iRhythm Technologies Inc (IRTC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iRhythm Technologies Q4 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Miss Lynn Lewis, Investor Relations. You may begin.

Thank you, Catherine. 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 and full year ended December 31, 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 provision 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 guidance for revenue, gross margin and operating expenses in 2017, 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 included in our third-quarter Form 10-Q filing made with the Securities and Exchange Commission on December 5, 2016. 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, February 15, 2017. And with that, I'll turn the call over to Kevin.

Thank you, Lynn, good afternoon, and thank you for joining us today. For those of you who are new to the iRhythm story, we offer a disruptive first-line option for ambulatory cardiac monitoring that allows physicians to diagnose many arrhythmias more quickly and efficiently than traditional technologies.

On our call today, I'll start with an overview of recent financial results and operating accomplishments. I'll then ask Matt to review the financials and discuss our financial guidance for 2017 and we'll open it up for questions.

Starting with our financial highlights, fourth-quarter revenues were $18.7 million, reflecting growth of 72% versus Q4 2015 and 11% sequential growth over the prior quarter. For 2016, full-year revenue increased to $64.1 million, representing a 77% increase over full-year 2015. Revenue growth in the year was driven by continued adoption of our Zio Service.

Fourth-quarter margin was 69.1% versus 61.7% in the prior period. Gross margin for the full year was 67.4% compared to 59.3% for the full-year 2015. Turning to business highlights for the year, our year was marked by strong execution across all areas of our business. I'm pleased with the influence we've already made on the clinical practise of diagnosing and managing patients with cardiac arrhythmias.

As of the end of 2016 our Zio Service has cumulatively been prescribed to more than 700,000 patients. Our patented and proprietary technology is uniquely combine an easy to wear 14-day biosensor, with powerful algorithms and analytics engine that distilled data from millions of heartbeats into clinically actionable information for physicians to diagnose and manage patients with arrhythmia symptoms.

To date we have more than 150 million hours of heartbeat data and patient information within our data repository and that is growing significantly every day. We are making investments to drive near and long-term growth of our business and I would like to take a few minutes to provide some color on where we are today and our expectations for 2017 in these areas.

From a near-term perspective we are sharply focused on increasing our in-network health plan contracting and expanding our sales channel to meet the growing needs of our service. The growing demands of our service. We estimate the US annual volume of ambulatory monitoring tests to be approximately $4.6 million and believe this core market represents a significant opportunity for growth.

Our low-cost, high-value positioning has been central to our success in securing governmental and private reimbursement coverage policies. Our coverage policy work began several years ago with success driven by major peer-reviewed publications that demonstrated the effectiveness of our Zio Service compared to traditional monitoring approaches like Holter monitor. To date we have 18 peer-reviewed publications and are proud that our service is the first and only long-term continuous monitoring system that is supported by such extensive clinical data in peer-reviewed publications.

As of December 31, 2016, policies for our Zio Service covered more than 290 million US health plan beneficiaries. It is highly likely that everyone on this call has a health plan benefit that provides for coverage for our service. Positive coverage policies are an important first step towards obtaining in-network contracting with any health plan. As specific coverage policies for our Zio Service come into effect, we subsequently move to an in-network or contracting phase. The time between coverage policy approval and in-network contracting in our experience is highly variable and ranges from 6 to 24 months depending upon the type of health plan.

We estimate at the end of 2016 we were contracted or in-network for our service with approximately 200 million health plan beneficiaries. Our goal is to grow that by 20% to 25% by the end of 2017, exiting the year with approximately 240 million to 250 million contracted and in-network health plan beneficiaries.

Securing broad coverage policies and contracts and in-network arrangements have helped to drive the adoption of our Zio Service across the country and enabled us to confidently make investments in the expansion of our sales channel. We exited the year with a total of 73 total sales and sales management headcount, of which 66 were quota carrying representatives. We have taken a highly disciplined and measured approach to sales expansion which has paid off for the Company. With average revenue generated per sales reps in 2016 close to $1 million.

To meet the market demand for our Zio Service in 2017 we will continue our disciplined approach to sales expansion, adding sales management and support infrastructure in the first half of 2017 and additional sales reps mostly in the second half. We expect to end 2017 with approximately 90 to 100 sales and sales management headcount, including 15 to 20 additional quota carrying reps.

We are also making investments in longer-term growth opportunities, including several research and clinical related studies that could expand the indications of use for our service. For example, the mSToPS study which assesses stroke risk as measured by the detection of atrial fibrillation in high-risk asymptomatic patients. We're also making investments in new products and in programs that could expand our presence outside the US. We will look to provide progress on these updates as these growth initiatives move forward in the future.

From a market perspective, we believe our compelling value proposition meets the needs of three primary stakeholders: patients, providers and payers. For patients, our biosensor delivers high compliance in that it is wire free, discrete, and non-disruptive to daily activities. Once applied to the chest it is worn continuously for up to 14 days without any need for a charging of batteries, data uploads, or any type of maintenance.

For providers, our service has been proven to be more accurate in detecting arrhythmias than other methods. It provides physicians with highly actionable diagnostic reporting that is curated from over 30,000 pages of continuous heart rate, heart rhythm and patient activity. Additionally, our system provides needed system-level tools that streamline clinical workflow and increase staff productivity.

For payers, our low-cost, high-yield service has been demonstrated to change medical decisions when compared to traditional monitoring methods. And our high-yield service enables a faster time to diagnose, thereby reducing the need for follow-on tests and potentially avoiding costly medical complications down the line.

We have invested heavily in our patented biosensor, powerful algorithms and extension, coverage policies and in-network contracts. Importantly, we've also made significant investments in a fourth component of our system. Or service, which is our information systems infrastructure that enables expansion of our service within large, integrated delivery systems.

In our experience, the large integrated delivery systems that routinely deploy our Zio Service are complex with upwards of a few hundred prescribing physicians working in as many as 7 to 9 sub-specialties and spread across as many as 10 different locations. Patients prescribed Zio within these systems can be associated with upwards of 140 different health plans.

To meet the needs of these large systems we are required to provide secure enterprise-wide physician accessibility to our service, and seamlessly manage the bidirectional flow of patient health and financial information including electronic prescribing, patient education, eligibility verification. Clinical event notification, results reporting, claims processing and inventory management.

To illustrate the complexity, patients entering an emergency department with dizziness and palpitations may be prescribed a Zio at discharge by an emergency department physician. It is unlikely that, that emergency department physician will be the person to interpret the patient's report. More likely that physician will be a cardiologist or electrophysiologist. And the patient's physician is unlikely to be either one of those, but rather a primary care physician.

It is critical that all these stakeholders are kept informed in a timely manner and accurately and that patient information and results flow between the physicians as well as through the patient's health plan. This information systems infrastructure is an additional core competency that we've invested significant time and effort to develop.

Combined, we expect to continue refining and improving our service so that it remains well aligned with the long-term goals of the US healthcare system. Improving population health, enhancing the patient experience and reducing per capita cost. With that I would 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. We are encouraged by the significant financial progress achieved in 2016. Examples of our momentum include revenue growth of 77.3%, gross margins of 67.4%. Our well-controlled and disciplined approach to operating spend, which includes ongoing investments to support and drive growth in our business, and a strong balance sheet that ensures adequate capital is available to support our growth initiatives and working capital needs.

Looking at fourth quarter 2016, revenue for the three months ended December 31, 2016, was $18.7 million, an increase of 72% year over year. This increase was primarily due to volume increases in our Zio Service related to sales force productivity gains. Gross margin for the fourth quarter 2016 was 69.1% compared to 61.7% for the same period in 2015. Margin expansion was largely driven by productivity gains in two categories. Reduction in device-related manufacturing costs, and continued productivity gains through our machine-learn algorithms associated with report generation.

In addition, we also experienced some mix shift in contracted claims driven by the success of our contracting efforts and account education of those arrangements, leading to some price expansion. Operating expenses for the fourth quarter 2016 were $17.3 million, an increase of 27% compared to $13.6 million for the same period the prior year. The increase in operating expenses was primarily due to sales, general and administrative expenses related to our expansion of our sales force and to support the costs associated with becoming and being a public company.

The net loss for the fourth quarter 2016 was $6.3 million, or a loss of $0.37 share. Compared with net loss of $7.7 million or a loss of $5.46 per share for the same period the prior year. I would now like to offer our initial financial guidance for 2017.

We expect 2017 revenue to be in the range of $85 million to $90 million, which represents annual growth of 33% to 40%. Gross margin for 2017 is expected to range from 69% to 71%, and operating expenses are projected to range from $82 million to $86 million, including $11.5 million to $13.5 million for research and development, and $70.5 million to $72.5 million for SG&A.

Our success in obtaining coverage and contracting policies has driven large-scale investments in our sales force. We plan to continue selectively expanding our sales force and sales operations teams as we grow and as we move closer to reaching the maximum number of contracts that we can obtain in the United States. As Kevin noted, we ended 2016 with 66 quota carrying reps and plan to hire an additional 15 to 20 during 2017, predominantly in the second half of the year.

To add some color around our sales expansion model and expectations, we have seen historically that it takes approximately 3 to 6 months for new sales hires to begin contributing, and on average 3 to 4 years to reach peak productivity, which we currently estimate to be approximately $2 million per year. Even with broad contracting and accelerating awareness there can still be considerable lag in reaching meaningful volume growth as we work towards converting physicians to our Zio Service from our largest competitor, that being the status quo.

As Kevin said earlier, we are very pleased with the progress we made in 2016 and look forward to updating you on our progress on future calls. That concludes our prepared remarks today. And with that we would like to open the call up for questions. Turning it back over to the operator.

(Operator Instructions)

Mike Weinstein, JP Morgan.

Thank you. Congratulations on another very strong quarter guys and for the guidance. Let me spend a minute, if I can, on the 2017 guide and the plan. Can you talk a little bit about your thought process as you kind of went through the budgeting for 2017? You talked to us about the repetitions that you are expecting when you set your guidance when you talked about your thoughts on rep productivity and how you thought about the right number of reps to add over the course of the year?

Sure. Hello Mike, this is Kevin. I will take a stab at that and Matt and Derek can chime in too as well here. Maybe it is a two-part question.

The number of reps that we have and when they occur, is I think is the second part of it as it relates to our guidance, if I understood your question. So we ended the year with 66 people, and the view that we have in the business now is we have to build our sales channel for the long haul. This is a very large market. We have stated previously that we think it takes upwards of 125 to 150 people to really cover the US.

And when we ended the year we looked at the number of sales reps per sales manager and found it to be at the upper limit. This was a reason why we gave you both numbers. The 66 and I forget what the other number was, 73 or something like that. If you do the math on that we find out that our sales reps are managed -- a manager has about a span of control of about eight or nine per person. That is really, really at the upper limits of being able to be successful.

The plan that we have here is really focused in the beginning of the year and we started this a little bit at the end of last year to really bring on more managers, such that we are in position for not only the rest of this year, but well-positioned for 2018 from a structural standpoint. And therefore as we add reps they are not being added to a manager that is already overloaded. So that is the primary reason.

And then also just our ability to onboard people quickly. Adding 20 people to an organization that is -- in this case it is more than that. It is 20 sales reps plus the sales managers. It is going to end up being about 30 people in total. That is a lot for a company our size.

We are growing as fast as we can. If there is opportunity for us to do more, we certainly will. We are as aggressive as possible. But at the same time, we do have a rather disciplined approach to how we do things and think that, that's been a good guidepost for us up until now.

Kevin, can you talk about the call strategy and how you weigh the breadth of accounts you are calling on versus going deeper into those accounts and kind of or you feel like you are at this point?

Matt has talked about this in the past. I think our same-store, new store sales ranges from 50/50 to sort of 60/40 overall. So we are growing our existing accounts just as much as we are adding new accounts.

We do have an emphasis on large integrated delivery systems, as referenced in my prepared remarks. We have large accounts that have hundreds of prescribers across multiple locations and there we tend to deploy a sales rep to really go after those centers, and in many cases those accounts are still not fully penetrated. So there is a lot of opportunity for us to continue to grow.

Kevin, the techs that you have and for those that are not familiar with this, iRhythm has technicians in Chicago and Houston at two different centers that are evaluating each of the datasets from each patient as they come in, are your hiring techs at the same rate? Is there any bottleneck risk there?

No, there isn't. The process for us works that the algorithms and machine learned tools carry all of the data simultaneously from a record. So all 30,000 pages are analyzed by a machine and they essentially present to a technician a preliminary report that has been edited. And we have had to add people, but nothing to the extent of the growth rate that we have and some parts of that organization have higher turnover than others.

Some of them are physicians that work for us during medical school or residency. And then they go on to be successful as a doctor and so forth. By and large the scaling of that is not a limitation for us, we are relying very, very heavily on the machine learned algorithms and tools. It's a big part of our R&D investment to continue to drive that, both to manage the volume as well as even some new indications and applications that we have under development are machine learned as well.

Last question. Matt, do have any thoughts or any comments that you want to make just on the cadence of the quarters in 2017, any thoughts relative to seasonality that you see in your business

Mike, I think what we have discussed in the past is there is a cadence to the business and we do have a nice historical stream of understanding how the growth rates happened year over year and sequentially. Our initial thoughts on 2017 is at there is no material change from the prior year. In terms of that year-over-year growth and more importantly, the sequential growth. We do have again, have some seasonality in that Q3 timeframe. Physicians and patients take vacations, so there is some slowdown, if you will, sequentially but again should be in tandem or in line with what we have seen in prior years.

Understood. Okay, I'll let some others jump in. Thank you, guys.

Thank you Mike.

David Lewis, Morgan Stanley.

Good afternoon and congrats on the quarter. Kevin I do want to start off on account penetration for a second. Maybe you can answer a two-part question. How is penetration varying between Holters and event recorders at these accounts? Are you as successful on Holter versus vent, or more successful, one or the other? And also related, what is different about the practice that moves 10% of their business to Zio versus the one that we are getting on diligence that is moving 40% to 50% of their business on Zio; and I had a couple of follow-ups.

I think the difference between a Holter and event monitoring is probably skewed towards slightly more Holter than events, overall. The reason for an event monitor would be less frequent arrhythmias, and that is a perfect surrogate for our substitute for Zio as well as in a Holter mode when this has been the traditional first line test. I don't have exact numbers but my thinking and sort of the headset we have is, it is probably 65/35, Something like that, Holter replacement to event replacement.

Events tends to be less used as well. I think there are about 2.9 million Holters and about 1.6 million events. That is about a 2 to 1 ratio to begin with.

The second question about account penetration, that is a complex one. The tenure of the account, how long they have been using Zio tends to be a driver. Whether or not the prescribers are all electrophysiologist cardiologists. Whether cardiologists allow the service to be prescribed and led by primary care, and then of course the big item here has to do with payer contracting.

So we do see that there is a need for selective prescribing relative to those areas where we have relatively low payer contracting versus high, and that goes hand-in-hand with the fact that physicians are often measured on the patient experience. And patients that may complain, if you will, that they get an out-of-network bill is a real issue in the industry and is an issue at iRhythm as well. And one of the reasons why we are driving so hard for these contracts.

Kevin, in our recent work it is pretty clear that the reason that people are not using the product is that they are not aware of it or they frankly haven't had sales force interaction. In that regard, 15 to 20 reps in line with our model, but stills seems to be frankly, a smaller number that I think you could do what the market could service. It sounds like from here your comments are you want to grow this business the right way to be in the position to add more reps maybe in 2018, which I understand. But I guess if I think about your guidance, the guidance seems to imply on that rep count kind of flattish revenue per rep trends in 2017, just given that 40% growth you had in revenue per rep in 2016. Flattish trends with the fourth quarter seems a little conservative given it seems to be where existing reps could really drive some significant utilization. Can you talk us through what would provide a year where revenue per rep was more flattish with the fourth quarter, versus expanded at rates we have seen in the prior few quarters?

Maybe just unpack that a little bit. I am not sure that you can take fourth-quarter revenue and multiply it by four, because the tenure of our folks in the fourth quarter of 2016 are at various levels of productivity. Some people are brand new. Some people have been with the company for a long period of time. So the people that have been here for a long period of time are much more productive on the dollar sense, but probably not growing at the great rate of the company. The new people are probably growing multiple times as that.

It is a little dangerous just to multiply the number by four. And importantly the headcount that will add, if they are added in the back half of the year, they really won't contribute that much to revenue during the year. I would probably look at the 66 and divide that by our guidance and think about it that way. As the first proxy and I think you will see that, that is a pretty healthy number overall.

Okay. Just two more quick ones and I will jump back in queue, just Matt for you, gross margins had a very nice progression across the quarters. For next year gross margins very much in line with our model, but it seems that number could be a better number just in light of the growth rate. Is there any impact from the real-time launch in the back half of the year on GMs? And maybe for Derek, can you just update us on data release updates potentially for mSToPs and SCREEN-AF as we move into 2018? Thanks so much.

Sure Dave, this is Matt. I think management is viewing gross margins in 2017 with some cautious optimism. You're right, we are in line with what you stated before, but we continue to make, as Kevin pointed out, some material investments in our infrastructure both in terms of the algorithms and in terms of workflows. And those costs to some extent do offset some of that productivity. So I think that is what you are seeing in our initial guidance here. Overall, I still think the management team feels very confident that we're going to be achieving our goals of reaching that 75% to 80% gross margin range long-term.

Dave, this is Derrick. In terms of the mSToPs and SCREEN-AF studies which are silent AF studies, we're expecting mSToPs -- both are enrolling as we speak. And mSToPs we think would have some sort of readout in 2018 and SCREEN-AF will likely be after that.

Thank you very much.

Thanks David.

Jason Mills, Canaccord.

Thank you very much. Kevin, can you hear me okay?

Yes we can. Hello Jason.

Hello, good afternoon, congrats on a great quarter. Mike and David asked several good great questions and see if we can find some other ones here. Just sticking first, Kevin, with the sales force -- or for Matt -- could you calibrate this appropriately, I want to make sure my model is calibrated, separating managers from quota carrying reps. Looking at exiting 2015 timeframe, it looks like by and large you exited 2016 with maybe a few more quota carrying reps than 2015, I'm sorry if it missed it. But if you could calibrate us there. And the second part of the question, Matt you have us some good color with respect to the general ramp of the new sales rep; very little contribution three to six months and it takes three to four years to get to peak contribution. I am wondering if you have seen any change to that as your training programs have improved over the years, or whether you expect to see any improvements to that as you look to add these folks in the back half of the year and looking out the next couple of years? Just given the improvements and training programs and learnings and expertise. Thank you.

In terms of the number of people in 2015, I think we previously reported that 2015 was about 50 to 52 people, is where we exited the year and that was average.

Okay. That is quota carrying, Kevin?

Exactly. We've only reported up -- today's the first time we have mentioned anything beyond quota carrying. Just to give the color on that span of control factor that we are trying to improve upon there.

Look, when you think about rep productivity, I think David highlighted this a little bit about awareness of iRhythm and Matt commented on this term status quo. The single largest challenge we have is getting physician's time. In the vast majority of delivery systems today physicians are extremely overloaded. They are overworked they feel undervalued and despite new technology that can help them, they often don't have time to really see you, me too, use it and so forth. That is probably the biggest challenge we face.

Getting physicians to sort of embrace the need to change the way that they are doing things today. That is the single largest driver. Making people aware, getting time with them, educating them. Once they start using the service they use it really well, notwithstanding the payer contracting related issues which line up quickly behind that.

As far as training sales reps and, does that help improve productivity? Yes, I think nominally it does. Sure. Overall the more they can tell the depth and breath of our story that includes the benefits to the patient that I was describing. The benefits to them in terms of their ability to make clinical decisions faster and more accurately and then also describe the benefits of that information infrastructure and how it helps them to streamline their productivity, and derive high patient satisfaction or patient engagement.

When our sales reps are able to message all four of those elements we are extremely successful. And that story has evolved over the last two to three years as we have built more and more competency in the business.

Okay. That is helpful. Thanks, Kevin, for that color. I guess another way to look at it, and David may have touched on this a little bit, with respect to the types of accounts you have targeted here Q4 and those maybe are targeting over the next say 12 to 24 months, is there a demonstrable difference in the complexion of the account that you have sort of under the [cap] this point in time versus those that you will be targeting over the next 1 to 2 years? And does that at all pose any risk as it relates to sales rep productivity? I guess what I'm thinking about there is if you're perhaps targeting accounts that are smaller in some way or lower volumes, perhaps it is harder to climb the productivity or vice versa, I suppose as well.

I don't think so Jason. I think the primary driver in the marketplace has been physician practice, acquisition, and consolidation. It is estimated that somewhere between 75% and 85% of cardiology practices are owned or leased by hospital systems. It wasn't that way when we started Zio in 2012. It was less than that. That has actually made our job maybe a little bit easier in that, the drive towards value versus drive towards volume plays well into our strategy overall.

Selling to large health systems, selling a value proposition that is quantifiable to patients and providers and patients, makes our job a little bit easier and I am less worried about being able to penetrate based upon size. It is more of a market dynamics of what is going on with physician practices, challenges with payers, things of that nature, that we have talked a lot about in the past.

Thank you. That is very helpful. Just a few quick ones and I will let others jump in as well. You mentioned [O-US] investments. I'm wondering, as we model out over a longer period of time, when should we start to see some contribution from the international markets and in what form will that be? Will it be a similar model to the United States or is it too early to give us anything on that front? And then Matt, for you, you gave some general color on unit and growth contribution -- unit NASP contribution, to growth in the quarter. Is it dissimilar in any way to sort of the trends we have seen in recent quarters and recent years, and if so could you give us a little bit more color on that front too? Thanks a lot.

Okay, I will take the first one on international and I will pass it to Matt and he can talk about your second question. Jason, I think it is too early for us to give any color on international markets timing, costs, value impact, and so forth. I think it is way out in the future for us. I just caution you to think about a large US market that's got 4.5 million tests in it that we're very, very aggressively going after.

As I said in the prepared remarks we are planning for the longer term in some of these investments: new products, new indications, and new geographies. Nothing to be pursued or nothing to be measured in the short term for us here in the next couple of years. I wouldn't do that.

Okay.

Yes, Jason, on the other one, I don't think I mentioned that specifically in the call today but I think historically we have indicated that our growth overall is typically, is predominantly volume driven. And I think we have been specific around 80/20. 80% volume and 20% price. And our expectation remains that, again as we mentioned in the past, that the next year, 18 months we expect it to remain in that 80/20 realm.

Thank you guys, congrats again.

Thanks, Jason.

Thank you, I am showing no further questions at this time. I would like to turn the call back to Mr. Kevin King for any closing remarks.

Thank you all for joining us today on the call. We truly appreciate your interest in iRhythm. We look forward to keeping you informed about our progress on our next updates, and operator, we can end the call here. Thanks very much, everyone.

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.