iRhythm Technologies Inc (IRTC) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Vince and I will be your operator on today's call. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

(Operator Instructions)

Please note that this call is being recorded today, Monday, December 5, 2016 at 1:30 PM Pacific time and will be available in the Investor Relations section of iRhythm's website at www.irhythmtech.com. I would now like to turn the meeting over to Lynn Lewis, Investor Relations.

Thank you, Vince. Thank you all for participating in today's call. Joining me are Kevin King, President and Chief Executive Officer; and Matt Garrett, Chief Financial Officer.

Earlier today, iRhythm released financial results for the quarter ended September 30, 2016. A copy of the press release is available on the Company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements including, without limitation, our examination of operating trends and our future financial expectations, which include full year 2016 guidance and our expectations of achieving profitability, are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

IRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, December 5, 2016. With that, I'll turn the call over to Kevin.

Thanks, Lynn, and good afternoon, and thank you for joining us today. For those of you that are less familiar with iRhythm, we are a leading digital health Company focused on the advancement of cardiac care. We believe there is a large opportunity to change how patients with cardiac arrhythmias are monitored, diagnosed and treated, and our goal is to be the leading provider of first line ambulatory monitoring for patients at risk for arrhythmias.

We completed our Initial Public Offering in October, raising approximately $111 million, to help fund the growth and expansion of our business. I want to thank everyone involved including our employees and customers that contributed over the many months leading up to that event.

Since this is our first call as a publicly traded Company, I'd like to use the next few minutes to provide an overview of our business including some recent financial and operational highlights.

Matt Garrett, our CFO, will follow with a review of our financial results and will provide guidance for the full year 2016. I will then wrap up and we look forward to opening the call for questions.

Third quarter revenues were $16.8 million, representing 80% growth over the same quarter a year ago, driven by continued adoption of our ZIO Service, which I will describe in a moment. Gross margins for the third quarter of 2016 were 69% compared to 60% in the third quarter of last year.

Turning to our business, as most of you know, cardiac arrhythmias are highly prevalent. There are an estimated 11 million patients in the US with arrhythmias and many patients remain undiagnosed due to technology limitations or poor patient compliance.

Atrial fibrillation, or AFib, the most common form of arrhythmia, can lead to more serious health conditions such as stroke and heart failure. Importantly, demographics are driving AFib growth as the percentage of US population increases. We have developed a unique platform that combines an easy-to-wear biosensor, called the ZIO Patch, which can be worn for 14 days with powerful proprietary algorithms that distill data from billions of heartbeats into clinically actionable information.

We believe that our ZIO Service allows physicians to diagnose many more arrhythmias more quickly and efficiently than traditional technologies and avoid multiple indeterminate tests. We believe the ZIO Service is a disruptive first line option for ambulatory cardiac monitoring. Our solution is the only patch-based monitor to achieve meaningful scale to date with over 500,000 monitored patients.

It addresses patient compliance issues because the patch is unobtrusive and may be worn in the shower, while sleeping or during moderate exercise. In addition, clinical studies have shown that our ZIO Service improves physicians' ability to more accurately detect arrhythmias, allowing them to potentially change the course of treatment. The core of our highly differentiated proprietary platform is the capability to curate vast amounts of data into an actionable report that physicians use for clinical decision making.

Today, we have more than 125 million hours of heartbeat data and patient information within our data repository. To give you an idea of the magnitude of the data challenge, a single patient record of 14 days of ECG data if printed would be roughly 30,000 pages. We recognized the enormity of this data challenge early in the development of our business and invested heavily in proprietary analytics, algorithms and a data repository that could drive both clinically superior results and scale.

Turning to reimbursement, our low cost, high value positioning has been central to our success in securing reimbursement policies and contracts in in-network arrangements with both private and government payers. As of September 30, there is payer coverage for a ZIO Service for over 290 million US patients, as of September 30, and we have contracts and in in-network arrangements for approximately 200 million of these individuals.

There is substantial clinical evidence around our ZIO Service that has been driving our strong clinical adoption and payer coverage. At the recent American Heart Association Scientific Sessions in New Orleans, we announced study results that suggest the extended continuous cardiac monitoring using our ZIO Service is more useful for arrhythmia detection than Holter monitoring in patients with Adult Congenital Heart Disease, or ACHD.

The study analyzed 387 ACHD patients' results from extended continuous monitoring with the ZIO Service from June of 2013 to May of 2016; 51% of these patients were found to have a significant arrhythmia, fewer than half of which were reported during the first 48 hours of monitoring. Because the ZIO Service can record up to two weeks of continuous heartbeat data, significant arrhythmias beyond the Holter monitor's typical 48-hour monitoring period can be detected.

Additionally, the ZIO Service has been the subject of 18 peer reviewed publications which analyze the clinical utility and benefit of our ZIO Service in a variety of settings including cardiology, the emergency department, and neurology. We're proud that the ZIO Service is the first long-term continuous monitoring system that is supported by extensive clinical data with peer reviewed publications and we believe that it will enable diagnosis earlier in the clinical pathway and improve patient outcomes.

Looking ahead, we have a significant market opportunity. Today, approximately 4.6 million ambulatory cardiac monitoring procedures are performed annually in the US, representing an approximate $1.4 billion opportunity for us.

We also see the potential to significantly expand the market through new indications for cardiac monitoring, and we have been investing in a variety of clinical studies. The most promising of these new potential indications is the monitoring of asymptomatic, or silent, AFib in patients whom are deemed high risk due to age, hypertension, or diabetes, but who may not yet be diagnosed with AFib. We estimate a population of greater than three million such patients in the US who could benefit from cardiac monitoring.

We also see opportunity for monitoring AFib patients following a stroke or certain interventional procedures like cardiac surgery or ablation, and in order to provide physicians more information while they manage the patient's drug regimen or medical condition. We have invested in several clinical studies that are underway and I look forward to highlighting the results on future calls.

Finally, we are confident that our ZIO Service is well aligned with long-term goals of the US health system, improving population health, enhancing the patient experience, and reducing per capita cost. And with that, I'd like to turn it over to Matt Garrett, our CFO, for a more detailed review of our financial results and guidance. Matt?

Thank you, Kevin. Revenue for the three months ended September 30, 2016 was $16.8 million, an increase of 80% year-over-year on an as-reported basis. This increase was primarily due to volume increases in our ZIO Service related to sales force productivity gains. Gross margin for third quarter 2016 came in at 69% compared to 60% for the same period in 2015.

Margin expansion was largely driven by productivity gains in two categories, reduction in device-related manufacturing cost and continued productivity gains through our machine learned algorithms associated with report generation. In addition, we also experienced some mix shift driven by the success of our contracting efforts.

Operating expenses for the third quarter 2016 were $14.2 million, an increase of 28% compared to $11.1 million for the same period of the prior year. The increase in operating expenses was primarily due to sales, general and administrative expenses, related to the expansion of the sales force, and to support the growth in our business. The net loss for the quarter ended September 30, 2016 was $4.1 million, or a loss of $2.80 per share, compared with a net loss of $5.7 million, or a loss of $4.07 per share for the same period in the prior year.

Turning to our balance sheet. At September 30, 2016, we had $5.8 million in cash and cash equivalents. Our capital structure also contains approximately $33 million of long-term debt that does not mature until December 2021. With the proceeds of the recently completed IPO, we maintain the flexibility to repay the debt prior to maturity, but presently have no plans to do so.

On October 20, 2016, our common stock began trading on the NASDAQ Exchange following the pricing of our Initial Public Offering. The IPO generated net proceeds of approximately $111 million after deducting underwriter discounts and estimated offering costs.

I'd now like to offer our financial guidance for the full year 2016. We expect 2016 revenue to be in the range of $62.4 million to $62.9 million, which represents annual growth of 73% to 74%.

We are encouraged by the traction we have achieved in the first nine months of 2016. Examples of our momentum include revenue growth of over 70% for the year, gross margins approaching 70%, and a well controlled and disciplined approach to operating spend, which includes ongoing investments to support and drive growth in our business. Areas of investment include expanding our sales channel, improving our cost of service, and investing in next generation products and services.

These are the messages and benchmarks we will take forward as we continue to grow and expand our business. We plan to continue investing in the business in sales, R&D, and the core infrastructure.

There are also critical steps required for us to achieve sustainable growth. First, we must continue expanding our governmental and private reimbursement coverage policies, and, secondly, we need to contract with those same entities after coverage policies are secured so that patients are within network. Our success in obtaining coverage in contracting policies has driven large scale investments in our sales force. We plan to continue expanding our sales force and sales operations teams as we grow and as with approach contract saturation in the United States.

As it currently stands, we exited Q3 2016 with 66 quota-carrying reps. The pace at which we add sales reps is driven by careful analysis of territories including factors such as contracting, market size, and account opportunities.

To be clear, even with broad contracting there can be a considerable lag in driving volume growth within any of our given territories. On-boarding, training, and the challenges of claims reimbursement can all have an impact on our growth rate. So while we are making strides in achieving developmental and operational milestones, we still have work to do.

We look forward to updating you on our progress on future calls. Now back to you, Kevin.

Thanks, Matt. So in summary, we are addressing an existing $1.4 billion opportunity in the US by reshaping the market with a disruptive, differentiated and competitive platform which is supported by broad payer coverage.

Additionally, we believe that we have the potential to address additional patient populations with unmet clinical needs, such as the estimated three million patients in the US who are currently not being monitored for conditions such as atrial fibrillation. Driven by our capability to curate vast amounts of data into actionable results for clinical decision making, we are experiencing strong adoption and rapid growth.

We have a large body of clinical evidence supported by 18 peer reviewed studies and have several additional studies underway to further expand our indications and potential market opportunity.

This concludes our prepared remarks. Operator, please open the call for questions.

Yes, sir.

(Operator Instructions)

Our first question is from Mike Weinstein of JPMorgan. Your line is open.

Good afternoon, guys. First of off, congratulations on the growth this quarter, obviously, fantastic performance. I think since this is the first call as a public Company, I think it would be worthwhile, Kevin, and Matt, just to spend a few minutes talking about kind of the keys to continued growth and market development.

I thought, Matt, I thought your comments were helpful just talking about the mix of reimbursement challenges and getting payers under contract. But maybe flush that out a little bit for people, so people understand kind of what ultimately has driven this acceleration in the business you've seen over the last several quarters and kind of what are the keys to keeping the momentum going? Thanks.

Sure. Thanks, Mike, for the comment on the quarter, as well. We appreciate it.

Look, I think at the highest level the primary drivers for our growth are threefold. One of them is a measured approach to sales force expansion. As Matt identified in his prepared remarks, we have about 66 people today and we think that at full penetration, if you will, our business needs somewhere between 2X to 3X that amount to really fully cover the opportunity in the United States.

Along with that, and actually commensurate with that expansion, is the need for us to continue to obtain in-network contracts with the remaining 100 million contracted lives. As we said earlier, we think on the coverage side we're near universal coverage with close to 300 million. That said, we've only got two-thirds, roughly 200 million in contract, and those are really important for us to finalize. We think it's a matter of time before we get there and we do have plans for addressing that.

I think continued growth and expansion, the third point here I would make is around clinical studies in some of these new application areas that we were describing. Some of them near term related to some of the post-procedural monitoring, surgery, things of that nature that are not necessarily standard of care today, as well as the work that we've been doing on the high risk patients. The read-outs for those studies are probably not until 2018, so a little bit longer. But nonetheless, important to continue to expand the total size of the pie. With that, I can stop and if there's a follow-on, Mike, I'd with happy to -- Matt and I would be happy to help.

Yes, and, Matt, anything you would add to that? If we really think about the acceleration of the business the last several quarters, a big part of that has been your progress on the reimbursement, and then on the contracting side.

So maybe just characterize for us kind of where you feel you are at this point, and what dictates the decision on how many reps you think you might add in 2017? Thanks.

Yes. Let me first add that we're looking to provide guidance for next year, including rep productivity and additional numbers in our Q4 earnings call at some point in early February, Mike.

But in terms of the broader question, as we've talked about, where we need to be comfortable is that in any particular region, any particular state, that we have a significant enough amount of contracting that lowers the pressure on our customers to prescribe our product. I think we've identified that when you started achieving 70% or 80% contracting rates that allows you to more rapidly expand into those territories.

That model is something, as I mentioned, we will continue to carry forward and as more contracts come online in those territories, those will be the territories that we identify first for additional headcount and, again, I think we'll be able to share more on that with you here in the Q4 earnings call in February.

That's great. And then last, just for those that really aren't familiar with kind of the existing market and kind of the Holter monitor market and the event monitor market, is there anything competitively that you're aware of, or that you guys are tracking, that you think investors need to be aware of at this point?

No, we don't, Mike. If we think about those 4.6 million annual procedures within the US, about 60%, close to 3 million of them are Holter monitors. Those are first line tests. That's a completely addressable market segment for us and there really isn't any innovation in that segment.

Event monitoring is either a first line or second line test. We address roughly two-thirds to three-quarters of that market. And then you have the rest, which are second line tests. Those are the mobile cardiac telemetry and implantable loop recorders.

Some of those segments are being taken down as a result of the improvement in ZIO. And if there's any innovation, it's more in those product lines that we see, mobile cardiac telemetry and implantable loop recorders. But it is important to note that those are considered second line tests, and the more effective and the more well established ZIO becomes, I think the harder it is for those second line technologies to gain a larger foothold.

Understood. Listen, I'll let some others jump in, but, again, congratulations.

Great, thanks, Mike.

Thanks, Mike.

Thank you. Our next question is from David Lewis of Morgan Stanley. Your line is open, sir.

Good afternoon, and congratulations on a first quarter.

Thanks, David.

So, Kevin, I wonder if you'd start off with the market here a little bit? A couple quick questions on the market and then maybe a few for Matt. I guess is ZIO -- everyone is basically familiar with the penetration of ZIO in the sort of first line indications. But if you think about things like post-AF ablation, post-ischemic stroke and others, what percent of your business today do you think is sort of non-first line?

And then kind of a related question. ZIO success and that share capture is coming against Holter or event, do you care, and what do you think the mix is between Holter and event right now? And is that an important distinction, frankly, for investors?

Sure. Let me take the second question first. We really don't care whether the share is taken from Holter or event. They're both considered first line tests.

They both generally have the same inadequacies relative to patient compliance, low diagnostic yields, and things of that nature. So not really. In terms of ZIO, the first question again was --

Just non-first line indications, what percent of your business is (multiple speakers) like post-AF or post ischemic?

Yes, those are pretty small numbers. I think in the US alone there are about 120,000 ablation procedures done each year. You can imagine we've got a small percentage of those. I think the way to really view both those questions, Mike, is we want to be the full line supplier for our customers.

So if today we start out as a replacement, the first line replacement for Holter and event, eventually we want to capture the prescribing patterns for these follow-ons. And it makes a lot of sense, a lot of patients are diagnosed initially with ZIO.

It doesn't make a whole lot of sense to then get a follow-up with an older technology. And those things will come in time. Today, they're a relatively small percent and represent some good upside for us.

Okay. And then maybe, Matt, or Kevin, a couple other ones. Matt, just thinking about the fourth quarter, I know we have the revenue guidance, but I'm assuming that expense guidance is going to go up sequentially pretty materially as a public Company, plus building out the channel.

Any sense or any kind of rough strokes you can give us in terms of directionally where that spend is going to head in the fourth quarter? And then just any updates from a product perspective heading into next year? Any changes to product pipeline, we've been expecting perhaps a real-time product update in the back half of 2017, any changes to those assumptions? And I'll jump back in queue.

Why don't you take the second one.

The second one, Mike, no changes to what we've previously communicated around new product timing and capability. Those are essentially on track and we will look forward to something in the latter half of the year. And, Matt, on the other side relative to spend in the fourth quarter?

Yes, I think that's a fair question, David. We didn't cover that directly. I think that we feel very confident in what we have provided the market in terms of where spend will come in for the fourth quarter. I think the range is somewhere between $16.5 million to $17 million, so, obviously, a material increase in burn as we've chatted, but nothing beyond what we had previously communicated.

Okay. Thank you very much.

Thank you. Our next question's from Jason Mills from Canaccord Genuity. Your line is open.

Hi. Thanks for taking my question. I'll echo congratulations on a strong quarter. Can you guys hear me okay?

Yes, we can, Jason, just fine.

Super. Thanks, Kevin. So just starting with a few housekeeping items on the revenue model, Matt. I'm wondering if you could give us a sense for the 80% growth in the quarter was at the very, very top end of your flash range, so, obviously, a strong quarter. I'm wondering if you can give us a sense for the contribution from both volume on the unit side, as well as price, if there's anything, any color you're willing to give there?

Yes, so as we've talked about, we're debating the level of detail we provide on this subject to clarify the baseline. We've indicated that we believe that a majority of our growth can and will continue to come from volume. The numbers that we've discussed is in the kind of 80/20 range.

But beyond that, Jason, I don't think that we're going to have anything to add other than that's our expectation moving forward, that we stay in that sort of a range, and, obviously, if it does change or becomes material one way or the other, we'll address that with you accordingly.

Since you didn't call it out it was in that range?

Yes, look, the majority of our growth here is coming from volume and that volume is skiing off of, if you will, the sales force expansion that we put in place last year and continue to put in place here. So the reps that we hired last year are increasing in their productivity. Matt, same store, new store sales mix, you've talked in the past is roughly --

Stays in that 60/40, 50/50 range.

So we're continuing to penetrate existing accounts and we're continuing to open new accounts at about an equal rate. If you think about the -- whatever -- 80% growth, half of it coming from existing and half of it coming from new. Those factors, Jason, swamp any other non-volume-related change or contribution to growth in the quarter.

That's right.

Okay. That's helpful. Just to add on to your last comment on same store, new store, Kevin, are you going to be providing the number of accounts on a regular basis? I'm wondering if you could give us an update on domestic accounts exiting the quarter?

Probably not. Probably not. I know we did some early conversations with you and David, Mike, and so forth, but I don't think we're going to be updating that stuff going forward. We'll probably give ratios, same-store to new-store ratios and so forth.

Okay. And then similar to Mike's commentary and questioning, just as investors get up to speed on the story, one thing I think may be useful, if you could just help folks understand the level of diagnosis that you're providing with ZIO, specifically, AFib burden, and maybe give all of us a quick tutorial on the importance of AFib burden to your customer base, the providers and what that means to -- why that's important sort of relative to your service versus another shorter-term monitoring device like Holter, et cetera?

Yes, look, I'm not a physician but I'll do my best here. So we have -- when we're looking at the diagnostic measurement that's provided -- and we'll talk specifically about atrial fibrillation -- we have both the frequency of which the arrhythmia occurs, and so arrhythmias are rather elusive in nature, can stop and start at any particular point in time.

So shorter-term monitoring tools like Holter monitoring, or even intermittent tools like mobile cardiac telemetry or event recorders, really fail to capture the initiation, the duration, and the termination of events and both when they happened, as well as those factors. So that's one key advantage for us.

The second key advantage for us, we believe, is the ability to measure the percent of time the heart is in atrial fibrillation versus not. And that's the measurement that we call atrial fibrillation burden. Now we did a study that was presented at the Heart Rhythm Society this past fall. It was done by Dr. Alan Go at Kaiser.

It was a data study that looked at -- looked within our data repository of all Kaiser patients that had atrial fibrillation, that were diagnosed with AF, and we married that database with the electronic health record from Kaiser. Many of you know Kaiser's got an extensive long-term data repository. We looked at patients over multiple years to look for the incidence of stroke.

And in that study, we found a direct correlation between atrial fibrillation burden and stroke risk, such that each doubling of atrial fibrillation burden increased stroke risk by 33%. So if a patient went from 10% burden to 20% burden, their stroke risk essentially went up by 33%. And if it went from 20% to 40%, then later on it increased by another 33%.

And so the key here that physicians want to know is when do I put people on, or when might I take people off of anti-coagulation therapy? And the taking off is somewhat as important as putting them on. Putting them on will help reduce stroke risk by a measurable amount, I think it's somewhere in the order of 60% to 80% reduction being on. But if you don't have atrial fibrillation and you're on anti-coagulation therapy you run the risk of bleeds and bad things like that happening. And so what Alan Go envisions the use of the atrial fibrillation burden score to be a determinant of when to use and when to discontinue anti-coagulation therapy.

That's helpful. Thank you, guys.

That's a unique -- I should just add, that's a measurement unique to iRhythm and its ability to measure burden on a beat-to-beat interval over that 14-day period of time.

Got it. Thanks, Kevin.

Thank you. At this time, I see no further questions in queue. I'd like to turn it to Mr. King for any closing remarks.

Well, thanks very much, everyone, for joining the call today. We really appreciate your interest in iRhythm and look forward to updating you on our progress shortly, and we wish you all the best. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.