iRhythm Technologies Inc (IRTC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your iRhythm Quarter 4 2018 Earnings Call. (Operator Instructions) As a reminder, today's call will be recorded. I would now like to turn the call over to Lynn Lewis with Investor Relations. Ma'am, you may begin.

Thank you, Sydney. Thank you all for participating in today's call. Joining me are Kevin King, CEO; Matthew Garrett, CFO; and Derrick Sung, EVP of Strategy and Corporate Development. Earlier today, iRhythm Technologies released financial results for the fourth quarter and full year ended December 31, 2018. 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 expectations for hiring, growth in our organization and reimbursement, guidance for revenue, gross margin and operating expenses in 2019 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 quarterly report on Form 10-K 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, February 12, 2019.

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

Thanks, Lynn. Good afternoon, and thanks for joining us. Strong momentum carried us into 2018, and we exited the year even stronger. Our full year revenue was $147.3 million, representing 55% growth over the prior year after adjusting for Topic 606 and exceeding our guidance range of $142 million to $144 million.

Gross margin for the full year improved 2.9 points. Fourth quarter revenue was $43.2 million, up 56% when compared to the prior year period, and gross margins increased 75 points -- increased to 75.6%, a 3.4 point improvement over the same period in 2017. I'm exceptionally proud of our team's many accomplishments, which included substantial progress on the long- and short-term goals we set for our organization.

Briefly this past year, we achieved our annual sales expansion goal, reaching 110 reps; increased sales productivity in terms of time to ramp as well as peak productivity; published 3 major studies in peer-reviewed journals, highlighting the superiority of our ZIO service and opportunity to expand our market. We now have 26 published studies and over 30 new studies in our pipeline. We reached nearly full reimbursement coverage and in-network contracts in the U.S. for our ZIO XT service. And we made strong progress on ZIO AT contracting and launched this new offering to targeted accounts. It's clear to us that the power of the ZIO platform is helping our customers to achieve meaningful improvements to clinical decision-making in less time and at lower cost than previously possible.

We're in our strongest position to date, both operationally and financially. ZIO's proven clinical superiority, the completeness of our ZIO service combined with the strength of our sales and support organizations, gives us confidence to project 2019 year-over-year revenue growth in a range of 36% to 40%.

I'd like to take a few minutes to briefly summarize our recent progress and offer some thoughts on milestones and goals for 2019 and beyond, and then I'll turn the call over to Matt for further review of our financial performance and guidance for 2019.

Starting with our commercial organization. Sales force expansion continues to be a key factor fueling our growth. Over the past several years, we've been successful in adding and integrating 20 to 30 high-quality reps per year. As noted earlier, we reached our hiring goal for 2018 in the first half of the year and then focused our attention to sales training and the build-out of our customer care organizations for the remainder of the year. This focus paid off as 2018 hires have shown higher levels of initial productivity than the new reps we brought on in previous years. Equally important, our most tenured reps, those with 3 or more years of tenure, continue to increase through peak sales and now average $2.5 million in sales annually. This average peak sales level continues to move higher as a result of greater brand awareness, impactful clinical studies, greater in-network contracts and a focus on large integrated delivery systems.

While it's difficult to predict exactly where the upper limit may be, we believe the peak sales can move even higher. We plan to add 20 to 30 reps in 2019, ending the year with a sales organization of about 130 to 140. Importantly, we will continue to expand our commercial team to whatever cost-effective size is required to capture the full and untapped market potential that lies in front of us.

Turning our attention to account penetration. We continue to see increased adoption in new and existing accounts, driven by the recognition of the proven superiority and completeness of our platform and increased size of our sales force. A key measure of new account velocity is measured by the time it takes for a new prescriber to reach 50 initial ZIO prescriptions. At the end of 2018, we estimated this metric to be roughly 3 months, an improvement of more than 50% from the prior year.

ZIO AT is another key component to our market penetration strategy. ZIO AT allows us to address an important subset of patients who have higher-acuity conditions such as syncope or unexplained loss of consciousness and may require more immediate physician notification. ZIO AT provides a meaningful opportunity to gain account penetration by enabling us to offer an even more complete solution for our customers. Results from accounts within our limited launch phase is encouraging, each are migrating from legacy options to the complete range of ZIO XT and ZIO AT.

In January, we presented data that demonstrated the ZIO XT acceleration effect taking place in a representative account that recently adopted ZIO AT. The data available in a presentation on our website covered the period from December 2016 to December 2018. It highlighted that ZIO XT's share grew from an initial 10% of total account volume to a combined 90%, with ZIO XT at 76% and ZIO AT at 14%. While still in the early days of our ZIO XT, AT experience, we believe this data is representative of the opportunity that lies in front of us.

It's worth reiterating the primary reason for our phased rollout of ZIO AT is that the number of possible contracted lives for ZIO AT is significantly less than that of ZIO XT. Many health plans continue to have negative MCT coverage decisions, stating that the technology is either still unproven or too costly compared to alternatives. In those that do cover MCT, the policies are often narrowly limited in indications or require a failed first-line testing. We expect to have completed our initial contracting efforts by the first half of this year and will then more aggressively expand AT into the market at that time.

We believe our accelerating market share gains are coming not only from our proven clinical superiority, but from the completeness of our service, enabling us to emerge as the standard of care in long-term continuous monitoring.

Early in our business lifecycle, we recognized that traditional algorithm approaches to detecting irregular heart rhythms was a challenge and would likely not scale to meet the needs of the future. We generate, for example, over 1 terabyte of patient ECG data each day, a number that continues to grow with increased volumes and longer patient wear times. It's also well understood and documented in the scientific literature that computerized ECG interpretation error rates approach 50% and can be as high as 70% for certain complex arrhythmias.

Increasingly, there is a reliance on experts for correction and most ECG algorithms are based on the 1980 MIT-BIH Database that only contains 47 subjects with 4 different arrhythmia classes. Our development investment to create a highly scalable proprietary AI platform was driven by 3 factors: one, the opportunity to substantially improve the accuracy of ECG analysis, reducing the rate of misinterpretations and inappropriate patient management; two, the expected increase in ZIO volume, an increase in wear times and a growing complexity of each patient's ZIO record; and lastly, AI allows us to move away from outdated feature engineering techniques such as P wave detection to utilize all of the information contained within an ECG record. This means our future AI capabilities will not only accurately diagnose patients with current arrhythmias but also be capable of predicting a patient's future risk, allowing for earlier medical treatment and possible prevention.

Some of the benefits of our AI investments were published in a major study in January issue of Nature Medicine. The study described the capabilities of our deep neural network, which we collaborated with Stanford Machine Learning Group using our proprietary ZIO database. The Nature publication highlights that we have the first and only set of deep learning artificial intelligence algorithms, demonstrated to exceed expert interpretation by board-certified cardiologists across 12 diagnostic classes of cardiac arrhythmias.

We're increasingly excited about the opportunities arising from the market expansion of -- through our clinical research efforts. As a reminder, the legacy ambulatory monitoring market, where we're rapidly taking share, is focused on the initial diagnosis of symptomatic patients and amounts to over 4.5 million tests per year in the U.S. We estimate that our share in this existing market segment is now in the double digits, as we broaden our presence and displace legacy Holter, Event and Mobile telemetry with our ZIO XT and AT services.

In 2018, we published the KP-RHYTHM study, which expanded our addressable market into the growing population of at least 1 million patients who have already been diagnosed but require ongoing monitoring and characterization of their arrhythmias to manage their conditions. We also published the results of 2 additional trials, mSToPS and the MESA study, which are helping us to develop the asymptomatic or silent AF market that could open up an additional 10 million-plus patients. We have a robust pipeline of clinical research, and you can expect to see additional studies coming out of the year that will demonstrate the clinical utility, comparative effectiveness and strength of our ZIO platform across a variety of indications.

In 2019, we look forward to continuing our momentum with strong execution across our business, confidence in our highly competitive positioning and differentiation includes ZIO's proven superiority, the growing strength of our AI algorithms and data analytics and the completeness of a platform that routinely creates meaningful value for our customers, large and small.

With that, I'd like to turn it over to Matt Garrett, our CFO, for a review of our financial results and guidance for 2018.

Thanks, Kevin. We're extremely pleased with our financial performance for the fourth quarter of 2018, not just with top line revenue growth, but more importantly, our execution on the P&L.

Our continued focus during the quarter on sales force productivity, sales infrastructure support and large integrated system penetration drove accelerating top line growth. We also continue to demonstrate material improvement in our gross margins, while our spending profile, net of one-time adjustments for annual bonuses, commissions and long-term debt restructuring, gives us continued confidence in expectations for our long-term financial performance.

Highlights for the fourth quarter 2018 as adjusted for Topic 606 are as follows: revenue growth of 56% year-over-year and sequential growth of 13%; non-adjusted gross margins of 75.6%, an increase of 3.4 percentage points over the prior year; continued success of AT launches in key pilot accounts, which contributed to the accelerated adoption of XT and iRhythm as the full solution in those accounts; and growth in our sales force productivity through the development and onboarding of new reps as well as the continued impact of penetrating large integrated systems, leading to confidence that the top end of our rep productivity thresholds can, in fact, continue to increase over time.

Taking a more detailed look at fourth quarter results as adjusted for Topic 606. Revenue for the three months ended December 31, 2018, was $43.2 million, an increase of 56% year-over-year and 13% sequentially. As Kevin noted, sales force productivity levels continue to rise, as we penetrate these large integrated systems and as reps hired over the past year achieve meaningful productivity levels. We've spoken in the past about positive trends in our growth trajectory, which remain compelling and in turn support the confidence we project in the business and our ongoing investment thesis that continues to deliver benchmark performance. Some of the trends we'd like to highlight include the continued positive impact of mix shift to contracted claims, small but regionally important payer contracts continue to flow in for ZIO XT as we approach peak pricing for that portion of our business.

Our attention now turns to the ZIO AT mix that will continue to drive meaningful ASP growth for the foreseeable future. Volume to price mix for the quarter was 85%:15%, a ratio that we expect to see continue into 2019. For the second quarter in a row, same-store new store unit growth ran at a robust 60% to 40% split. We view this mix as a positive sign of our ability to more deeply penetrate existing accounts as we focus on new large integrated systems that tend to have slightly longer lag times to onboard than smaller accounts. As one example of this measure, our top 25 existing accounts grew a combined 50% year-over-year and 17% sequentially, nearly all of whom exhibited double-digit annual growth.

We continue to see significant improvements in sales productivity levels, and as a result, we now believe that $2.5 million in sales is no longer the ceiling for third and fourth year reps, but rather the potential average. As of note, new reps are achieving material levels of productivity earlier than we've seen in prior years. And finally, we continue to see dramatic XT volume expansion in accounts where we have piloted AT.

In the month post AT launch, we experienced a 42% increase in average XT volume. This continues to validate our confidence in the pull-through impact AT will have on XT volume upon broad commercialization of AT. In summary, these trends continue to speak to our ability to scale this high-volume business in a meaningful way around our strategic approach to opening and penetrating large volume accounts, which is the key component of our growth strategy.

Turning our attention to the rest of the P&L. Nonadjusted gross margin for the fourth quarter of 2018 was 75.6% compared to 72.2%, a 3.4 percentage point improvement over the same period in 2017. In the quarter, we had a nonstandard cost adjustment related to a vendor rebate, leading to a positive onetime 0.5-percentage-point impact on margins. Excluding this adjustment, gross margin still expanded to 75%, over 1 full percentage point of sequential growth.

Operating expenses for the fourth quarter of 2019 were $44.2 million compared to $30.6 million for the same period of the prior year. Growth in spend continues to be driven by sales force expansion and sales force support hiring needs. Bad debt expense and stock compensation continues to run higher as well due to overdelivery on our top line growth. It is important to note that OpEx was approximately $4 million higher in the quarter than we anticipated due to a number of material one-time adjustments, most notably for commissions and annual bonuses booked in Q4. Even with these charges, the 44% increase in spending was our lowest year-over-year quarterly growth in OpEx in over 2 years. While we'll continue to keep a close eye on OpEx growth, it is our present plan to continue our substantial investment in the growth drivers, as I will discuss in guidance momentarily.

One final note. On October 23, 2018, we paid -- repaid an existing debt obligation using proceeds from the issuance of debt from a different lender, Silicon Valley Bank, and accounted for as a debt extinguishment. As a result, we incurred a total loss on existing debt of $3 million. Finally, the net loss for the fourth quarter of 2018 was $14.7 million or a loss of $0.61 per share compared with a net loss of $11.1 million or a loss of $0.48 per share for the same period of the prior year.

Turning to our guidance for 2019. We anticipate revenue for the full year 2019 of $201 million to $206 million and would expect similar quarterly patterning that we've seen historically. This represents annual growth of 36% to 40%, demonstrating our growing confidence in our ability to scale the organization appropriately as we continue to produce benchmark top line growth.

Gross margin for the year is expected to range from 75% to 76%, continuing our trends on both price and cost improvements. Finally, we expect operating expenses to range from $191 million to $197 million, including $28 million to $30 million for research and development and $163 million to $167 million for SG&A. This range reflects our expectation that OpEx will continue to trend downward even as we continue to scale the business.

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

(Operator Instructions) And our first question comes from David Lewis with Morgan Stanley.

Just a few questions for me, if you'll bear with me. Kevin, I sort of start with you, obviously. Very strong finish to the year and encouraging guide above the consensus to start the year. So obviously, you seem to certainly have momentum in the business. Can you sort of breakdown with us this early in the year what's underlying that confidence? And how much of this is just core XT traction? Or any, if at all, material contribution from AT? And then I have some follow-ups on spending.

Sure, David. Look, AT is going to -- is -- will eventually become a material part of our business, but at this point it's still early days. And the AT market opportunity, as I described, is roughly 10% of total. So if you're going to be modeling, I think the way to model it is, it's about XT penetration, it's conversion in new and existing accounts, it's increased sales productivity, it's increased productivity from a number of new salespeople, it's physician confidence driven by the clinical superiority of our product as measured by our clinical studies. I think those are the main drivers for us here.

Okay. Very clear. And then Matt or Kevin, just thinking about spending here for a second because you had some commentary in the script here. So obviously, you still guiding to modest SG&A leverage here in 2019, which we didn't see in 2018. Can you sort of talk about the -- your confidence in sort of the unit profitability model here? On one hand, you have gross margins heading higher, rep productivity is heading higher and you've taken up those expectations, but still you're spending materially on sort of sales force expansion. Is sort of that's the right way to think about the business this year and next year? And maybe talk a little about just your confidence that the incremental sales acquisition's coming at a high contribution margin, but you're spending significantly to drive enhanced growth. I just want to flesh that out. And then I had a quick follow-up on R&D.

I think you got it right, David. The total addressable market for us is quite large. Even when we're growing at the rates we have been growing, we're still a relatively small share. And we need to continue to invest in the commercial side of our business. If you look at the R&D spend, the R&D spend is a healthy increase as well because we've got a big pipeline of new indications, new products, new technologies that we're investing in over time. That said, we're increasingly confident that there is strong leverage and strong pull-through in our business. You're beginning to see that effect now where the OpEx growth rates are slowing, while the revenue growth rates are continuing to be in the upper tier of our peer groups and so forth. So I'm totally confident. And I think as far as profitability, it's not that far off. Matt, I don't know if you want to comment on what timing or range or something like that, but if you've got a number?

Yes. I don't know if we -- David, I don't know, again, if we've really talked specifically about a time. I think we've talked about the fact that as long as we can continue to find these investment opportunities for us to drive top line growth, we're going to do that. Obviously, we're guiding to the high end of our sales rep numbers from IPO earlier in this overall process, but we're not sure we've achieved the high end of that range. So there's always the potential for additional spend there if we can continue to see that growth trajectory. All of that said, we grew Q4 versus Q4 even with those one-time adjustments of 44%, and the guidance we just gave, I think, indicates that the midpoint of less than 30% OpEx growth. So we're clearly seeing the traction in the business that we thought all along. If you wanted to tie us down, I think at this point, we'll be looking at 2020 as a time frame to start talking about EBITDA and OpEx breakeven.

Okay. Matt, very helpful. And just one quick follow-up on spending, and I'll jump back in queue. R&D -- I don't think anyone has a problem with you spending more money on R&D but what's interesting is that number is up on an absolute dollar basis in '19 versus '18, yet we're pretty far along with, obviously, mSToPS, SCREEN AF. So it feels that, that number may be equal parts development and research. Can you just flesh that out a little bit for us because, I think, where are those absolute dollars going, given major trial expense may or may not be behind us?

So David, the trial expense is not included in our R&D number. It's in our SG&A number. So when you're looking at R&D, you're looking at product technology, algorithm indications, new product expansion, innovation.

Our following question comes from Robbie Marcus with JPMorgan.

Maybe I can start, you're building your reps. Your growth is extremely strong and strong going out of '18 and into '19. Can you help us understand how much of that is driven by opening new accounts? And how much penetration is left at your existing accounts? So if we think about how much more of the sales force you'll need, how much is already opportunity you have in place to go capture? And how much is, you have to go seek out?

Robbie, that's an evolving -- there's a -- we should say, there's a evolving answer to that question. As you know, we've guided towards a 50-50 same-store, new store split for quite some time. That changed in Q3, where I think our initial thoughts was that had a lot to do with summer seasonality in the business, but what we're seeing is that we're actually having the ability to further penetrate existing accounts in ways that are potentially expanding our customers' ability to sell ZIO product. What I mean by that is, we're able to go further upstream into emergency rooms and even into primary care in a way that was hard for us based upon our knowledge of accounts, use of Event and Holters that would be an incremental add to that particular account. And we're going in the opposite direction as it relates to the neurology departments and some of the other new indications that we're identifying. So basically what I think we're seeing is not with EHR integration with our approach of going after larger accounts and with these additional, kind of, added benefits to our sales model, we're seeing the ability to deeper penetrate in existing accounts than we've seen in the past. Does that answer the question?

Yes. That's really helpful. And then maybe just 2 other quick ones, I'll just throw at you together. First, how do we think about what's in your numbers now from some of the new indications like KP-RHYTHM? And are you starting to see asymptomatic at all in your treatment numbers? And then maybe just help us understand how the new neural learning will play into the algorithm, when that will hit the algorithm? And is that something you're going to roll out and make a big deal about to doctors and physicians?

Sure. Robbie, I would say that studies like KP-RHYTHM are still in the awareness phase. There have been a number of published articles that came out ahead of KP-RHYTHM, one on the significance of atrial fibrillation burden. And while physicians are highly aware of the importance of it, there are only now starting to internalize it and figure out how it can help them to better manage their patients with paroxysmal AF. So I think of the 1 million patients that are in that TAM or in the very earlier stages, and that will roll out over time. That said, there is no question that it takes a lot to characterize atrial fibrillation beyond just presence of atrial fibrillation, and that's what the study was meant to prove out. So I think that's the perspective we have on that. Relative to the deep-learned algorithms, these are in operation now. We received FDA clearance for a release, a particular release last year. We had clearance prior to that, but we did another version upgrade. And we're seeing material benefits in our business. And the way that we describe it to our physicians is, look, it's all about helping you to make a confident diagnosis and treatment decision for your patients. And most physicians know that, traditionally, algorithms have not been very accurate, and it is a cause for concern for them. Now the paper highlights that we're superior to -- superior or equal to expert cardiologists, and I think that that's giving people great confidence in their ability to prescribe ZIO, and I think that's going to be a big driver force as we go forward on the prescribing pattern side.

Our following question comes from Jason Mills with Canaccord.

Can you hear me okay?

Yes, we can.

Wanted to start with, I guess, a bit of a 20,000-foot question. Specifically, the inertia that you talked about facing since you really launched several years ago, being the status quo, and I'm presuming that's what you'll say now, but I'm just wondering more broadly, if given your success -- if your success suggests that you're seeing the floodgates open a little bit with respect to that inertia and those that still to this date have not, in a large way, decided to change to a patch-based, a EKG-monitoring algorithm, whether or not the evidence of your recent growth would suggest given that the floodgates are either opening or about to open there? And then I guess, the second part of the question is the prototypical competition question. Besides inertia, given your success, usually breeds interest in trying to replicate it. Is there anything of note in terms of different competitors out there or things that you see on the horizon?

Sure. Yes look, thanks for the words on inertia and progress that we're making here. I'm a little bit more conservative than most, Jason, in that I don't believe health care is ever binary, it's off and then it's on. So I'm not so sure I would use the word floodgates. I would use steady momentum, progress, driven by 2 major factors, right? That we are proven to be clinically superior, and we're offering the most complete solution for our customers. And those 2 things need to go hand-in-hand. There is an and in between there, clinically superior and complete. And that's what's allowing us to penetrate these accounts. So we're increasingly confident that we are the leader in this space. I don't really see competitive threats in a big way. Our competitive threat is really all about helping customers to change their status quo, as you mentioned earlier in your first comment there. So it doesn't appear that anything is really immediately on the horizon. And if it were, it would need to be proven clinically, it would need to be as complete as iRhythm is in helping people to understand how to diagnose and manage their patients to the level of effectiveness that we have.

Sure. Okay. That's helpful. And then, Matt, I know we've talked about my model and sort of trying to understand the productivity of your sales force and project forward, and these models can get somewhat kludgy and incomprehensive. But I'm wondering if you'd be willing to talk a little bit about some of the metrics that you went over in a little bit more detail. It's quite amazing to me that you're still not seeing the upper limits or at least you don't think you've seen the upper limits of your productivity curve. I think you also mentioned that the newer reps are becoming very productive, highly productive, even quicker. I'm wondering if you can quantify that even a little bit further to help us refine our models? And then, Kevin, you mentioned that you will continue to add as you see necessary. I know in the past you sort of talked about an upper band to your sales force. It seems like maybe at this point in time, you're not sure if that upper band is going to be adequate enough to really go after the target addressable market. Maybe you could address that? Then I have one more follow-up.

There's a lot there. Let's see. I think, Jason, you're starting with kind of what has changed from our perspective as it relates to sales rep productivity, both in terms of scale and in terms of when they can get to scale and why has that so dramatically changed. I think that there is a number of reasons for that. Some of them we've known and some of them have come along a little bit more lately, that leads us to not quite knowing where that peak is. And I will give you some examples. Remember, when we set the original model at 4 years and $1.5 million -- $1.4 million, $1.5 million, that was 4 years ago when we probably were only 40% to 50% contracted with just a few major players other than CMS. So now we're nearly complete on the ZIO XT side of the business. Going into accounts where you're nearly complete on contracting versus ones where you're less than 50%, I think automatically provides you a leg up. Secondly, I think that we've done a lot in the last 2 to 3 years on hiring and training, bringing on better people, training them in a more unique and complete way. We just got back from national sales meeting last week, where, I believe, the feedback was quite strong in the discussion around how we go about these large integrated systems and how we attack them. I think that, that has improved. I think the ability for us to offer a full EHR solution has helped in our ability to onboard particularly the large accounts. Some of those accounts will not work with you if you do not have bilateral EHR capability. We have developed over the last couple of years, part of our expenditures, something you've heard me talk about is the infrastructure support for the sales team, not the least of which is onboarding teams. We literally have full-time individuals who work with the sales team to onboard these large integrated systems to ensure that they run smoothly. And then finally, I just think it's a combination of all of the clinical studies and brand awareness we have seen is really making a difference when we do end up approaching a novo account, if you will. And I think when you add all of that up, plus what I answered to Robbie earlier about the ability to penetrate more deeply in existing accounts even more than we probably thought early on, all of those indications have led us to be able to have a stronger position around sales rep productivity, and where we've taken the cap off the $2.5 million and are now calling it an average.

Got it. That's very helpful. And then lastly, maybe spreading the love around for Derrick, if he is available. On mSToPS and the silent AF screening market, if you will, could you help us understand or level-set us with respect to the process. We, obviously, have 3-year data that we're waiting to see, and I presume the folks that would write mSToPS or the ZIO into guidelines would want to see those 3-year data. Maybe you could explain the process of getting written into the guidelines specifically for this new target addressable market and just perhaps walk us through process and procedure there.

Sure, Jason. So I think the silent AF market is a market that we're very excited about. We've become increasingly optimistic about it as we published our mSToPS data and have really been in the center of these discussions around developing the market. And to your point, it does require a significant market development effort. That market development effort starts with evidence, clinical evidence and also health economic evidence to demonstrate that we can not only find patients with atrial fibrillation in this high-risk but asymptomatic population, but that by finding it, we can then -- this will then lead to treatment, which will lead to earlier -- which will lead to the improvement of health outcomes and ultimately, health economic benefit. So for the mSToPS study in particular, as you mentioned, that is data that will be coming out at the 3-year end point. So that will certainly help drive guidelines which are written by societies and the professional clinical community as well as coverage decisions, which are driven by the payer community. Now it's not about mSToPS alone, however. We have -- we and others are investing in additional clinical evidence to drive forward this market. In our case, there is another study that we're involved in called SCREEN AF, and that's a similar asymptomatic, at-risk, at-home study involving the use of our ZIO. That study we expect to be fully enrolled sometime this year in 2019 and potentially have a readout of top line data potentially late this year or maybe early next depending on timing. We also are aware that we're not in this effort alone and that there are other stakeholders, such as pharma companies, payers and ourselves in addition to the clinical community who are very much interested in developing this market. So all of that, I think, gives us a very optimistic outlook on this market. It is long term, but those are kind of the steps that are going to be required to develop this market. So it will take a little time.

Jason, just back on your comment on opening the floodgates. There is an interesting stat out there on oral anticoagulation therapy penetration in that, I believe, warfarin still holds 55% market share after the massive investment in clinical evidence of the benefits of oral anticoagulation therapy. I think it's just the conservatism of health care and the requirement for proof, not only on the clinical side, but on the cost-effectiveness side that kind of tamps down the market, that's very different from, say, a technology adoption of iPhones or any other type of trend and -- that we see on the consumer side.

Our following question comes from Glenn Novarro with RBC Capital Markets.

I have one on the sales force and then a few follow-ups. Kevin, you talked about adding 20 to 30 reps in 2019. Can you talk about where you are in the hiring process? How many you've hired? And how confident you are in getting these reps onboard in the first half of the year? And then I have 2 follow-ups on AT.

Sure. Glenn, Kevin. Look, our goal is to get most of these people in place in the first half of the year. So we'll hopefully get there. Hiring right now is taking place. I don't have the exact number of people that we've hired off the top of my head. I would expect that it would follow the same trajectory that we have in the past. We've gotten pretty good at doing about 10 a quarter. And if we follow that, we should get pretty close to 20 by the midpoint of the year and possibly a few more towards the back half of the year. But we're going all out, all the territories are open. All of the recruiting is taking place for all of the open assignments. And there's really nothing holding us back other than just our ability to hire the right people. And that's a difficult process at iRhythm that we really spend a lot of time qualifying all employees to make sure that they've got the right wherewithal to do the job, not only for today but for tomorrow.

And then my follow-up is on AT. Kevin, in your prepared remarks, you talked about some reimbursement challenges for AT. Can you talk about what you're doing to resolve these reimbursement challenges with the payers and timing of this resolution? And then also you talked about mix in AT pricing. Can you talk about the price premium AT is getting over XT? And I'm assuming that's been a pretty sustainable premium since its launch?

Yes. Look, I can take -- I'll take the second one first. So the price premium over XT is about 2 to maybe 2.5x. You can go to Medicare websites, and you can look up pricing and so forth, but it's on the average of 2 to 2.5x. The comment I made about contracting with AT is not specific to iRhythm, it's specific to the code. The MCT code has been around for about 10 years. And it's an expensive technology. And the evidence -- the peer review publications don't support its use as a broad tool for ambulatory monitoring. It prefers ZIO XT as a proven product, and in the past, it supported things like Holter monitors and Event monitors. That said, there is a narrow indication for AT when patients need more timely delivery of information. That's associated with their risk or their acuity. And it's in those cases that health plans do allow -- do have positive coverage policies and do have the ability to contract. So we've been driving like crazy to get inside -- in-network with those. We're making very good progress, and I think we're going to wrap that up to the level that we can by the midyear. And that will remove any patient friction that we might experience going forward. That said, organizations like the Blue Cross and Blue Shield Association, which represents about 80 million to 90 million lives in the United States has a negative coverage policy for MCT. So that just says that any Blue Cross and Blue Shield member either has to pay for their product out of pocket or they need an alternative test. And depending upon where you live, Blue Cross and Blue Shield could be the dominant player, if you will, in that market. And so it requires us to be very sensitive to our accounts and understand how they're going to deal with prescribing ZIO AT when the percentage of their patients may be high. It's not in all cases, but it may be high, and that's a little bit of a dance that has to done because we certainly don't want to jeopardize the high degree of penetration that we have with payers amongst the XT business. So it's more of a strategic tiptoeing, if you will, with accounts and figuring out how to bring on the right accounts. And there is only 400 -- about 400,000 accounts. It's only one tenth of the whole ambulatory cardiac monitoring market. And the reason why it's there is largely because the coverage policies don't allow it to get any bigger.

Our following question comes from Joanne Wuensch with BMO.

Can you hear me okay?

Joanne, yes?

In no particular order, you mentioned emergency rooms and primary care settings. How much do you think you're penetrated or that you've started selling ZIO into those markets?

Joanne, it's Matt. I would argue that it's very, very small at this point. You're only going to see this in our -- in some of our larger-integrated systems and clearly, it's probably some of the more mature systems that we've had on board for quite some time. So it's very anecdotal, and I don't think that we're in a position yet to put any sort of figure on that.

Okay. That's helpful. What do you -- go ahead.

Go ahead, Kevin.

I was going to say, the way in which our service works is that ZIO can be prescribed by anyone across a delivery network. And so if a patient were to enter the emergency room in the status quo days, they would -- with cardiac arrhythmia symptoms, they would then get an appointment to go to cardiology to get a Holter monitor, take the Holter monitor home, wear it, bring it back. And eventually, their report would have to find their way to their primary care physician or the person who saw them. They won't see the same person that they saw in the emergency room. In the cases where emergency departments or primary care are using ZIO, in the new world, you can prescribe ZIO. It can be on the shelf in the emergency department, you leave with it and the next time you come back to the hospital, your report is done. And so this is a workflow enabler, if you will, or improves the workflow inside of these large integrated delivery systems. And I'm confident that more and more -- we're going to see this more and more as these digital services, like ours, enable people to deliver care at the time it's needed, can do it in less labor and at less cost.

I think it's a really good point, Kevin. And I -- just to add to the subtle nature of this, a good portion of these individuals who are coming through the emergency room feel that they're having some sort of palpitations or events, but in actuality it's something else. So the ability to capture them in the emergency room, the system understands that and the ability to rule out is incredibly valuable because it does not waste cardiologists' or EPs' time to see patients that they otherwise would need to spend time with. So that is where you get into this value prop at the integrated system level that they see very clearly, and we're happy to help drive.

Just a second question. If I heard you right, in 2020, we should start thinking about you moving towards profitability. Walk me through peak gross margins and when do you think you'll be cash flow breakeven?

Well, I'm not sure we're quite ready to say a particular quarter or a particular period, but I do believe that on our current kind of organic look at the business, there is reason to believe that we could be both EBITDA and OpEx breakeven at some point during the year 2020. That said, without understanding the top end of our sales force hiring, additional investment that we want to make in the business that, as we sit here today, we don't see, I'm not ready to call a particular time. I'm just saying that we believe, given where we are today that, that is absolutely achievable. The other thing that I've said recently is if you look at our growth rate and assuming that you're going to continue to have benchmark growth, it'd only take us 1 to 2 quarters max if we were to slow that OpEx growth significantly, which would mean pulling back on some of the levers that we think are important to top line growth, but nevertheless, would be able to do that in such a way that we would see cash flow breakeven and/or OpEx -- or EBITDA positive numbers very, very quickly. So that was my point of saying, we keep an eye on our spend. And as long as we feel that the overall growth rates of OpEx continue to decrease as we achieve what we think is our top line guidance, that we can see -- we can easily foresee that ability in 2020.

Our following question comes from Suraj Kalia with Northland Securities.

So Kevin and Matt, maybe I can -- you could help us with a little additional granularity on the metrics. Can you tell us what is the average new accounts being opened per tenured rep and per new rep?

Suraj, we don't really give that level of detail out.

Okay. And in terms of the OpEx, Kevin, again, at least from the commentary and from what I understand, you've recognized the service component of analyzing the ECG readout in COGS, clinical trials are represented in the SG&A component. Can you walk us through the SG&A component. I want to piggyback on one of the earlier questions about the OpEx, the SG&A, again, even if I look at the FY '19 guidance, still seems quite high. What else is included? Is it higher commissions, is it incentives? Any color there would be great.

Yes, so the question on clinical trial cost. When we run a trial, is that not taken out of OpEx? Am I mistaken?

No, it's OpEx.

It's OpEx. Okay. So that's in our SG&A?

Correct.

Okay. And all of our cost of our service, is device and data curation and all of the other associated are in CORs.

That is correct.

What we call CORs. So Suraj, I don't know how to answer your question. It seems that you're asking for what's in SG&A?

No. What I'm asking is, you have currently 110 reps. Let's say, x amount is spent on clinical trials, which is embedded in the SG&A. You're going to add 20, 30 additional reps this year. Trying to triangulate, okay, this is how much the SG&A has increased, this is why it's increasing. Even if I look at a tenured rep generating $2.5 million revenues annualized, given some of the data is -- I'd love to get some additional color. Okay, we're spending $20 million in clinical trials, these many reps. So the -- from a modeling perspective, we can back out, okay, this much is in -- the reps are being paid, this is their commission. Again, just trying to put the nuts and bolts together and eventually say, okay, this much time down the line on a normalized basis, the company is going to reach profitability or where, again, things are going to settle down?

Yes. Well, Suraj, I mean, I think I did about as much detail as we've ever given on profitability with my previous comments on 2020. And we don't really give out the level of detail that you're requesting as it relates to '19. I'll share this with you the way that we look at it. We've seen this improvement in productivity, obviously, in gross margin. We've seen it as it relates to our sales reps. Where we're also starting to see it is in that infrastructure about supporting the sales reps, and we're also seeing a diminishing growth from a run rate basis on some of the items we've talked about throughout 2018, such as sales commissions as well as stock compensation and bad debt expense. We don't expect those to continue to grow. So when we say that we grew year-over-year OpEx of 44%, which includes the $4 million of kind of onetime accruals, if you take that out, you're actually less than, I think, in the low 30s. We're guiding towards the low 30% next year. That growth on a run rate basis coming out of Q4 would be mostly related to the new sales headcount and the continued investment that we're making in the support structure around that team. And I think that's probably about as much details as we go into.

Ladies and gentlemen, I'm not showing any further questions at this time. I would now like to turn the call back to Kevin King, the CEO, for any closing remarks.

Thanks, everyone, for joining our call today. We look forward to talking with you at the end of the first quarter on further updates. All of our material is on our iRhythm website for you to review. We look forward to talking to you soon. Thanks.

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.