Heartbeam Inc (BEAT) 2013 Q3 法說會逐字稿

Good afternoon. Thank you for joining us for the BioTelemetry third quarter 2013 earnings conference call.

Certain statements during the conference call and question and answer period to follow may relate to future events and the 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 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 and good afternoon, everyone. I'm Joe Capper, President and CEO of BioTelemetry. Also with me on the call today is our Chief Financial Office Heather Getz. I will provide commentary on our third quarter performance. Heather will take you through a more detailed review of our operating results and we will then open up the call to your questions.

I am delighted to be with you this afternoon to report on another highly productive quarter in which we made considerable progress executing against our strategic objectives and delivering solid financial results now under our new corporate identity BioTelemetry.

As has been my practice and, especially for those of you who are newer to the Company, I would like to remind you that we continue to manage the business in pursuit of three broad strategic objectives. First, we seek to solidify our leadership position in cardiac monitoring. Second, we are building a leading research services business around the Cardiocore brand and platform. And third, we look to identify diagnostic markets that would benefit from the application of our wireless platform and proprietary technology.

I am sure you agree the BioTelemetry name is much better suited for a Company with this broad strategic focus and direction. Now let me tell you why this direction is such a positive one.

We just reported another strong quarter of financial performance. For the fifth consecutive quarter we experienced year-over-year revenue growth, up 18% over the prior year quarter to $32 million. EBITDA was $3.6 million, the highest quarterly EBITDA in four years. Total volume was up 7% compared to last year with MCOT volume up a remarkable 13%. And we ended the quarter with $21 million in cash and no debt.

In addition to excellent financials, the quarter was filled with considerable operational success. In the patient services business, the comprehensive sales approach we implemented at the outset of the year continues to be the catalyst driving renewed focus on the benefits of remote monitoring as we once again saw year-over-year growth in all three service lines, MCOT, event and Holter.

As you may recall the implementation of the United Healthcare agreement began in earnest in the month of July and we are pleased with the early results. As we indicated in the past, the third quarter has historically been our toughest from a seasonal perspective. As expected however the rollout of the United Healthcare agreement did help dampen this phenomenon. In fact, during the third quarter, MCOT volume was up 3% sequentially.

As a reminder, late last year we launched the market's most advanced wireless event monitor. To date we have serviced over 26,000 patients, up significantly since our last report. We are now servicing more patients with the wireless event then with the traditional event, demonstrating the clear benefit and market demand for the system.

Also, you will recall that during the second quarter we introduced the MCOTos 2.1. This new device gives physicians the ability to choose MCOT or wireless event monitoring service on demand and the convenience of a single system. By combining these two life-saving technologies into one device, we are able to monitor patients more effectively while providing increased efficiency and ease of use to our physicians. We have now serviced over 3,500 patients with the MCOTos 2.1. This is just another example of the Company's superior product portfolio driving our strong market presence.

These traits are not lost on payers and recently helped us secure a three-year agreement to be the exclusive provider of remote cardiac monitoring services for Kaiser Foundation hospitals and Permanente medical groups, covering 6 million lives. The contract was effective as of November 1, 2013 and we commenced implementation on time. We expect this agreement to make a nominal contribution during the fourth quarter but ramp nicely as we move into 2014.

I'm also pleased to inform you that we recently received FDA clearance to market our new low-cost 14-day Holter called CardioKey. We anticipate launching this new system in early 2014 in a few different formats, including a reusable patch design. We expect cardio key to have considerable advantages over other patch products in terms of cost and user flexibility.

Also as a reminder we expect to introduce new products in the near future resulting from the previously announced multi-year development agreement with IMEC, a worldwide leader in nanoelectronics.

Turning to research services, we have now operated Cardiocore division of BioTelemetry for a full year and we are pleased with the progress. Revenue was up in the period, the pipeline is growing and we continue to attract new customers.

While research is performing well in near-term we have recently put more focus on achieving the strategic initiatives important to drive consistent, long-term results, which are one, enhancing our position outside of United States, particularly in Europe and Japan, creating a competitive advantage in terms of equipment costs and differentiation. And third, adding services to complement the current core lab offering.

Doing these three things will make us more competitive in this large and growing market and will have the added benefit of dampening some of the revenue choppiness typically associated with the research business. We anticipate having meaningful progress to report on this front in the coming quarters.

With that overview, I will now turn the call over to Heather for detailed financial review of the quarter. Heather?

Thank you, Joe, and good afternoon, everyone. As Joe mentioned, revenue in the third quarter was $31.9 million, an 18% increase over the third quarter of 2012. The increase was aided by the acquisition of Cardiocore and $1 million of additional revenue generated in our patient services business as our total patient volume increased by 7%. Notably, this volume increase in patient services was largely driven by MCOT.

Gross margin came in at 61% in the third quarter of 2013, compared to 61.5% in the prior year quarter. Growth in the research services segment due to the acquisition of Cardiocore reduced margin by approximately 200 basis points while efficiencies in the patient services business and higher MCOT volume contributed 150 basis points to the gross margin.

For the third quarter, our adjusted operating expense increased $400,000 to $19 million, due to the addition of Cardiocore. Excluding Cardiocore, our adjusted operating expense was lower, substantially as a result of a reduction in bad debt.

With the increased margin dollars stemming from the higher revenue more than offsetting the increased operating expense, we generated positive adjusted EBITDA of $3.6 million for the third quarter of 2013, compared to $300,000 in the third quarter of 2012. When you add back stock compensation of $800,000 for the third quarter of 2013, adjusted EBITDA reached $4.4 million, or a 13.9% return. Our third quarter EBITDA increased sequentially and is the highest in four years.

On an adjusted basis, we were operating income positive for the second consecutive quarter and on a year-to-date basis. Again, this has not occurred since 2009, the year in which we received dramatic reimbursement reductions.

I also want to note the one-time expenses in the third quarter were largely related to the patent litigation we have pending against MedNet. The trial was initially scheduled for December and has been pushed back to February, partially as a result of the government shut down last month. We expect the expense related to this litigation to slow in the fourth quarter and then pick up again in the first quarter of 2014. We believe that we will incur an additional $1 million to $2 million over this time period.

Now turning to the balance sheet, we ended the quarter with $21 million in cash, which was up $2.7 million compared to year-end and no debt. Year to date we generated $7.1 million in cash from operations, which was partially used to invest in new devices as well as our new operating system, bringing us to free cash flow positive of $2.2 million. We continue to make progress on reducing our accounts receivable, causing our consolidated DSO to decline to 51 days, a 10-day improvement from year-end.

Finally, before I turn the call back to Joe, the CardioNet comprehensive strategy, as well as the United and Kaiser agreements, should continue to bolster patient services volume in the fourth quarter and into 2014. As mentioned last quarter, we do expect some pricing pressure resulting from the United contract and the general reimbursement environment.

Looking at research services, we expect revenue growth to be slightly lower due to the previously disclosed delay of certain studies and the cancellation of one study resulting from a shift in strategy by the study sponsor. Given the above factors, we still anticipate our overall fourth quarter revenue to grow year over year in the mid to high single digit.

From a cash flow perspective in the fourth quarter, I expect to utilize cash generated from operations to invest in building inventory as a result of the increased demand of MCOT, as well as wireless event. In addition, we will have some upfront costs related to the move of our corporate headquarters. As a result, I expect to use cash in the fourth quarter and be free cash flow neutral for the year.

To reiterate, in 2013 on a consolidated basis, we expect to see organic top and bottom line growth and expect our adjusted EBITDA return, after adding back stock compensation, to be approximately 12% for the full year. We expect to generate cash from operations and be free cash flow neutral.

And with that, I will now turn the call back over to Joe.

Thanks, Heather. As you have heard, there has been considerable activity and progress in our business over the last year. To summarize, we launched MCOTos and wireless event. We successfully integrated Cardiocore. We introduced the comprehensive CardioNet sales approach. Launched MCOTos 2.1, signed a three-year agreement with United Healthcare. Signed an exclusive three-year agreement with Kaiser. Received FDA clearance for CardioKey. And completed an ROI study based on insurance claims data that has demonstrated significant in-patient cost reductions with the use of MCOT. This study has recently been accepted for publication.

These key achievements, together with other less celebrated activities, have produced far superior results than at any point in our past. More importantly, we are now incredibly well-positioned to achieve even greater results as we move into 2014.

Before we move to take your questions, I want to reiterate just how excited we are about the Company's current position, especially in the context of the well-publicized focus among payers and providers to lower costs. The use of telemetry over remote monitoring is one of the few areas we can point to within healthcare where technology is being properly applied to leverage labor related costs. As various parties within healthcare look for ways to curtail expense growth, it is easy to see how our message resonates, particularly the more comprehensive approach we have adopted.

Monitoring over 1 billion heartbeats per day, BioTelemetry is undoubtedly the clear leader in the remote cardiac monitoring business. And we believe our core competencies are both scalable and transferable. The recent upward trend in the business has been born out of the successful execution of our strategic growth plan, which has increased profitability of our operations and driven the acquisition of key assets. Our challenge is to continue to build on our recent success and momentum.

The Company is now on a trajectory which is driving improved revenue growth, increased diversification and generating higher margins. Since the plan is working, we have focused our business development activity. I'm finding ways to enhance and accelerate its key tenets.

I also want to take a minute and thank all of those at the Company who helped deliver the highest EBITDA in four years and year-over-year revenue growth of 18% during the third quarter. As I said at the conclusion of last quarter's call, we have never been better positioned in our history to grow the business and leverage our technology. We are just starting to see the results of our strategic initiatives take hold and you should expect us to build on this momentum.

With that we will now pause and open the call up to questions. Operator, we are ready for our first question.

(Operator Instructions) Brooks O'Neil, Dougherty & Company.

So I have a couple of questions. I guess I'd like to start out just can you tell us a little bit more about this Kaiser arrangement? The exclusivity sounds somewhat unique and I'm just curious how you see that and perhaps what they're thinking in signing an agreement like that with you.

It's actually relatively unique among payers, but not that unique with Kaiser. They typically drive compliance to whatever standard they adopt. So it didn't surprise us, we were glad that we persevered and were awarded that contract. But it's not really that unusual for them.

And it means we will get a disproportionate amount of the market share, nearly all of it. There will be some exceptions I'm sure along the way. Most contracts have provisions for certain types of exceptions. But their communicated plan to us is to drive compliance to our equipment.

Maybe along those same lines, can you give us any update or insight into how -- progress you might be making with other payers, particularly the Blue Cross organizations?

Yes, as you know, were constantly in pursuit of any payers that do not cover their service or any of our services or reimburse. The largest one still left is WellPoint Anthem, which is a member of the Blues alliance. And we are working with them diligently to try to help them see the light. I mean it's an ongoing process, Brooks, I really can't put a timeline on it or anything of that nature.

And likewise, I guess you're probably reluctant to say a whole lot about United, but can you give us any color on how that's going?

Yes, I mean we anticipate this taking a little while to fully ramp up. I think we've given you some indication in the past as once we're at full implementation what we think it means to the business.

I can tell you we're pleased with the rollout, we saw nice uptick in the quarter. We saw MCOT growth year-over-year of about 13%, half of which is associated with the United agreement. So the real key message there is it's not all United, which is really, really good message, right? As we're growing that contract and there's -- we're also executing on other initiatives within the organization to grow the business at large. And to the extent there may be some halo effect. But we anticipate that, continuing to see that type of progress.

And then maybe my last question is, could you tell us just a little bit more about this Holter you just had approved and what you see as some of the unique features of that, how you expect that maybe to contribute as we head into 2014?

Yes, we developed it sort of as a direct response to the success that iRhythm was having with the ZIO patch. It seems as though the patch form factor is being adopted within the marketplace. When you hear us and other companies talk about products and development, typically in that form factor, which makes sense, it seems to be a patient friendlier way to wear a monitoring device.

Our system should add some benefit in that it's a two-piece device, but once we get it in a patch form factor -- when we first ran it through FDA we did it in a traditional format where you wear the device, in this case on a lanyard, and you have leads coming out of it. We're going back in the next couple of months to get the patch portion of it approved as well. So, we think first quarter we'll be ready to go in a patch form factor.

Unique in that as I started to say, it's a two-piece device. So the monitor itself, which is very small and low cost, will be reusable. So there's a couple of different ways we can position this in the marketplace. Currently, the iRhythm product needs to be mailed back into to be interrogated and then a report is sent back to the physician weeks later. So you can imagine that in terms of customer satisfaction we'll be able to deliver a report much faster, it's going to be a lower cost system, so we'll be able to market in different ways. So we're pretty excited about the different options with it.

I don't really -- I can't talk to you about size of the market, what we expect, how much penetration we expect to get, but it certainly will be a nice complement to our current portfolio.

Bruce Jackson, Lake Street Capital.

First with the revenue gains that you provided for the research business, you gave us a percentage current number. Is that number going to be up sequentially into the fourth quarter on an absolute basis?

Are you talking about the future growth number that we gave you around 15%?

Yes.

So can you repeat your question?

Sure. You said the research services business is going to be up year-over-year, but I just want to know if it's going to be up sequentially in the fourth quarter.

I don't know that we've broken that out like that in the past. One of the things you guys have constantly asked us to do and I understand why is to give more guidance. The guidance we've been given is more directional and we haven't given specific guidance like that.

Yes, I mean in my script, Bruce, what I referred to was the year over year growth on a consolidated basis in the mid to high single digit. So that would include patient, product and research.

Okay, I got it now. And next question is, can you just kind of qualitatively tell us how much of the incremental revenue gain in the quarter for patient services was a result of the United health contract? Was it like a big part of it or a small part of it? Just a little color.

No, we can't do that on a revenue basis. I think I told you volume was up about 13% year over year and roughly half of it was due to that agreement, half of it was the rest of the business.

And then I was out on the CardioNet website and I saw something called CogeraHealth. Do you have anything to day about that?

Well, not yet. I'll explain to you what it is. One of the kind of new product areas we've been looking at for quite some time is in INR testing. At-home INR testing, which is the test needed to regulate the amount of warfarin or Coumadin an individual takes. It's a test that's done periodically, usually once a week. Historically it was done in a centralized fashion at a Coumadin clinic or PT clinic usually associated with a hospital. Over the last several years that, like other point of care tests, has started to migrate its way into the home, which is highly convenient. We started to do some work in that area a few quarters ago. We haven't spoken about it publicly because it's more -- it's in a developmental phase.

We recently went live with a couple of websites because we're attracting new patients. It was part of the United agreement. So we do anticipate building that into another line of business to complement -- more than likely that will roll up into the patient services business to complement the current cardiac monitoring portfolio. It's the same call point, it's the same type of patients that you would be servicing. But it's really early on, so we've hesitated to talk about it much.

I will tell you I like it, it's a recurring revenue business. I like the margins, I like the service. We need to do more operational work, we need to automate it a little bit more and we need to do a few more things with it before we're ready to roll it out nationally. But you're a good spy though.

Well, thank you. The last question I've got is about the patch form factor. So you said Q1 is the first form factor that's going to launch and then the IMEC version is going to launch later in 2014 is that the plan?

We haven't put a definitive timeline out for the IMEC products. I will tell you that we're very pleased with the progress of the projects that we're working jointly with them. If anything, will accelerate those. I hope to have something in the marketplace from them sometime in 2014, but there's still an incredible amount of work to be done there.

Dan Trang, Stonegate Securities.

Question regarding the research services, and I know in the past you said they're going to be lumpy. And and I'm wondering when we can see -- when do you expect to see more normalized number?

Hard to say. It's the nature of that business. You have studies start and stop all the time. I think the bigger you get, the better, right? It just makes sense because the studies will start to take up on an individual basis a lesser percentage of your total book of business. So we're very much focused on finding ways to scale that business. But it's probably going to be a little while before we're really at a point where we can say we're not susceptible to those kind of puts and takes on a quarterly basis.

And I know that your revenue was aided by your past acquisitions. I'm wondering are you still in kind of acquisition mode? Just kind of whether you are or you're not, just kind of some color behind that please.

Dan, I would say that we have at all times a very active business development funnel. And all of those initiatives, whether it would be to acquire a company, an asset from a company or invest in a technology, are looked at for the purpose of accelerating the plan that we've outlined. And I will tell you that again we're very active and there's assets that we like and we're always looking. That doesn't mean there's anything that's going to happen imminently but we're always looking for opportunities to accelerate a strategic plan.

Nick Leventis, Balyasny.

A couple of quick questions for you. Going back to the CardioKey for a moment, is that approval -- is it tracking on schedule or is it tracking a little bit ahead of schedule in terms of getting --

Ahead of schedule.

-- that product out to the market? Ahead of schedule.

Yes, it's ahead of schedule. We have the FDA approval now. We'll have -- will go back for another approval on the patch portion of it. And then will probably launch it in the first order and that slightly ahead of schedule.

Second question for you, obviously a nice win with the Kaiser contract, them being very prestigious and the market and doing a lot of their own work on the clinical side. I guess question to you is we first came off the United contract win and they're also very well known in the marketplace for doing their own clinical research, so now with two big name brands behind you, how is that changing conversations with other potential customers? Is it making it easier, was the United contract, did that weigh -- did it help sway, Kaiser? Or any kind of commentary you can offer around that would be very helpful.

Yes, I do think it adds to the credibility of both the technology and the Company. Now there is not an automatic trickle down effect or ripple effect if you will. You're going to get WellPoint because you got United, I wish, right? However, I will tell you that it matters. It matters a lot in conversations that I've personally had with people. It certainly does make a big difference. So the easy answer is it can't hurt, but I actually believe it will help tremendously.

And then one last question. So the study that you guys are looking to publish, is there any timeline on when we might expect to see that get into a journal?

It's been accepted by a journal, a peer-reviewed journal. Don't ask me the name of it because it escapes me right now. And it was accepted about a week ago, we were told 6 to 8 weeks.

(Operator Instructions) Jan Wald, Benchmark.

I guess some of the questions I had have been answered. But let me try for maybe a little bit more on a couple. In terms of your physician services business, now that you have United and Kaiser what should we look for for growth over the next may be even year or two just directionally? I know you're not going to give us numbers.

And also, just in terms of understanding the business of little bit more how much of that is MCOT versus some of the other devices that you have to offer? How should we understand that sort of business model?

The first part was really about kind of volume growth, patient services. What we have said is once it's fully ramped, United should add 10% to 15% to our volume. And the big question is how fast it can ramp it up. Kaiser is unknown yet, we still have to do a little bit more work on that in terms of impact. A lot of that was kind of baked in, because we anticipated winning this thing for couple of months. But I would say that kind of 10% number is probably a healthy number to work with, Jan. I'm pretty comfortable with that right now with how the business is developing and how is trending.

We just did 13 year-over-year, six of it was outside of these contracts. And these contracts are still going to ramp up, so I mean I kind of like the way the business is trending from a volume perspective and we're doing a lot of other things that we haven't really talked a lot about today because we're trying to develop them. But I think there's other ways that we can apply this technology and grow the businesses. Different sectors that have not necessarily used or deployed the technology the past.

I'm personally bullish on it, but I drink my own Kool-Aid a lot. I think 10% is probably a decent number to work with.

Okay, and that's a 10% in volume in the business. Any sense of MCOT versus the other devices or is it just a gross number?

I would just use that as a gross number for now.

On the CardioKey product, how do we understand that opportunity? It's another component or another tool in the tool box. But in its use is going to do something good to margins, is it going to provide more business? How do we understand how that device is going to fit into the -- your armamentarium?

I would think about it in terms of share, not necessarily margin right away. It's a 14-day Holter. What has happened in that business is it's the smaller of our three current businesses. And what's happened is people, primarily a company called iRhythm, launched a 7-day patch, 10-day patch, 14-day patch, eventually they got to a 14-day patch that started to take share away from other service lines. And frankly including event and MCOT, not just Holter. It's reimbursed as a Holter, but it took other services lines, because as you can imagine, you're getting a couple of week's worth of data and its full disclosure data, which is very valuable at times.

So it allows us to compete in that market and it'll stem the loss of share in some of our service lines that we have experienced in the past due to not having a product like this. And it will probably create more opportunities for us long-term. There may be some application to develop additional markets with this product, given the price point and some of the flexibility.

And I guess maybe a three-part question on Cardiocore. There's a (inaudible) strategic. I guess there's lot happening in the CRO space. There's -- I've seen a lot of companies that are, they're all of a sudden making a lot more money than they had in the past. There's a lot of M&A activity, so it seems to be a pretty exciting market, if you will at this point.

How does Cardiocore fit into that framework? How do you see the business growing over a period of time?

And then secondly, you mention that you're going to grow services. I guess you're a core lab right now. I guess the question I have is what kind of services might you be adding to that core lab capability?

And the third thing is you've mentioned that one of the growth vehicles for you is going to be looking at international, which would be Europe and Japan. And I wonder how MCOT fits into that strategy because it would seem to me that that would be a device that would be very useful in a research services play over in Europe.

So to your point, a lot happening and then there's a lot happening with our business in that context as well. So I do think that what you're hearing about the CRO environment does affect us as well and we anticipate continuing to see growth opportunities in that business.

There is cardiac safety studies be required and various levels, but all levels of development, including now post market release. So I don't see a slowdown of opportunity in the traditional core lab services that we offer.

Part two of your question was, what additional services would make sense or we're looking at. There's a couple that really seemed to go nicely or hand in hand, if you will, with cardiac's safety services that we intend to offer. And the two that kind of jump to mind are really the respiratory services business and the (inaudible) or previously referred to as ePRO business, which is kind of an electronic diary. Those service lines complement what we're doing quite nicely. So we are looking at ways to integrate them either through partnership or through other forms of technology integration.

The third question was about international and to the extent that we pursue an international footprint for research services, which is something that's very important to us, what affect that would have on the patient services side in terms of marketing MCOT or market MCOT in research.

Too early to tell yet. We really don't know. That's one area where we haven't done a ton of work and that is marketing of MCOT services outside of the US. We've done a little bit in research but we've not done much outside the US, outside of research, primarily because there hasn't been a huge demand for it yet.

I do believe that that will change over time but it's hard for me to say how long that will take and kind of what the price points will be and what the market opportunity will be. So I think more to come on that. I mean I don't have a good answer for you today but I kind of agree with you that it would make sense logically, especially in some countries where healthcare costs are a big focus right now. But we're just not seeing it yet.

I'm not showing any further questions at this time and I would like to turn the call back over to Mr. Joseph Capper for closing remarks.

Thank you, Operator. Thank you, everybody, for joining the call. That concludes this afternoon's call. We look forward to speaking to you after our next quarter. Thanks.

If you joined the conference late today, you may listen to the conference call via digital replay, which will be available through the investor information section of the BioTelemetry website at www.biotel.com until November 19, 2013. This does conclude the program and you may all disconnect. Everyone have a great day.