HeartBeam, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good afternoon. Thank you for joining us for the Biotelemetry’s Third Quarter 2013 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities and Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company’s executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Joseph Capper. Sir, you may begin.

[Joseph Capper:]

Thank you, operator and good afternoon, everyone. I’m Joe Capper, President and CEO of Biotelemetry. Also with me on the call today is our Chief Financial Officer Heather Getz. I will provide commentary on our third quarter performance, Heather will take you through a more detailed review of our operating results and we will then open up the call to your questions. I’m delighted to be with you this afternoon to report on another highly productive quarter and which we made considerable progress executing against our strategic objectives and delivering solid financial results now under new corporate identity Biotelemetry. Attesting my practice and especially for those of you who are newer to the company I would like to remind you that we continue to manage the business in pursuit of three broad strategic objectives. First, we seek to solidify our leadership position in cardiac monitoring. Second, we are building a leading research services business around the Cardiocore brand and platform; and third, we look to identify diagnostic markets that would benefit from the application of our wireless platform and proprietary technology. I’m sure you’ll agree the Biotelemetry name is much better suited for company with this broad strategic focus and direction. Now let me tell you why this direction is such a positive one. We just reported another strong quarter of financial performance for the fifth consecutive quarter we experienced year-over-year revenue growth up 18% over the prior year quarter to $32 million EBITDA was $3.6 million the highest quarterly EBITDA in four years. Total volume was up 7% compared to last year MCOT volume up a remarkable 13% and we ended the quarter with $21 million in cash and no debt. In addition to excellent financials the quarter was filled with considerable operational success. In the patient services business the comprehensive sale approach we implemented at the outset of the year continues to be the catalyst thriving renewed focus on the benefits of remote monitoring. As we once again saw year-over-year growth in all three service lines. MCOT, Event and Holter. As you may recall the implementation of the United Healthcare agreement began in earnest in the month of July and we are pleased with the early results. As we indicated in the past the third quarter has historically been our toughest from a seasonal perspective. As expected however the rollout of the United Healthcare agreement did help dampen this phenomenon, in fact during the third quarter MCOT volume was up 3% sequentially. As a reminder late last year we launched the market’s most advance wireless event monitor. To date, we have serviced over 26,000 patients, up significantly since our last report. We are now servicing more patients with the Wireless Event than with the traditional event demonstrating the clear benefit in a market demand for the system. Also you will recall that during the second quarter we introduced the MCOTos 2

[Heather Getz:]

Thank you Joe and good afternoon every one. As Joe mentioned revenue in the third quarter was $31.9 million, an 18% increase over the third quarter of 2012. The increase was aided by the acquisition of Cardiocore and $1 million of additional revenue generated in our patient services business as our total patient volume increased by 7%. Notably this volume increase in patient services was largely driven by MCOT. Gross margin came in at 61% in the third quarter of 2013 compared to 61.5% in the prior year quarter. Growth in the research services segment due to the acquisition of Cardiocore reduced margin by approximately 200 basis points while efficiencies in the patient services business and higher MCOT volume contributed 150 basis points to the gross margin. For the third quarter our adjusted operating expense increased $400,000 to $19 million due to the addition of Cardiocore. Excluding Cardiocore our adjusted operating expense was lower substantially as a result of a reduction in bad debt. With the increased margin dollars coming from the higher revenue more than offsetting the increased operating expense. We generated positive adjusted EBITDA of $3.6 million for the third quarter of 2013 compared to $300,000 in the third quarter of 2012. When you add back stock compensation of $800,000 for the third quarter of 2013 adjusted EBITDA reached $4.4 million or a 13.9% return. Our third quarter EBITDA increased sequentially and is the highest in four years. On an adjusted basis we were operating income positive for the second consecutive quarter and on a year-to-date basis again this has not occurred since 2009 the year in which we received dramatic reimbursement reduction. I also want to note the onetime expenses in the third quarter were largely related to the patent litigation we have pending Mednet. The trial was initially scheduled for December and having pushed back to February partially as a result of the government shutdown last month. We expect the expense related to this litigation to slow in the fourth quarter and then pick up again in the first quarter of 2014. We believe that we will incur an additional $1 to $2 million over this time period. Now turning to the balance sheet. We ended the quarter with $21 million in cash which was up $2.7 million compared to year end and no debt. Year-to-date we generated $7.1 million in cash from operations which was partially used to invest in new devices as well as our new operating system bring us to free cash flow positive up $2.2 million. We continue to make progress on reducing our accounts receivable causing our consolidated DSO to decline to 51 days a 10 day improvement from year end. Finally before I turn the call back to Joe, the CardioNet comprehensive strategy as well as the United and Kaiser agreement should continue to boost our patient services volume in the fourth quarter and into 2014. As mentioned last quarter, we do expect some pricing pressure resulting from the United contract and the general reimbursement environment. Looking at research services we expect revenue growth to be slightly lower due to the previously disclosed way of certain studies and the cancellation of one study resulting from a shift in strategy by the study sponsor. Given the above factors we still anticipate our overall fourth quarter revenue to growth year-over-year in the mid to high single digit. From a cash flow perspective in the fourth quarter I expect to utilize cash generated from operations to invest in building inventory as a result of the increased demand of MCOT as well as Wireless Event. In addition we will have some upfront cost related to the move of our corporate headquarters. As a result I expect to use cash in the fourth quarter and be free cash flow neutral for the year. To reiterate, in 2013 on a consolidated basis we expect to see organic top and bottom line growth and expect our adjusted EBITDA return after adding back stock compensations to be approximately 12% for the full year. We expect to generate cash from operations and be free cash flow neutral. And with that I will now turn the call back over to Joe.

[Joseph Capper:]

Thanks Heather. As you have heard there has been considerable activity and progress in our business over the last year. To summarize we launched MCOTos and Wireless Event. We successfully integrated Cardiocore. We introduced the comprehensive CardioNet sales approach. Launched MCOTos 2

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Brooks O’Neil from Dougherty & Company. Your line is now open.

[Brooks G. O’Neil:]

Good afternoon. Congratulations first for meeting the accomplishments. So, I have a couple of questions, I guess I’d like to start up just can you tell us a little bit more about this Kaiser arrangement, the exclusivity sounds somewhat unique and I’m just curious how you see that and perhaps what they’re thinking in signing the agreement like that with you?

[Joseph Capper:]

Yeah. How you’re doing Brooks? It’s actually relatively unique among payors but not that unique with Kaiser, they typically drive compliance to whatever standard they adopt. So, it didn’t surprise us, we were glad that we persuade and we’re awarded that contract. But it’s not really that unusual for them and it means we will get a disproportion amount of the market share nearly all of it, there will be some exceptions I’m sure along the way, most contracts have provisions for certain types of exceptions but their communicated plan to us is to drive compliance to our equipment.

[Brooks G. O’Neil:]

Great. Maybe along those same lines, can you give us any update or insight into how progress you might be making with other payors particularly the Blue Cross organizations?

[Joseph Capper:]

Yeah, it’s – as you know we’re constantly in pursuit of any payors that do not cover their service or any of our services are reimbursed. The largest one still left is WellPoint Anthem which is the member of the Blue’s alliance. And we are working with them diligently to try to help them utilize I mean it’s an ongoing process Brooks and I really can’t put timeline on it or anything of that nature.

[Brooks G. O’Neil:]

Sure. Likewise, that gets you probably reluctant to see a whole lot of how you made it. But can you give us any color on how that’s going?

[Joseph Capper:]

Yeah. I mean we anticipate this taken a little while to fully ramp-up but I think we’ve given you some indication in the past is once we’re at full implementation what we think it means to the business. And I can tell you we’re pleased with the rollout, we saw a nice uptake in the quarter, we saw MCOT growth year-over-year about 13%, half of which is associated with the united agreement. So, the real key message there is it’s not only united which a really, really good message, right.

[Brooks G. O’Neil:]

Right.

[Joseph Capper:]

That’s where we’re growing that contract and we’re also executing on other initiatives within the organization to grow the business that large. And to the extent there may be some halo effect. But we anticipate that continuing to see that type of progress.

[Brooks G. O’Neil:]

Great. And then maybe my last question, is – could you tell us just a little bit more of this all three you just had approved and what you see in some of the unique features or bad how you expect that maybe the contributor as we head into 2014?

[Joseph Capper:]

Yeah, it’s – we develop it sort of as a direct response to the success that iRhythm having with the ziopatach. It seems as though the patch form factor is being adopted within market place. When you hear us and other companies talk about products and developments, typically in that form factor which makes sense it’s a – it seems to be patient friendly or lay to wear a monitoring device. Our systems should add some benefit in that, it’s a two piece device. Once we get it in a patch form factor when we first ran it through FDA we did it in a traditional format where you wear the device, in this case on a [indiscernible] and you have leads coming out of it, we’re going back in a next couple of months to get the patch portion of it approved as well. So, we think first quarter will be ready to go in a patch form factor. Unique in that as I started to say it’s a two piece device. So, the monitor itself which is very small and low cost will be reusable. So, there is a couple of different ways we can position us in the market place currently the iRhythm product needs to be mailed back into be interrogated and then a report is sent back to the physicians weeks later. So, you can imagine that in terms of customer satisfaction we’ll be able to deliver a report much faster, it’s going to be a lower cost system as you will be able to market it in different ways. So, we’re pretty excited about the different options for that. I don’t really I can’t I think talk to you yet about sizes of the market, what we expect, how much penetration we expect to get but it will certainly will be a nice complement to our current portfolio.

[Brooks G. O’Neil:]

Great. Thanks a lot. And congratulations again.

[Joseph Capper:]

Thanks Brooks.

[Heather Getz:]

Thanks Brooks.

[Operator:]

Thank you. Our next question comes from the line of Bruce Jackson of Lake Street Capital. Your line is now open.

[Bruce Jackson:]

Thank you. Nice quarter. First with the revenue guidance you provided for the research business, you gave us a percentage gross number. Is that number going to be up sequentially in the fourth quarter on an absolute basis?

[Heather Getz:]

Are you talking about the future growth number that we gave you 115%?

[Bruce Jackson:]

Yes.

[Heather Getz:]

And so, okay. So, can you repeat your question?

[Bruce Jackson:]

Sure. You said the research services business was going to be up year-over-year but I spurn off it’s going to be up sequentially in the fourth quarter.

[Joseph Capper:]

I don’t know that we’ve broken that out like that in the past. One of the things you guys have constantly asked us to don’t understand why is to give more guidance. The guidance we’ve been given is more directional and we haven’t given specific guidance like that.

[Heather Getz:]

Yeah, I mean in my script Bruce, what I refer to was the year-over-year growth on a consolidated basis…

[Bruce Jackson:]

Okay.

[Heather Getz:]

In the mid to high single-digits.

[Bruce Jackson:]

Okay. Got it.

[Heather Getz:]

So, that would include patient product and research.

[Bruce Jackson:]

Okay, okay. Got it now. My next question is on – can you just kind of qualitatively tell us how much of the incremental revenue gain in the quarter for patient services was a result of the United Heath contracts, was it like a big part of it or small part of it. Just little color.

[Joseph Capper:]

No, we can’t do that on a revenue basis. I think I told you volume was up about 13% year-over-year and roughly half of it was due to that increment, half of that was the rest of the business.

[Bruce Jackson:]

Okay. And then I was out on the CardioNet website and I saw something called Cogera Health. Do you have anything to say about that?

[Joseph Capper:]

Well, not yet. Here is – I’ll explain to you what it is. One of the kind of new product areas we’ve been looking at for quite sometime is in INR testing at home INR testing which is the test needed to regulate the amount of warfarin or Coumadin an individual takes the test is done periodically usually once a week, historically was done in a centralized fashion at a Coumadin clinical PET clinic usually associated with a hospital over the last several years that like other point-of-care test that started to migrate swinging to the home which is high convenient. We started to do some work in that area few quarters we haven’t spoken about it publicly because it’s more – it’s in the developmental phase. We recently went live with a couple of websites because we’re attracting new patients it was part of the United agreement. So we do anticipate building that into another line of business to complement more than likely that we’ll roll up into the patient services business complement the current cardiac monitoring portfolio it’s the same call point, it’s the same type of patients that you would be servicing, but it’s really early on so like and we hasn’t tend to talk about it much I will tell you I like it as a recurring revenue business, I like the margins, I like the service we need to do more operational work, we need to automate a little bit more and we need to do a few more things but before we’re ready to roll it out lastly.

[Bruce Jackson:]

Okay, got it.

[Joseph Capper:]

But you’re – you’re a good spy though.

[Bruce Jackson:]

Well thank you. The last question I’ve got is about the patch form factor. So, you said the Q1 is the first form factor that’s going to launch and then the IMEC version that’s going to launch or just going to launch later in 2014 is that the plan?

[Joseph Capper:]

We haven’t a definitive timeline out for the IMEC products. I will tell you that we’re very pleased with the progress of the projects that we are working jointly with them if anything will accelerate those I hope to have something in the marketplace from them sometime in 2014, but there is still is an incredible amount of work to be done there.

[Bruce Jackson:]

All right, thank you very much.

[Joseph Capper:]

You’re welcome.

[Heather Getz:]

Thanks Chris.

[Operator:]

Thank you. Our next question comes from the line of Dan Trang of Stonegate Securities. Your line is now open.

[Dan Trang:]

Hi everyone, thanks for taking my call, congratulations on a strong quarter.

[Heather Getz:]

Thanks Trang.

[Dan Trang:]

A question regarding the restricted services I know in the past you said there going to be lumpy and I’m wondering when we can see a, when do you expect to see a more normalized number?

[Joseph Capper:]

Hard to say, that – that’s the nature of that business you have studies start all the time I think the bigger you get the better right it just makes sense because the studies will start to take up on an individual basis a lesser percentage of your total book of business. And so we’re very much focused on finding ways to scale that business. And it’s – but it’s probably going to be a little while before we really had a point where we can say you know we’re not susceptible to those kind of puts and takes on a quarterly basis.

[Dan Trang:]

Okay. And I know that your revenue was is it by your past acquisitions I’m wondering are you still in kind of acquisition mode just kind of what you are or you’re not just kind of some color behind that please?

[Joseph Capper:]

Again I would say that we have at all times a very active business development funnel. And all of those initiatives whether it would be to acquire a company and asset from a company or invested on technology are looked at for the purpose of accelerating the plan that we’ve outlined. And I will tell you that we again we’re active with those assets that we like and we’re always looking that doesn’t mean there is anything that’s going to happen eminently but we’re always looking for opportunities to accelerate the strategic plan.

[Dan Trang:]

Okay. All right, thank you.

[Heather Getz:]

Thanks Trang.

[Operator:]

Thank you. Our next question comes from the line of Nick Leventis of Balyasny. Your line is now open.

[Nick Leventis:]

Hi, thanks for taking my call and congratulations on a good quarter.

[Heather Getz:]

Thanks Nick.

[Nick Leventis:]

Couple of quick questions for you. Going back to the CardioKey for a moment, is that approval is it tracking on schedule or is tracking a little bit of ahead of schedule in terms of getting that product out to the market or ahead of schedule?

[Joseph Capper:]

Yeah it’s ahead of schedule. We have that approval now or we’ll have we’ll go back for another approval on the patch portion of it and then will probably launch it in the first quarter and that’s slightly ahead of schedule.

[Nick Leventis:]

Okay, great. Second question for you obviously a nice win with the Kaiser contract, you know them being very prestigious in the market and doing a lot of their own work on the clinical side, I guess question to you is, you know we first came off the United contract and they’re are also very well known in the marketplace for doing their own clinical research, so now with two big name brands behind you, how is that changing conversations with other potential customers is it making it easier to that laying, was the United contracted that way, did it helps way Kaiser or any kind of commentary you can offer around that would be very helpful?

[Joseph Capper:]

Yeah, I too think it adds to the credibility of both the technology and the company. Now but it’s not an automatic you know trickled out effect or ripple effect if you will, you know you’re going to get well point because you got United, I wish right. However, I will tell you that it matters, it matters a lot in conversations that I have personally had with people it certainly does make a big difference. So, the easy answer as it can hurt, but I actually believe that will help tremendously.

[Nick Leventis:]

Okay, great. And then one last question so the study that you guys are looking to publish, is there any timeline on when we might expect to see that get into a journal?

[Joseph Capper:]

It’s been accepted by a journal a peer-review journal don’t ask me the name of it because it skates me right now and when it was accepted about a week ago we were told 6 to 8 weeks.

[Nick Leventis:]

6 to 8 weeks, great. All right, well thank you very much guys and congratulations again on another nice quarter.

[Joseph Capper:]

Thanks Nick.

[Heather Getz:]

Thanks Nick.

[Operator:]

(Operator Instructions) our next question comes from the line of Jan Wald of Benchmark. Your line is now open.

[Jan Wald:]

Good afternoon everyone congratulations on a quarter and I guess some of the questions I had been answered but let me – let me try for may be look at more on a couple of in terms of your physician services business, now that you have United and Kaiser, what should we – what we should we look for growth over the next may be a year or two just directionally I know you – I know you’re not going to give this numbers and also just in terms of understanding your business a little bit more how much of that is MCOT versus some of the other devices that you have to offer. How should we understand that that sort of business model?

[Joseph Capper:]

The first part was really about kind of volume, growth, patient services. What we have said is once it’s fully ramped United should add 10% to 15% to our volume and that the big question is how fast you can ramp it up, Kaiser is unknown yet we still have to do a little bit more work on that in terms of impact a lot of that was kind of baked in because we anticipated when are those staying for a couple of months, but I would say you know that that kind of 10% number is probably a healthy number to work with them I’m pretty comfortable with that right now we have a business with development and how is trending but we just – did 13 year-over-year 6 of it was outside of these contracts and these contracts just still going to ramp up. So I mean I kind of like the way the business is trending from a volume perspective and we’re doing a lot of other things that we haven’t really talked a lot about today as we’re trying to develop them. But I think there is another way that we can apply this technology and go to business in different sectors that have not necessarily used or deployed the technology in the past. So, I’m personally bullish on it, but I tricked by own quite a lot I think 10% is probably a decent number to work with.

[Jan Wald:]

And there is a 10% in volume in the business, and sense of MCOT versus the other devices or is it just a growth number?

[Joseph Capper:]

I would assume that is a growth number for now.

[Jan Wald:]

Okay. I guess excuse me I have a follow upon on the CardioKey product, how does that – how do we understand that opportunity it’s another or you know another tool in the toolbox but and it chooses to kind of do something good to margins is it kind of provide more business, how do we understand how the device is going to fit into the, your – probably material in?

[Joseph Capper:]

I would think about it as in terms of share not necessarily margin right away. It’s a 14 day Holter. What has happened in that business, it’s the smaller of our three care businesses, what happened is people primarily a company called iRhythm launched a 7 day patch, 10 day patch, 14 day patch eventually they got to a 14 day patch that started to take share away from other service lines And frankly including MCOT not just Holter its reimburse to the Holter but it took other service lines because as you can imagine you’re getting a couple of weeks’ worth of data and its full closure data which is very valuable at times. So it allows us to compete in that market and we will, it will stand the loss of share in some of our service lines that we’ve experienced in the past to the not having a product like this and it will probably create more opportunities for a long term. There may be some application to develop additional markets with this product given the price point and some of the flexibility.

[Unidentified Analyst:]

Okay. And I guess may be a three part question on Cardiocore. There has been a strategic I guess there is a lot happening in the CRO space there is I’ve seen a lot of companies that are – well there are some making a lot more money than they had in the past, there is a lot of M&A activity. So, it seems to be a pretty exciting market if you will at this point. How does Cardiocore fit into that framework? How do you see the business growing over a period of time? And then secondly you mentioned that you’re going to grow services. I guess you’re a core lab right now. I guess the question I have is what kind of services would you be adding to that core lab capability? And the third thing is you mentioned that one of the growth vehicles for you is going to be looking at international which would be Europe and Japan. And I wonder how MCOT fits into that strategy, because it would seem to me that that would be a device that would be very useful in the research services play over in Europe?

[Joseph Capper:]

So, to your point lot happening and there is a lot happening with our business in that context as well. So, I do think that what you’re hearing about the CRO environment doesn’t affect us as well and we anticipate continuing to see growth opportunities in that business. There is cardiac safety studies being required at various levels but all levels of development including now post market release. So, I don’t see a slowdown of opportunity in the traditional core lab services that we offer. Part two of your question was what additional services would make sense or looking at. There is a couple that really seem to go nicely or hand-in-hand if you will with cardiac safety services that we tend to offer and the two just kind of jump to mind are really the respiratory services business and the [indiscernible] or previously referred to ePRO business which is kind of an electronic diary. Those service lines compliment what we’re doing quite nicely. So, we are looking at ways to integrate them either through partnership or through other forms of technology integration. The third question was about international and to the extent that we pursue an international footprint for research services, which is something that’s very important to us, what effect that would have on the patient services side in terms of marketing MCOT or marketing MCOT in research. Too early to tell you, we really don’t know that’s one area where we haven’t done a ton of work and that is marketing of MCOT services outside of the U.S. We’ve done a little bit in research but we’ve not done much outside the U.S. outside of research primarily because there hasn’t been a huge demand for it yet. I do believe that that will change over time but it’s hard for me to say how long that will take and kind of what the price points will be and what the market opportunity will be. So, I think more to come on that I just I mean I don’t have a good answer for you today but as I kind of agree with you that it would make sense logically especially in some countries where healthcare costs are big focus right now. But we’re just not seeing it yet.

[Unidentified Analyst:]

Okay. Thank you very much and again congratulation on the quarter.

[Joseph Capper:]

Thank you.

[Operator:]

Thank you. I’m not showing any further questions at this time. Now I’d like to turn the call back over to Mr. Joseph Capper for closing remarks.

[Joseph Capper:]

Thank you operator, thank you everybody for joining the call. That concludes this afternoon’s call. And we look forward to speaking to you after our next quarter. Thanks.

[Operator:]

If you joined the conference late today you may listen to the conference call via digital replay which will be available through the investor information section of the Biotelemetry website at www.bioteleinc.com until November 19th, 2013. This does conclude the program you may all disconnect. Everyone have a great day.