Heartbeam Inc (BEAT) 2014 Q2 法說會逐字稿

Good afternoon. Thank you for joining us for the BioTelemetry second-quarter 2014 earnings conference call.

Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities and Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company in the future to be materially different from the statements that the Company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on the 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, Mr. Joseph Capper. Please go ahead, sir.

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 Officer, Heather Getz.

I will provide commentary on our second-quarter performance, goals, and objectives. Heather will take you through a more detailed review of our operating results, and we will then open the call to your questions. Let's get started.

I am extremely pleased to report our second-quarter results, which included record quarterly revenue and numerous operational achievements. As you will hear today, we have made considerable progress towards our key objectives.

Our strategy is sound, and its implementation has driven our market growth, improved our revenue performance, and helped us expand our business into new areas of opportunity. As a reminder, the three pillars of our strategy are to: solidify our leadership position in cardiac monitoring; establish a leading research services business around the Cardiocore brand and platform; and look to identify markets that would benefit from the application of our wireless platform and proprietary technology.

These three components of our strategic focus are the driving principles that we actively pursue each day and have been successfully implementing. Let's take a few minutes to review the results of the strategy and the corresponding impact on our business.

This was our eighth consecutive quarter of year-over-year growth. Revenue grew by 33% to $42.7 million, the highest revenue quarter in the history of the Company. EBITDA was $5.1 million. We ended the period with $13.5 million in cash, up $1.5 million from Q1.

As mentioned on our last call, we completed the acquisition of Biomedical Systems' patient services assets in April. As for patient volume, the story continues to be quite impressive.

First, looking at organic growth in the base business, total volume increased by 16% year-over-year with MCOT volume up 17%. When we add in the effect of the Mednet and BMS acquisitions, total volume increased 108%, with MCT rising 44%.

Outstanding growth by any measure, the benefits of this scale will continue to be evident in the coming quarters. We also completed the acquisition of Radcore, a small imaging services company, in order to augment our research services offering.

In our patient services division we saw our comprehensive approach continue to generate greater penetration, clearly outshining the market with our organic growth rate of 16%. Our primary focus is to complete the two integrations currently underway, with a goal of maximizing customer retention and fusing the positive attributes of each operation.

Besides increased business, these companies both came with certain assets that dramatically strengthen our organization. In the case of Mednet, we will benefit from a customer-centric culture that drives growth and retention by adhering to a set of principles built around patient needs.

As part of the Biomedical Systems transaction, we assumed a small footprint in Europe and a proprietary Holter software system, both highly important strategic assets. As a reminder, this analysis software will interface with the full line of BioTelemetry Holter recorders, including the recently FDA-cleared 14-day Holter CardioKey, which we expect to launch later this year.

These two like-kind acquisitions create scale and synergy which have helped offset reimbursement pressure. Additionally, market share expansion in advance of launching our next-generation mobile telemetry system will help drive rapid acceptance when the product is ready to market early next year.

With the demand for remote monitoring solutions on the rise, our patient services business is in great shape. It has gotten much larger in a short amount of time through acquisitions. It is growing organically at a rate faster than the market as a result of our more comprehensive approach.

We are moving through the integrations as expeditiously as possible, creating margin with efficiencies along the way. And we are creating additional revenue opportunities with the exciting new products that will be coming to market in the near future.

Turning now to research services, during the quarter, we had three fairly significant advancements which have dramatically improved the growth outlook for this important division of the Company. We have repeatedly made mention of our need to bolster our presence in Europe in order to support existing clients and make us more competitive for future studies.

This extremely important step is now complete. With the acquisition of the BMS business in April, we assumed a small operations in Brussels, Belgium, which will become our European base of operations. We will add resources to this entity as business dictates.

We took a second big stride in the quarter by acquiring the assets of Radcore Lab, a small imaging core lab. Consistent with our strategic intent for the research business, this acquisition broadens our cardiac imaging offering and adds new oncology, musculoskeletal, and neurological imaging capabilities, supported by a state-of-the-art cloud-based analysis platform.

Lastly, we saw considerable improvement to our backlog, more than doubling since the beginning of the year, driven in large part by winning our two largest studies ever. As I mentioned in the past, we experienced more research revenue choppiness in 2014 than was anticipated. However, the aforementioned advancement, coupled with other successes we are experiencing in the business, have laid the groundwork for a record 2015.

In my closing comments, I will discuss how we see our third strategic objective, the development of new market opportunities, beginning to take shape. However, before I turn the call over to Heather, I would like to provide you with updates on the Department of Justice investigation and CMS reimbursement.

First, on the DOJ investigation, you may recall that in the first quarter of 2014 we recorded a nonoperating charge of $3.1 million related to discussions we were having with the government around a potential settlement. During the second quarter, the Company reached an Agreement in Principle for a potential settlement.

As a result, we have recorded an additional $3.3 million in the quarter reflecting an estimated total cash settlement amount of $6.4 million. By comparison, LifeWatch, who was approximately two-thirds of our size at the time, settled for $18.5 million. While we have an Agreement in Principle, the pending settlement is subject to the satisfactory negotiation and completion of a Final Agreement.

Also during the quarter, CMS published its proposed rule for the 2015 fee schedules. If there is no change when the final rule is published later in the year, the fee schedules that pertain to our business in 2015 will reflect rates that are the same to slightly higher than our 2014 rates. This potentially positive impact assumes another quote-unquote doc-fix patch is put in place when the current one expires in March 2015, which is highly probable.

While we were pleased that the proposed rates provide near-term stability, we continue to work through an industry provider group in an effort to establish a pricing methodology that properly reflects the healthcare cost savings our technology delivers. As many of you may recall, a study was published last year that clearly demonstrated substantial inpatient cost reductions associated with the use of MCOT.

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

Thank you, Joe, and good afternoon, everyone. Revenue in the second quarter was $42.7 million, a 33% increase over the second quarter of 2013, and our highest quarterly revenue in the Company's history. Patient service revenue increased by $9.3 million, resulting from a volume increase of over 100% due to the acquisitions of Mednet and BMS, as well as strong organic patient volume growth of 16%. Offsetting these volume increases was the impact of the previously disclosed Medicare rate reduction, which went into effect January 1, 2014.

Our product segment was up $1.3 million due to the acquisitions as well as strong Holter sales. Revenue was essentially flat in the second quarter -- versus the second quarter of 2013 in the research services segment.

On the gross margin line, we made a year-to-date adjustment to reclass certain expenses from SG&A into cost of sales, in order to align Mednet and BMS with our accounting processes, which resulted in our gross profit -- which reduced our gross profit percent by about 100 basis points for Q2. This impact will not reoccur in Q3.

Excluding this change, our adjusted gross margin was 57.2% compared to 61.5% in the prior-year quarter. The decrease in gross margin percentage was primarily due to lower average selling prices in our patient services segment as compared to the second quarter of 2013.

This reduction in ASP was primarily driven by the reduction in Medicare reimbursement rates, as well as a shift in product mix as a result of the acquisitions. The lower ASPs were partially offset by leverage from the increased volume.

To explain further, through our acquisitions as well as through our CardioNet comprehensive approach, we have made a conscious decision to create scale in our patient services business. By design, this strategy causes a shift in our product mix.

While MCOT, Event, and Holter are all growing, our acquisitions came with a higher percentage of their business weighted in favor of Event and Holter, which do not have gross margins as high as MCOT. However, our approach is leading to greater market penetration, increased growth, and higher same-store sales, which in return will create greater SG&A leverage. Essentially what we are giving up in gross margin percentage we expect to more than make up in operating margin in the long run.

To demonstrate the impact, I thought it would make sense to spend a minute reviewing our sequential comparison of Q2 2014 to Q1. Our revenue increased 15% from $37 million to almost $43 million. And while our gross margin percentage declined from 58% to 56%, our EBITDA increased 70%, from $3 million or about 8% return, to over $5 million or a 12% return. This increase in return demonstrates the additional leverage we are realizing from the acquisitions as they are integrated.

Moving back to our year-over-year comparison, as I mentioned, we generated positive adjusted EBITDA of $5.1 million for the second quarter of 2014, a 12% return, compared to $4.3 million or a 13% return in Q2 2013. The reduction in EBITDA return is substantially due to the Medicare reduction that went into effect this year.

In addition, as mentioned, we have not yet fully integrated our acquisitions, which added approximately $8 million of total expense in the quarter. As we integrate the acquisitions, these expenses will continue to decline, leading to an increased EBITDA return.

Now turning to the balance sheet. We ended the quarter with $13.5 million in cash, which was a decrease of $8.6 million compared to the end of 2013. This was due to the purchase of Mednet as well as cash used for capital expenditures, primarily medical devices.

Our consolidated DSO was 50 days, which was in line with year-end and down versus Q1. In order to finance the BMS acquisition, we used $8 million from our line of credit, which brought our total debt to $18 million. Our total debt to trailing 12-month adjusted EBITDA is about 1 time.

Finally, before I turn the call back to Joe, I would like to touch on the full year. As we laid out on our first quarter conference call, we expect to see continued momentum in our overall business, led by the volume growth in patient services segment, which is being bolstered by the acquisitions of Mednet and BMS. Partially offsetting the impact of the acquisitions and organic volume growth is the price impact of the previously announced Medicare rate reduction.

On the other side of our business, research services is showing great improvement in backlog with the addition of several large studies that will start in 2015. As Joe mentioned, we have added an additional service line with our acquisition of Radcore and are establishing a greater presence in Europe through our Brussels location. We believe these actions will enable us to reignite our growth in this very attractive market.

We are reiterating our overall guidance with top-line growth of 25%-plus for 2014 and EBITDA with a slightly lower percentage return than we realized in 2013 due to Medicare reductions, but higher than 2013 in terms of absolute dollars.

From a cash perspective, we will continue to generate cash from operations. We do expect to incur approximately $1 million of expense in the second half to integrate BMS and Mednet, which will be accounted for in restructuring and other. We believe that with our cash on hand, access to our facility, as well as cash generated from the business, that we have enough capital to meet our needs.

Looking at the third quarter, when I think about revenue, on the positive side we are seeing great momentum on our base business and with our acquisitions. However, we do typically see a seasonal decline in our patient services business in the third quarter, and we are forecasting to be slightly lower in our research segment due to the choppiness we have talked about.

When I put all these pieces together, I am expecting our revenue to be essentially flat to Q2, plus or minus a few points. Clearly our year-over-year comparisons will remain very positive.

On the EBITDA side, we believe our lower operating expense resulting from our integration efforts will lead to an uptick in the EBITDA return versus the second quarter. With that, I will turn the call back to Joe.

Thanks, Heather. As you have just heard, we had a successful second quarter with the business showing strong momentum. It appears we could have near-term reimbursement stability, which is meaningful, as our patient services business is growing at an exceptional rate organically and through acquisition.

Moreover, our research division also has a promising outlook, with its expanded service offering, European operation, and rapidly growing backlog. Clearly, we are excited about the prospects for our core businesses as well as our plans for further diversification, some of which I have spoken about on previous calls.

We have had an internal initiative to add an at-home INR monitoring service, allowing us to leverage our current [IDTS] sales and marketing infrastructure in order to establish an additional revenue source. This project continues to move forward and will now be integrated into our patient services offering.

During the quarter, we added dedicated business development resources and set quotas for the sales organization. We now have approximately 1,000 active patients.

We have also spoken about our collaboration with Wellbridge Health, a care management company focused on reducing unnecessary hospital readmissions and emergency room visits resulting from congestive heart failure. The relationship continues to develop according to plan, and Wellbridge now has two pilots underway.

In addition to these initiatives, we have been assessing how best to position the Company as a player in the emerging consumer mobile health market, a segment that many believe will evolve into a sizable market and has garnered attention from the largest medical device and consumer device companies in the world.

We have had interesting discussions with global companies on potential ways to pursue opportunities in consumer health with a goal of successfully commercializing products that straddle the medical device and consumer goods industry. This will require a breadth of knowledge across both industries that few companies possess.

Additionally, while there seems to be widespread agreement in the medical technology industry that major trends, such as escalating healthcare costs, increased consumer engagement, and advancements in technology, are converging to create significant market opportunities for mobile health devices designed around the consumer, none of us is quite sure what this market will ultimately evolve into and where the majority of the value will lie within it. As we assess how best to position BioTelemetry in a consumer mobile health market, we think about the following.

We believe body-worn sensors and mobile devices will proliferate in the short term for various areas of healthcare delivery including wellness, prevention, diagnosis, and treatment. All areas will require remote monitoring solutions. However, value will ultimately be linked to data relevancy.

By collecting health information remotely, also known as biotelemetry, and applying proprietary analytics, we have the ability to create valuable, actionable data feeds for healthcare providers, payers, and patients. In fact, we are one of the best companies in the world at doing so. We make data relevant.

Against this backdrop, we believe it makes the most sense to leverage what we do best in terms of remote data collection and analysis, and partner with other leaders where appropriate, such as consumer device developers. As such, collaboration will be an important part of our approach to the consumer mobile health market as the consumer mobile health market continues to evolve. Stay tuned.

In summary, our focus in the second half of 2014 is to: complete the integration of Mednet and BMS in a manner which maximizes customer retention, realizes appropriate synergies, and creates a stronger overall patient services business; continue to build on the comprehensive approach in patient services by adding additional products and services, first, with the launch of CardioKey later this year, followed by our next-generation telemetry products; continue to build out our service offering and ex-US footprint in our research business; and continue to develop additional sources of revenue.

Finally, I would again like to thank all of those at the Company who helped deliver our eighth consecutive growth quarter and another record high in revenue and patient volume. With that, we will now pause and open the call to questions. Operator, we are ready for our first question.

(Operator Instructions) Bruce Jackson, Lake Street Capital.

Thanks for taking my question. Can we get the MCOT percent of revenue number?

Yes, the MCOT is about 48% of our total revenue.

Then with the pricing, was it -- would you say it was up, down, or stable sequentially over the first quarter?

It was fairly stable.

Okay, great. With the new patient services operating system, can you give us a little color on what that is going to entail?

Are you referring to, in the press release, our discussion about the capital expenditures?

That's correct.

Okay, yes. So that is basically a front-end system in our patient services business that will consolidate multiple systems that we currently have. It will bring in some efficiencies to the business.

Yes, efficiency is a part of it; but another part of it is scale. It is just a more robust platform. Given the size of the business and how fast we are growing, we started this project a while back, thinking we would need a platform that was more robust, and, frankly, more integrated with the various portions of the operations.

Okay. Then with the research backlog, I know you can't give too many details on the new contracts that you have received. But can you give us just a little bit of color on how you think that business might ramp up going into 2015, and if it could get back to the levels of 2013?

I am not going to give you detail, Bruce. But I will tell you that I think we will exceed 2013 by a pretty decent amount.

Based on what I am seeing today and based on where our backlog for 2015 is at this point and in the prior year, compared to where we were -- if I look at that metric in years past, we are in better shape than we have ever been.

Okay. Last question. There is a move afoot to improve the reimbursement for telehealth initiatives. I was wondering just how you feel about that and if you might be able to take advantage of that in the event that it comes to pass.

Yes, I think it will. This is my own personal opinion. I suspect that it will, because there is so much pressure to find solutions that reduce inpatient costs, and that is one of them.

If you factor in Medicare penalties for readmits and the like, it makes sense to have those solutions paid for by somebody. So as far as we are looking at it, obviously, that goes back to the relationship we established with Wellbridge. It is not a -- at-home monitoring is for [part value], which is where most of the telehealth business is today. It is not a business that we are currently in.

Given all our other priorities, it made more sense for us to partner with someone who had a footprint in that space and had an emerging technology that we like.

All right. Thank you very much and nice quarter.

Thanks, Bruce.

Brooks O'Neil, Dougherty & Company.

Good afternoon. All I can say is: Wow. You've got a lot on your plate, and it is pretty exciting.

So I have a couple of questions. I am curious. Obviously, you may be reluctant to talk about specific customers. But obviously United has been a big and important addition to the mix. If you could give us any update on how it is going with them, that would be great.

Yes, volume is according to plan which we outlined when we signed the agreement. If you look at the kind of volume growth that we had in the quarter, a portion of that is attributable to the signing of that and other agreements.

I think it is also important to note, though, Brooks, is we are having a lot of positive signs around growth, even outside of those contracts. So while it is important for us, and possibly there is a halo effect that is helping drive some of this other business, I think the important message is the business is very healthy across-the-board.

Great. I get a lot of questions on the status with Cigna. Can you comment about that at all?

No, I'm not going to comment much on that one, Brooks, because there is ongoing dialog and we hope to have a resolution at some point. Obviously, you are aware of the ruling from the court on our appeal. That was rather favorable for the good guys.

And we hope that that will help move any discussions we have with them forward. So we will see. I will keep you posted on it, but too early to really put anything out on that.

Sure. Can you give us an update on the ScottCare patent case?

Yes, as you know, we filed that case at the same time we filed the Mednet case. The Mednet case proceeded through the courts more expeditiously, and you are aware of that resolution.

ScottCare and affiliates are far less formidable a competitor, but nonetheless we believe are infringing on our intellectual property rights and our patents. We had hoped to reach a settlement outside of litigation with that group. It seemed to be moving in that direction, and they pivoted.

So as recently as last week, our Board has decided, in spite of the size of their business, we are going to vigorously pursue that. Because we believe that there is, aside from size of the business, there is a lot of strategic value in our patent portfolio and protecting that is a necessity for the Company. So it is one that we will pursue.

Good. I guess just one last question. I also get a lot of questions about the competitive environment. Investors seem particularly focused on some of the large medical device players who, I think, have at least so far have been mostly focused on heart failure and mostly focused on implantables.

But if you could just comment, if you see them, what you see, what you think about what they are doing, et cetera, that would be great.

Yes, Brooks, it's a fair question, and obviously we've had conversations about this in the past. Let me bifurcate it into two groups at first, possibly three.

First of all, the implantable loop recorders, I think we had a question on the last call about that. We really see that as a complementary product to our portfolio.

It is focused on a relatively small segment of the market. It provides long-term monitoring for patients who -- it is designed primarily for patients that have very infrequent symptoms greater than 30 days. So we see it as a longer-term therapy.

It is important to note, Brooks, that it is a very expensive procedure. It is implantable. It is far more than 10 times the cost of an MCOT; and it has, frankly, a lower diagnostic yield.

So I see it as another phase in step diagnosis or step therapy, if you will, for a small niche of the industry. I know that there was more speculation around the product when Medtronic launched a next-generation version of their device, which was smaller and able to be delivered in a quasi-injectable format in the doctor's office. But it really didn't change much the capability of the product, nor did it change the target market.

So we think it is complementary. They've been out since -- they have been out for a couple of years with the implantable device, and then since early this year with the next-gen product, and it hasn't hurt our business.

As you have just heard, we are coming off one of our best organic growth periods ever, at least in a long, long time. So I think it just reinforces the fact that it is more complementary than anything else.

Then you mentioned the heart failure market as well. Again, we don't play in that market. A couple of these guys have taken steps through acquisitions to get more active there.

I think it is interesting. We will watch it. As our Wellbridge collaboration evolves over time it will become far more interesting to us.

Then if you think about that in terms of what else can they do, obviously some of them have expressed interest in coming into the monitoring business that we are in, through patch product acquisitions and the like. Obviously, that is a little bit longer-term. It takes you into 2015.

We are familiar with the products that are being discussed. They are no way near as competitive as the products we have on the market.

But I think it is even more important to understand that this is not a product-first market; it is a service-first market. And we have a very robust battle-tested service that is protected through a patent portfolio which we just discussed, and an algorithm stack, and a very sophisticated back-end software system that does this processing. It is not easy to replicate.

So I think it reinforces the attractiveness of remote patient monitoring, but it doesn't pose an imminent threat to our business. In fact, we are flattered that people want to come play with us.

Perfect. Thank you very much. Congratulations.

Thanks.

Thanks, Brooks.

Jan Wald, Benchmark Company.

Thank you. Good afternoon and congratulations on the quarter. It looks like you are making some pretty good progress. I guess most of the questions that I would have asked have been asked, but let me just try a couple on you.

In terms of Radcore, what did they add to your research services portfolio? And how are you going to grow out that business over time?

Do you think you will have to make more acquisitions to be competitive? Do you think you have got enough, and now expanding in Europe from Brussels is going to be what you have to do?

I think we have to do both, Jan.

Why imaging, right? The bigger companies, bigger sponsors are moving to preferred relationships. The larger CROs are moving to preferred relationships, and we needed to get more competitive in that area.

More often than not we were starting to see big requests, RFPs, for services that included both what we offer in terms of cardiac core lab services and imaging. So it was a logical one for us to look at.

We have already bid on three pretty sizable pieces of business, and we have already brought in a new piece of business with a new account since we have acquired the company. So it made good sense for us to get there.

There other service lines that will make sense for us to look at over time, not quite as imminent as that one was. So the idea of potentially partnering or acquiring assets that build out service offerings further makes sense as that becomes a more developed services business.

Europe is a necessity. We needed to be there and we need to grow that, and we are in the process of looking and interviewing business development folks to build out that presence as well.

In Asia, we have a few partnerships there that made good sense and work well for us. But that is another area that we need to focus on a bit more.

So ex-US is going to stay very important to us, and adding services over time. It is really both, Jan.

Okay. How do you think we should account for that growth in operating expense in our models? Is it going to be material for the next year? Or is it going to be something that can flow through without much -- without seeming very visible?

The combination of the service expansion as well as the international expansion?

Yes.

Yes, I mean it's not going to be immaterial, but we think it is going to flow through and be covered by the additional revenue that it will bring in.

Okay. I guess it looks like you're on your way with the Department of Justice, which is a good thing. Can you say anything about what the structure of the settlement might look like, or is it too early to say anything?

Yes, I would rather not, Jan, until it is final. I think we are in the home stretch. The number has been approved by both sides, so I think we are down to the end here. But I would prefer not to talk really about other terms of the agreement at this point.

In terms of the difference in which you are going to operate, once you are out from under the Department of Justice investigation, are you going to be able to do more marketing? Going to be able to advertise more? Go into more commercial settings?

What is going to be the difference that is going to be visible once you work through the DOJ?

Nothing is going to be different, Jan. We continue to operate the Company the way we always have throughout the investigation.

The Company has had a tremendous focus on Medicare compliance, both from a training and process standpoint. So those disciplines, if anything, will just get stronger within the Company, but it doesn't change the way we market our products.

Okay. One last question. Just would you help me with the Wellbridge milestones and just tell me when they might be? And when you might in some sense pull the trigger, or decide not to pull the trigger on the acquisition -- or on the partnership?

Anything else that we do with them strategically will be evaluated as the pilots progress and there is feedback, which we anticipate will be positive. We think it is a very sound process and system.

So we are talking 2015. We're not talking 2014, Jan.

Okay.

We will give you more -- as that evolves, we will give you a little bit more detail. It is way too early to think about revenue or modeling or anything like that.

Okay. Thanks a lot, and again, good quarter.

Thanks.

Thanks.

Matthew Farley, Passaic Capital.

Hi, guys. Thanks for taking my question. Can you hear me all right?

Yes. Hi, Matt.

Hi. Just a question. What was the organic revenue growth in the quarter?

It was about 7%.

About 7%? Okay. And the contribution from the acquisitions, is there any way to approximate how much was on the product side versus on the patient services side?

No. I mean on the product side, it was relatively low. And then just back out the 8% for the organic, and the rest is the acquisitions.

Okay, perfect. All right. Thank you very much.

Yes, no problem.

Thank you. I am not showing any further questions at this time. That concludes the Q&A session for today's call.

If you joined the conference call 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.biotelinc.com until Friday, August 15, 2014.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and everyone have a great day.

Thanks, folks. We will talk to you next quarter. Have a great day.