that process and what the cost structure of the business should look like when fully implemented?

Yes, Alex I would say on kind of run rate basis we've taken a lot of cost out of the current business. So, which is not a problem, right? I mean, really you'd rather grow your business and leverage your cost structure across more revenue, and that's our intent.

We're starting to get more traction in our core business. Yes, the second quarter was slower from an MCOT standpoint than anticipated, but we are getting traction there. We believe that given our ability to spread G&A and fixed costs across a bigger breadth of product with the acquisition. You know, we'll have more to reinvest into the business.

We're not looking at ramping up operational expenses. We think we can run the business with incremental additions over time. But, I would say kind of on run rate basis we're sort of where we should be.

Okay. And then second question, CardioCORE, can you lay out what the operating leverage might look like there relative to your existing business?

Yes. I'm not going to put dollars on it because we really didn't approach it from that standpoint. We approached it kind of a top line growth opportunity. There are abilities to -- there are some areas we can leverage for top line growth, but that's still sort of coming together. On the cost side, we know that we can acquire equipment cheaper than they can. We know that we have some monitoring center cost reduction.

We have some obvious cost area things that ---

I wasn't really talking about the cost so much in terms of the incremental margin at their business relative to yours.

On the gross margin line?

You know, the incremental margin, the incremental margin on a dollar of revenue from them versus your existing business.

So, if you're talking about on the gross margin side as opposed to operating margin, their gross margins are slightly lower than ours. So, they're around 50%.

Yes, but Alex, now it's important to remember, this is a high growth business. And I mentioned the compounded annual growth rate over the last six years. We expect to see continued growth in that business and there's a lot of leverage in that infrastructure, even at the cost of sales line.

And what kind of visibility do you have into the drugs that are going to need to be monitored, you know, as it moves through the pipeline?

Well, we have, in the business that we're acquiring there is an existing backlog that's fairly substantial; a business that we have in the works. Some of it is booked. Some of it not booked. But we expect that that will continue to move through the pipeline. And that kind of gives us good visibility to grow.

Drugs specifically, we're not at liberty to say for competitive reasons and because a lot of sponsors don't want you to say it.

But you do have a sense of what drugs are going to need monitoring a year from now?

Yes. Ones that we believe we'll be doing the monitoring for, yes.

Okay. Thank you.

We have no other questions so I'd like to turn the call back over to Mr. Capper for some closing remarks.

Thank you. In summary, what you heard on today's call was that CardioNet is a far more stable platform than it was seven quarters ago. You heard that volume, revenue, and EBITDA were all up sequentially. That we've been following a strategic plan leading to the acquisition of CardioCORE. That the research services business offers us a great opportunity to accelerate our growth into a large and growing adjacent market. And, finally, that the DoJ process/investigation is working its course.

Thank you for your continued support and interest in the Company. We will speak to you next quarter.

(Operator Instructions). Everyone may now disconnect and have a great day.