iRhythm Technologies Inc (IRTC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iRhythm Technologies Inc. Q2 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like introduce your host for today's conference, Lynn Lewis, Investor Relations. Please go ahead

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

Earlier today, iRhythm released financial results for the quarter ended June 30, 2017. 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 expectations for hiring, growth in our organization, reimbursement, 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 refer to the risk factors section of our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q 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, August 2, 2017.

With that, I'll turn the call over to Kevin.

Thanks, Lynn. Good afternoon, everyone, and thank you all for joining us today. Second quarter results once again demonstrated the traction we continued to achieve with ZIO, our ambulatory cardiac monitoring service. Growth in both existing and new accounts and momentum in our in-network payer contracting resulted in revenues of $23.9 million for the quarter, reflecting growth of 52% over the prior year. Gross margin was 72% in Q2 versus 67% a year ago.

Based on the strong first half results and expectations for the remainder of the year, we are raising our 2017 revenue guidance to $94 million to $96 million. Matt will go into more details on our Q2 financials and our guidance for the remainder of the year in his section.

At the beginning of the year, we highlighted the importance of 2 growth initiatives: expanding our sales channel to meet growing demand for our service and increasing our in-network health plan contracting. I'd like to take a few minutes to provide an update on notable progress in each of these strategic areas.

Starting with our sales force. The consistent growth in demand of our ZIO Service has enabled us to confidently pursue a path of sales force and infrastructure expansion throughout 2017. On our last call, we noted that our sales expansion efforts in 2017 would be divided into 2 phases. We previously noted the successful completion of Phase I of our hiring goals, the buildout of our sales management and infrastructure about a month earlier than planned. Moreover, I'm pleased that the integration of new hires has been almost seamless with very little disruption to our sales trajectory. With that critical step largely complete, we were able to shift our focus to Phase II, the expansion of our territory managers within our sales force.

Our track record of achievements, strong sales leadership and disruptive technology approach to the market has helped us to build a very large pipeline of qualified and experienced candidates to fill the open positions across the country. I'm confident that we'll meet our goal of ending 2017 with 81 to 86 quota-carrying reps and a total field force of over 100 people, including sales management.

Turning to our second strategic objective, growth of in-network contracts. It's vitally important to us that the millions of patients who experience expense cardiac arrhythmia symptoms or suffer from cardiac arrhythmias have cost-effective access to our service through their health plan. During the second quarter, we added over 30 coverage policies and in-network contracts and, we are on target to achieve our goal of exiting the year with approximately $240 million to $250 million contracted in in-network health plan beneficiaries, representing a 20% to 25% year-over-year growth.

Non-contracted business now represents less than 10% of our total business. Our ZIO Service is covered by the vast majority of U.S. health plans, which is important as positive coverage policies are the 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 obtaining in-network or contracted status. The time between coverage policy approval and in-network contracting and our experience is highly variable and remains in the range of 6 to 24 months, depending upon the type of health plan.

Our success in expanding reimbursement coverage is in large part due to the extensive clinical data available in peer-reviewed publications as well as the acknowledgment and support we have from leading health organizations worldwide. To-date, we have 18 peer-reviewed publications, and are proud that our service is the first and only extended continuous monitoring system that is backed by extensive clinical data in peer-reviewed publications.

Further supporting our position as the market leader for first-line detection and management of arrhythmias is the increased recognition from professional organizations. During the recent Heart Rhythm Society annual scientific session in Chicago, an Expert Consensus Statement on Catheter and Surgical Ablation for Atrial Fibrillation was jointly released by 10 professional organizations including HRS, the European Heart Rhythm Society, European Cardiac Arrhythmia Society and the Asia Pacific Heart Rhythm Society. The statement acknowledged that extended continuous patch monitors such as ZIO are an effective tool for AFib monitoring following cardiac ablation procedures. The statement further confirmed that extended continuous monitoring helps to accurately assess true atrial fibrillation burden, leading to a more accurate and an actionable evaluation post-ablation.

This validation, combined with other recent statements such as the recent American College of cardiology, AHA and HRS guideline for the management of syncope and ISHNE and HRS consensus statements on the external ambulatory cardiac monitoring provide growing worldwide support for our ZIO Service's efficacy in accurately assessing arrhythmia burden as well its ability to act as a first-line monitor.

We are continuing to pursue the expansion of indications and clinical uses. At the recent European Stroke Organisation Conference in Prague, data was presented demonstrating that ZIO was more efficient for the detection of arrhythmias than Holter monitors in patients who have recently experienced or transient ischemic attacks, also called TIAs. This randomized controlled study of 116 subjects was conducted with half wearing a ZIO monitor and the other half wearing a Holter monitor.

In statistically significant findings, paroxysmal atrial fibrillation was detected in 16.3% of patients using a ZIO monitor compared to only 2.1% of patients using a Holter monitor. Paroxysmal atrial fibrillation a preventable cause of cryptogenic stroke or TIA, however, due to the transient nature of the arrhythmias, a considerable portion of cases are likely to be missed by short-term Holter monitors.

On the research and development front, artificial intelligence or machine learning generally refers to complex arrhythmias -- complex algorithms that learn patterns and data and subsequently can predict similar patterns in new sets of data. Increasingly, we see machine learn products making their way into our every day lives through applications such as language translation, image recognition and self-driving cars. We're proud to be among the pioneers moving this technology forward into health care through our exploration of state-of-the-art machine learn techniques.

We've previously discussed how our machine learned algorithms are a significant characteristics that sets iRhythm apart from other cardiac monitoring services. Recently, our data scientist team collaborated with leading artificial intelligence scientists at Stanford University to use our vast database of curated continuous ECGs to develop an algorithm that could lead to better decisions involving less time and cost. The collaboration leveraged a precisely annotative set of ECG records from our database of more than 200 million-plus hours of labeled ECGs to develop a neural network capability, neuronal network comparable to artificial ancient models used in computer vision and speak recognition applications.

The developed algorithm without the aid of human intervention, was shown to outperform individual cardiologists in detecting 12 types of heart arrhythmia as well as normal sinus rhythm and noise. These ongoing research investments support our goal of continued improvements and enable our operating costs to decrease as volume continues to grow. This work also demonstrates iRhythm's commitment to staying well ahead of the curve and competition as the leader in arrhythmia detection.

We were pleased to receive FDA clearance in June for our ZIO AT, our next-generation offering aimed at increasing our served market with the intention -- with the addition of timely data transmission capabilities to serve patients who have more critical symptoms, such as syncope, pre-syncope and ventricular tachycardia. We had extensive clinical involvement in the design and development of this important new offering. And importantly, based on that feedback, we've taken the best of our existing ZIO XT platform, and added differentiated capabilities which we believe will address some of the shortcomings of competitive products in this space.

Early customer feedback has reinforced that it's an advantage to have ZIO AT and ZIO XT uniquely share a single-common platform, including biosensor design, workflow tools and comprehensive final reporting for patients.

Since receiving FDA clearance, we have initiated early market testing in select locations across the country. Additionally, we started the process of establishing in-network contracts with commercial payers for this new service which is a critical step in our launch process. Over the next several months, we'll be focused on the remaining tasks needed for broader commercial release, and we'll provide additional details as they unfold.

Before I turn the call over to Matt, I'd like to welcome 2 new board members, Bruce Bodaken and Ralph Snyderman, who joined our board in July. Mr. Bodaken served as Chairman and CEO of Blue Shield of California from 2000 to 2012, where he was responsible for strategy and management of California's third-largest insurer. He was previously served as Blue Shield of California's President and Chief Operating Officer from 1996 to 2000. Mr. Bodaken has served on the Board of Directors of Rite Aid Corporation since May of 2013, and on the board of directors of Wage Works since September of 2005.

Dr. Snyderman is Chancellor Emeritus, James D. Duke Professor of Medicine, and Director of the Center for research and personalized health care at Duke University. From 1989 to 2004, he served as Chancellor for Health Affairs at Duke, and was the founding CEO and President of Duke University health system.

With that, I'd like to turn it over to Matt, our CFO, for a more detailed review of our financial results and guidance

Thanks Kevin. We were pleased with our overall financial results for the second quarter 2017, and remain encouraged by our growth, all while managing and supporting our continuing sales force expansion efforts. Highlights for the second quarter include: revenue growth of 52%, gross margin improvement to 72%, more successes on the contracting front for ZIO XT and a solid start on contracting for our soon-to-be-launched ZIO AT service offering, a step-up on investment into sales and operations to support our rapid growth, and last but not the least, we achieved our first ever positive cash flow quarter.

Now taking a more detailed look at our second quarter results. Revenue for the 3 months ended June 30, 2017 was $23.9 million, an increase of 52% year-over-year. This increase remains volume driven for our ZIO Service as a result of growth in new and existing accounts and continued success in our in-network contracting efforts. Revenue trend remains very encouraging while same-store new store sales remain very robust as well, centered around the 50-50 mix split.

Finally, direct non-contracted revenues continue to shrink as a percentage of our overall business. This improvement benefits our revenue mix and patient volumes because providers becomes less concerned with complexities of non-contracted reimbursement while raising our unit pricing at the same time.

Turning our attention to the rest of the P&L. Gross margin for second quarter 2017 was 72%, compared to 67% for the same period in 2016, nearly a 5-percentage point improvement. Margin expansion continues to be driven by 3 variables. Productivity gains through our machine learned algorithms associated with report generation, the impact from our mix shift to contracted claims and continued reduction of device-related manufacturing costs. Our continued improvement in all 3 of these categories gives us confidence in our ability of ultimately achieving our long-term guidance of 75% to 80% gross margins.

Operating expenses for second quarter of 2017 were $23 million, an increase of 61% compared to $14.3 million for the same period of the prior year. The increase in operating expenses was primarily driven by 2 factors. First, we have accelerated sales force expansion investments, following the completion of our sales management hires and second, due in large part to the increase in our stock price since the October IPO, we had a material increase in stock compensation expense beyond our forecasted estimates and guidance.

We remind investors that this is a non-cash expense and we will -- and will be adjusted for in our guidance moving forward. The net loss for second quarter 2017 was $6.4 million or a loss of $0.24 per share, compared to a net loss of $4.4 million or a loss of $3.09 per share for the same period in the prior year. And as mentioned in the highlights, we had our first ever cash flow breakeven quarter, driven largely by solid cash collection efforts.

While we do not anticipate nor are we guiding to consistent positive cash flow quarters for the business here in the near future, this is still an important milestone for our business, signaling our ability to manage growth, investment expenses and our overall balance sheet.

Turning our attention for the remainder of 2017 guidance. Based on the continued confidence in the adoption trends of our ZIO Service, we are raising our expected 2017 revenue guidance to a range of $94 million to $96 million, up from $88 million to $92 million provided on our last earnings call. This represents annual growth of 47% to 50%. We remind investors that our business typically experience a summer seasonality in Q3 due to the inclusion of 2 major holiday weeks of July 4 and Labor Day and vacation schedules of physicians and patients alike, which impacts sequential growth between Q2 and Q3, thus our increase annual guidance should be weighted towards Q4 financial performance.

Gross margin for 2017 is expected to range from 71.5% to 72.5%, up from 69% to 71%. Operating expenses are projected to range from $89 million to $92 million, up from $85 million to $88 million in the prior earnings call, $11.5 million to $13.5 million for research and development expenses, and $76.5 million to $79.5 million for SG&A expenses.

As previously mentioned, a significant portion of these OpEx increases are due to the acceleration of our sales team hiring and non-forecasted stock compensation expenses. In addition to these expenditures, we will also be incurring costs in the second half of the year, associated with auditor attestation of iRhythm internal controls as the company triggered stocks 404b requirement as of June 30, 2017.

Our revised revenue outlook reflects our continued success in obtaining coverage and contracting policies and hiring plans for our sales force and sales support infrastructure. We reiterate our goal of exiting the year with 81 to 86 quota-carrying reps and a total sales organization headcount, inclusive of sales management and sale operations at just over 100.

As we have stated in the past, we believe that it takes approximately 3 to 6 months for new sales hires to begin contributing on average, and 3 to 4 years to reach peak productivity.

We continue to see improvement in rep productivity levels, which we attribute to improved contracting, training and the investment the company has made in sales management and operational investments such as customer service, revenue cycle management, payor relations and general sales support. These investments remove a great deal of day-to-day work for our sales team, freeing up time to accelerate awareness of the ZIO brand with existing and new customers.

As Kevin mentioned in his prepared remarks, we are very pleased with the progress we have made this quarter and look forward to updating you on our progress on future calls.

That concludes our prepared remarks for today. Joining me for Q&A is Kevin King, President and CEO and Derrick Sung, our Executive Vice President of Strategy and Corporate Development. We would now like to open the call up for your questions. Operator?

(Operator Instructions) Our first question comes from the line of Michael Weinstein from JPMorgan.

This is actually Allen on for Mike. I just want to start off with a quick one. I'm not sure if I missed this, but did you hire any territory managers this quarter?

Say that once again. Are we hiring?

Did you hire any territory managers in this quarter, in 2Q?

Yes. We haven't been giving the quarterly numbers here for the breakout. We generally have guided towards the 81 to 86, and did note in the beginning of the year, we started with about 66 people.

Okay. And also, just in terms of the recent guideline changes that you highlighted on the call. How is that helping you drive, I guess, awareness, how that's helping you with new accounts, coverage and doc conversion? Or do you that think that it'll take more time to see its annual benefit from those endorsements?

I would say, Allen, incrementally, it helps a lot. Physicians rely on their respective medical societies, whether it's ACC or HRS or AHA here in the United States, such that they can take those and translate those into provider-specific care guidelines. And it's early days for a lot of these but it is beginning to translate and it is certainly building awareness, and it this helping in the areas of syncope, and we see that in the emergency setting. We see this post-ablation monitoring, and just in general, as a replacement for Holter and event-like monitoring.

Okay. And then just like a final quick one. I'm not sure if you're willing to disclose this, but you mentioned with your new ZIO AT device, you're really going to have kind of competitive advantages to really address the shortcoming of the current MCT or [IL] devices. I'm just wondering if there's any incremental details you can give on that and to say what kind of competitive edge you think you will be able to bring, whether that's price or an actual like design improvement.

Yes. It's more on capability and functionality than it is on price. We really don't compete necessarily on the basis of price. In the prepared remarks, we talked about a single platform that is -- was by design, and is a major advantage in all aspects that I've described, with a common bio sensor, common workflow tools, common reporting capabilities, these are all essential to patient adoption, physician usage, physician office staff usage that helped the adoption of the product. And then, of course, we think that the marriage of both XT and AT bring unparalleled performance that's not been available in the past.

Our next question comes from the line of David Lewis from Morgan Stanley.

Kevin, just a few questions. I want to come back to the real-time launch here which recently began. If you think about -- 2 things I'd like to get a better sense of. One, from a contracting perspective how long should we think about the process, but what's it going to take you to go back to your existing contracts and get the approval for realtime, sort of number 1. Is that a 2-quarter process? is that a 6- to 8-quarter process? And then from a pricing perspective, our sense is for a lot of reasons, you want to price this product at a premium. Can you give us a sense of what that premium could be? We sort of assume 2x to 2.5x, the core pricing, and then I have a couple of follow-ups.

Sure, David. Thanks for the questions. On the pricing side, I think the best proxy is to look at the delta between Medicare for XT and Medicare for the MCT code, and it is about 2x to 3x. That's a good estimate for you to be thinking about and a good proxy going forward. Related to the contracting rates, I think it's closer to the 4 to 6 quarters than it is the 2 months or 2 quarters that you are describing. These payers, as we've noted in the past, can have a long tail and here, we don't necessarily need the policies. We need to get the contracts, and those can be an arduous task for us, or they have been routinely, so I probably err more towards the 4 to 6 quarters. It's early days so we'll give updates as we go forward, but that's our current thinking.

Okay. Just 2 more quick ones for me. The first is just is there any specific plan to capitalize out of the NICE guidelines ex U.S. or the EPACS data that came out over the next few months. Is there other specific action plans that capitalize on some of that expansion, geographic or obviously, indication expansion in the case of EPACS?

Well, the initiative we have in the United Kingdom, we don't talk a whole lot about it. It's not material to where we are, but that is growing and expanding. And in many ways, it's growing and expanding in payer-related acceptance, through both private payers and through the national health system and it expands -- it's expanding through physician adoption and site adoption. Hopefully, by the time we get to providing 2018 guidance, we'll give at least a sneak peek on where we are on that. And that market is a toehold into the rest of the European, EMEA region, right. Europe, Middle East, Africa and so forth. And there's a prioritization plan that we have not disclosed yet, but a sequence of countries that we would -- that we are planning to go after and we do have initiatives underway. They're not commercial, they are rather pay-related and health policy-related within these countries. If those become successful as we hope they will, then we would deploy a sales force. And then as we've said before, most countries in this region are single payer, so you either get paid or you don't. And if we do, then we're able to deploy a sales force.

Okay. And then just -- Kevin, I know it's a little early to talk about 2018. If I think about NICE plus EPACS, plus the potential for mSToPS next year and the real-time product. Is the way to think about next year -- is it crazy to believe that with better payer coverage and all those incremental guidelines, we should be thinking about rep additions in '18 that should be at or in excess of what you're going to add in '17?

Yes, most definitely, David. We previously described -- let's sort of break this up a part, right? There's the current TAM that we serve in the U.S. and that's roughly 4.5 million to 4.6 million tests per year. The new ZIO AT platform addresses about 10% of that market that was unaddressable before, maybe 450,000 to 500,000, right? And so the market has grown for us from that standpoint. And we've described our sales force buildout to somewhere between 130, I think to 150 or 125 to 150. And you ought to be thinking that we're going to be trying to move along a linear path from where we are to that. And if things change, we'll give you an update but that's really what we are looking for. I don't know if we'll get to that total number next year, but you should plan that we'll be adding more feet on the street throughout '18 as well to go after the market opportunity. If mSToPS gets published and the market gets larger and we get payer adoption, then it could be a completely different game. That's a much larger TAM of about another 3 million patients that may require more than what I've described here.

(Operator Instructions) Our next question comes from the line of Jason Mills from Canaccord Genuity.

I'd like to start by following up on one of David's questions with respect to the TAMs, or Kevin you are going over the target addressable markets, what you have today and what AT brings to you additionally. And perhaps, with respect to the latter target addressable market, addressed by AT, could you talk about the adoption curve potential or expectations within that target addressable market relative to sort of the trend lines you've achieved thus far within the current TAM, and maybe what any additional gating factors that you'll have over and above the contracting process which you've talked about to address the TAM for AT?

Let me try to play that back. So how much does the addition of AT help both our TAM and our trajectory of our business, is that kind of a summary, Jason?

I have a bad habit of asking very long questions that get convoluted. It's just a curse, sorry. So I guess, in a more simplistic view, if we look at the adoption curve of XT thus far, and we can kind of get a sense for the share within that 4.6 million tests per year, if we sort of carve out and look at that 500,000 tests, that could be best addressed with the next-generation product. Should we be thinking about and going back a couple of years and looking at the XT curve, should we be thinking about AT following a similar curve within that 0.5 million patients? Or could it be accelerated or will it take longer based on any additional gating factors that might exist?

I think it's probably a two-part way to think about it, Jason. One is trajectory should or could be about the same. On the good side, the one word of caution is the indications of use for AT or for mobile telemetry indications are largely second line testing or much narrower than they are for XT, and that could tamp it down. And that's partly why 90% of the market is XT and 10% of the market is MCT, right, on that total percentage. Far more patients addressable by the XT product than AT. I will say that some of the early learnings that are coming out of our market development or market testing are that XT volume will probably rise as AT gets adopted. More of this single-platform capability, more broader portfolio of offering, if you will, covering from low to high, gives us higher expected volume on the XT side. So it could be that there's a bigger benefit to XT than there is to AT.

And I would just add, in both existing and potentially new accounts for the XT.

And again, early days for us but that's directionally probably the way I would best describe it.

Okay, that's helpful. And then sticking with the concept of target addressable market, that third future market, which encompasses several additional -- expanded indications down the line that's quite large -- 3 million patients you referenced. Could you talk about the clinical work afoot and development internally that gets you to a point that you'll be able to start talking about that TAM and when that might be?

Yes. Yes, most definitely. So these are -- I'll go back to what I so to David, right? Today, we feel that we've got a large addressable markets and a small but growing share, rapidly growing share. So the TAM is important a little bit in the longer run. That said, this doubling of the total addressable market is clearly within our sights. And I would say to me, Jason, most of this adoption is related to our ability to successfully challenge the status quo. And what I mean by that is, the Holter monitor has been the technology of comparison for these markets that we described, whether they are post-ablation monitoring, whether they are cryptogenic stroke and TIAs, whether they are AF burden, and not so much on the high-risk asymptomatic arrhythmias but the others, certainly, the Holter monitor has been the gold standard there. And our ability to really open that up and use ZIO is predicated on these head-to-head studies that we've shown. And these guideline committees are now starting to recognize it, that's why you're seeing these post-ablation guidelines coming out. That's why you're seeing AF burden becoming recognized by these societies as well, I think those are the primary drivers for opening that up. mSToPS is going to require that study to be read out. And we can report that we have enrolled our last patient in that trial. That was about a 6,600 patient trial. Those patients have all been enrolled, and so the analysis and readout portion of that is to follow. And I think in the past, Derek was thinking that, that somewhere towards first half of 2018. So if the mSToPS results bear resemblance to what we did in the pilot phase, where we're seeing 5% atrial fibrillation in this population versus 1%, and an equal amount of atrial tachycardia in those patients, we'll be well on our way to driving this into the market in the not-too-distant future.

Okay that's super helpful, I really appreciate it. Last question for me, maybe Matt, for you on your side. At this point in time, now you're run rating just under $100 million, obviously a huge TAM in front of you, but should we be thinking about seasonality at this point in your business? And again, I apologize if I missed that in your prepared remarks.

Yes, I did cover that, Jason, in the prepared remarks. And the answer is we do see seasonality. We see it for a number of reasons, there's 2 major holidays during the third quarter and quite frankly, physicians and patients alike take vacations. So we do see some of that. So the guidance that we provided in terms of our overall raise, our recommendation is for those investors who are modeling, that we weight that performance or that increase to the Q4 time frame.

Thank you and at this time I'm not showing any further questions on the phone lines and would like to turn the call back over to Kevin King for any closing remarks.

Okay operator. Thank you, thank you, everyone for joining our second quarter earnings call. We're very appreciative of your time and interest in following our company and look forward to updating you at our next earnings call. Thanks, very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.