HeartBeam, Inc.
Q2 2014 Earnings Call Transcript

Published: 2 Aug 2014

[Operator:]

Good afternoon. Thank you for joining us for the BioTelemetry, Second Quarter, 2014 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 the Forms 10-K or 10-Q. We assume no duty to update these statements. At this time all participants have been placed on a listen-only mode. The floor will be open for question and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Joseph Capper. Please go ahead, sir.

[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 second quarter performance, goals and objectives. Heather will take you through a more detailed review of our operating results, and we’ll then open the call to your questions. So let’s get started. I’m extremely pleased to report our second quarter results, which included record quarterly revenue and numerous operational achievements. As you will hear today, we’ve made considerable progress towards our key objectives. Our strategy is sound, and its implementation has driven our market growth, improved our revenue performance, and helped us expand our business into new areas of opportunity. As a reminder, the three pillars of our strategy are to

[Heather Getz:]

Thank you, Joe, and good afternoon, everyone. Revenue in the second quarter was $42.7 million, a 33% increase over the second quarter of 2013, and our highest quarterly revenue in the company’s history. Patient service revenue increased by $9.2 million, resulting from a volume increase of over 100% due to the acquisitions of Mednet and BMS, as well as strong organic patient volume growth of 16%. Offsetting these volume increases was the impact of the previously disclosed Medicare rate reduction, which went into effect January 1, 2014. Our product segment was up $1.3 million due to the acquisitions, as well as strong Holter sales. Revenue was essentially flat versus the second quarter of 2013 in the research services segment. On the gross margin line, we made a year-to-date adjustment to re-class certain expenses from SG&A into cost of sales in order to align Mednet and BMS with our accounting processes, which reduced our gross profit percent by about 100 basis points for Q2. This impact will not reoccur in Q3. Excluding this change, our adjusted gross margin was 57.2% compared to 61.5% in the prior year quarter. The decrease in gross margin percentage was primarily due to lower average selling prices in our patient services segment as compared to the second quarter of 2013. This reduction in ASP was primarily driven by the reduction in Medicare reimbursement rates, as well as a shift in product mix as a result of the acquisitions. The lower ASPs were partially offset by leverage from the increased volume. To explain further, through our acquisitions, as well as through our CardioNet comprehensive approach, we have made a conscious decision to create scale in our patient services business. By design, this strategy causes a shift in our product mix. While MCOT, Event and Holter are all growing, our acquisitions came with a higher percentage of their business weighted in favor of Event and Holter, which do not have gross margins as high as MCOT. However, our approach is leading to greater market penetration, increased growth and higher same-store sales, which in return will create greater SG&A leverage. Essentially what we are giving up in gross margin percentage, we expect to more than make up in operating margin in the long run. To demonstrate the impact, I thought it would make sense to spend a minute reviewing our sequential comparison of Q2, 2014 to Q1. Our revenue increased 15% from $37 million to almost $43 million and while our gross margin percentage declined from 58% to 56%, our EBITDA increased 70% from $3 million or about 8% return to over $5 million or a 12% return. This increase in return demonstrates the additional leverage we are realizing from the acquisitions as they are integrated. Moving back to our year-over-year comparison, as I mentioned, we generated positive adjusted EBITDA of $5.1 million for the second quarter of 2014, a 12% return compared to $4.3 million or a 13% return in Q2, 2013. The reduction in EBITDA return is substantially due to the Medicare reduction that went into effect this year. In addition, as mentioned we have not yet fully integrated our acquisitions, which added approximately $8 million of total expense in the quarter. As we integrate the acquisitions, these expenses will continue to decline, leading to an increased EBITDA return. Now turning to the balance sheet. We ended the quarter with $13.5 million in cash, which was a decrease of $8.6 million compared to the end of 2013. This was due to the purchase of Mednet, as well as cash used for capital expenditures, primarily medical devices. Our consolidated DSO was 50 days, which was in line with year-end and down versus Q1. In order to finance the BMS acquisition, we used $8 million from our line of credit, which brought our total debt to $18 million. Our total debt to trailing 12-month adjusted EBITDA is about one time. Finally, before I turn the call back to Joe, I’d like to touch on the full year. As we laid out on our first quarter conference call, we expect to see continued momentum in our overall business led by the volume growth in patient services segment, which is being bolstered by the acquisitions of Mednet and BMS. Partially offsetting the impact of the acquisitions and organic volume growth is the price impact of the previously announced Medicare rate reduction. On the other side of our business, research services is showing great improvement in backlog with the addition of several large studies that will start in 2015. As Joe mentioned, we have added an additional service line with our acquisition of Radcore and are establishing a greater presence in Europe through our Brussels location. We believe these actions will enable us to reignite our growth in this very attractive market. We are reiterating our overall guidance with top-line growth of 25% plus for 2014 and EBITDA with a slightly lower percentage return than we realized in 2013 due to the Medicare reductions, but higher than 2013 in terms of absolute dollars. From a cash perspective, we will continue to generate cash from operations. We do expect to incur approximately $1 million of expense in the second half to integrate BMS and Mednet, which will be accounted for in restructuring and other. We believe that with our cash-on-hand, access to our facility, as well as cash generated from the business, that we have enough capital to meet our needs. Looking at the third quarter, when I think about revenue, on the positive side we are seeing great momentum on our base business and with our acquisitions. However, we do typically see a seasonal decline in our patient services business in the third quarter, and we are forecasting to be slightly lower in our research segment, due to the choppiness we have talked about. When I put all these pieces together, I am expecting our revenue to be essentially flat to Q2, plus or minus a few points. Clearly our year-over-year comparisons will remain very positive. On the EBITDA side, we believe our lower operating expense resulting from our integration efforts will lead to an uptick in the EBITDA return versus the second quarter. And with that, I’ll turn the call back to Joe.

[Joseph Capper:]

Thanks Heather. As you have just heard, we had a successful second quarter, with the business showing strong momentum. It appears we could have near term reimbursement stability which is meaningful, as our patient services business is growing at an exceptional way organically and through acquisition. Moreover, our research division also has a promising outlook with its expanded service offering, European operation and rapidly growing backlog. Clearly, we are excited about the prospects for our core businesses, as well as our plans for further diversification, some of which I had spoken about on previous calls. We have had an internal initiative to add an at-home INR monitoring service, allowing us to leverage our current IDTS, the sales and marketing infrastructure in order to establish an additional revenue source. This project continues to move forward and will now be integrated into our patient services offering. During the quarter we added dedicated business development resources and set quarters for the sales organization. We now have approximately 1,000 active patients. We have also spoken about our collaboration with Wellbridge Health, a care management company focused on reducing unnecessary hospital readmissions and emergency room visits, resulting from congestive heart failure. The relationship continues to develop according to plan and Wellbridge now has two pilots underway. In addition to these initiatives, we have been assessing how best to position the company as a player in the emerging consumer mobile health market, a segment that many believe will evolve into a sizable market and has garnered attention from the largest medical device and consumer device companies in the world. We have had interesting discussions with global companies on potential ways to pursue opportunities in consumer health, with a goal of successfully commercializing products that straddle the medical device and consumer goods industry. This will require a breadth of knowledge across both industries that few companies possess. Additionally, while there seems to be widespread agreement in the medical technology industry with major trends such as escalating healthcare costs, increased consumer engagement, and advancements in technology are converging to create significant market opportunities for mobile health devices designed around the consumer. None of us is quite sure what this market will ultimately evolve into and where the majority of the value will lie within it. As we assess how best to position BioTelemetry in a consumer mobile health market, we think about the following. We believe body worn sensors and mobile devices will proliferate in the short term for various areas of healthcare delivery, including wellness, prevention, diagnosis and treatment; all areas will require remote monitoring solutions. However, value will ultimately be linked to data relevancy. By collecting health information remotely, also known as biotelemetry, and applying proprietary analytics, we have the ability to create valuable, actionable data feeds for healthcare providers, payers and patients. In fact, we are one of the best companies in the world at doing so. We make data relevant. Against this backdrop, we believe it makes the most sense to leverage what we do best in terms of remote data collection and analysis and partner with other leaders where appropriate, such as consumer device developers. As such, collaboration will be an important part of our approach as the consumer mobile health market continues to evolve. Stay tuned. In summary, our focus in the second half of 2014 is to complete the integration of Mednet and BMS in a manner which maximizes customer retention, realizes appropriate synergies and creates a stronger overall patient services business; continue to build on the comprehensive approach in patient services by adding additional products and services, first with the launch of CardioKey later this year, followed by our next-generation telemetry products. Continue to build out a service offering and ex-U.S. footprint in our research business and continue to develop additional sources of revenue. Finally, I would again like to thank all of those at the company who helped deliver our eighth consecutive growth quarter and another record high in revenue and patient volume. With that, we will now pause and open the call to questions. Operator, we are ready for our first question.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from Bruce Jackson from Lake Street Capital. Your line is opened. Please go ahead.

[Bruce Jackson:]

Thanks for taking my question. Can we get the MCOT percent of revenue number?

[Heather Getz:]

Yes, the MCOT is about 48% of our total revenue.

[Bruce Jackson:]

Then with the pricing, would you say it was up, down or stable sequentially over the first quarter?

[Heather Getz:]

It was fairly stable.

[Bruce Jackson:]

Okay, great. And with the new patient services operating system, can you give us a little color on what that’s going to entail?

[Heather Getz:]

Are you referring to in the press release, our discussion about the capital expenditures?

[Bruce Jackson:]

That’s correct.

[Heather Getz:]

Okay, yes. So that’s basically a front-end system in our patient services business that will consolidate multiple systems that we currently have. It will bring in some efficiency to the business.

[Joseph Capper:]

Yes, efficiency is a part of it, but another part of it is scale. It’s just a more robust platform. Given the size of the business and how fast we are growing, we started this project a while back thinking we would need a platform that was more robust and frankly more integrated with the various portions of the operations.

[Bruce Jackson:]

Okay. Then with the research backlog, I know you can’t give too many details on the new contracts that you’ve received, but can you give us just a little bit of color on how you think that business might ramp up going into 2015, and if it could get back to the levels of 2013?

[Joseph Capper:]

I’m not going to give you detail Bruce, but I think I will tell you that I think we will exceed 2013 by a pretty decent amount. Based on what I am seeing today and based on where our backlog for 2015 is at this point and the prior year, compared to where we were, if I look at that metric in years past, we are in better shape than we’ve ever been.

[Bruce Jackson:]

Okay, last question. There is a move afoot to improve the reimbursement for telehealth initiatives and I was wondering just how you feel about that and if you might be able to take advantage of that in the event that it comes to pass.

[Joseph Capper:]

Yes, I think it will, but this is my own personal opinion. I suspect that it will, because there is so much pressure to find solutions that reduce inpatient costs, and that’s one of them and if you factor in Medicare penalties for readmits and the like, it makes sense to have those solutions paid for by somebody and as far as we are looking at it, obviously it takes us back to the relationship we established with Wellbridge. It is not a at-home monitoring for just a part value, which is where most of the telehealth business is today. It’s not a business that we are currently in. Given all our other priorities, it made more sense for us to partner with someone who had a footprint in that space and has kind of had an emerging technology that we like.

[Bruce Jackson:]

All right. Thank you very much and nice quarter.

[Joseph Capper:]

Thanks Bruce.

[Operator:]

Thank you and our next question comes from Brooks O’Neil from Dougherty & Company. Your line is now opened. Please go ahead.

[Brooks O’Neil:]

Good afternoon. All I could say is, wow, you’ve got a lot on your plate and it is pretty exciting. So I have a couple of questions. I’m curious; obviously you may be reluctant to talk about specific customers, but obviously United has been a big and important addition to the mix. If you could give us any update on how it’s going with them, that would be great.

[Joseph Capper:]

Yes, volume is according to plan which we outlined when we signed the agreement and if you look at the kind of volume growth that we had in the quarter, a portion of that is attributable to the signing of that and other agreements. I think it’s also important to note though Brooks, is we’re having a lot of, you can call it positive signs around growth, even outside of those contracts. So while it’s important for us and possibly there’s a halo effect that’s helping drive some of this other business, I think the important message is the business is very healthy across the board.

[Brooks O’Neil:]

Great. I get a lot of questions on the status with Cigna. Can you comment about that at all?

[Joseph Capper:]

No, I’m not going to comment much on that one Brooks, because there is ongoing dialog and we hope to have a resolution at some point. Obviously you are aware of the ruling from the court on our appeal that was rather favorable for the good guys and we hope that that will help move any discussions we have with them forward, so we’ll see. I’ll keep you posted on it, but too early to really put anything out on that.

[Brooks O’Neil:]

Sure. Can you give us an update on the ScottCare patent case?

[Joseph Capper:]

Yes, as you know, we filed that case at the same time we filed the Mednet case and the Mednet case proceeded through the courts more expeditiously and you are aware of that resolution. ScottCare and affiliates are far less formidable a competitor, but nonetheless we believe are infringing on our intellectual property rights and our patents. We had hoped to reach a settlement outside of litigation with that group. It seemed to be moving in that direction and they pivoted, so as recently as last week, our board has decided, in spite of the size of their business we are going to vigorously pursue that, because we believe that there is aside from the size of the business, there’s a lot of strategic value in our patent portfolio and protecting that is a necessity for the company. So it’s one that we will pursue.

[Brooks O’Neil:]

Good. I guess just one last question. I also get a lot of questions about the competitive environment. Investors seem particularly focused on some of the large medical device players, who I think have at least so far have been mostly focused on heart failure and mostly focused on implantables. But if you could just comment, if you see them, what you see, what you think about what they are doing, etcetera, that would be great.

[Joseph Capper:]

Yes Brooks, it’s a fair question, and obviously we’ve had conversations about this in the past, so let me kind of bifurcate it into two groups at first, possibly three. So first of all, the implantable loop recorders. I think we had a question on the last call about that. We really see that as kind of a complementary product to our portfolio. It’s focused on a relatively small segment of the market. It provides long term monitoring for patients who – it’s designed primarily for patients that have very infrequent symptoms, greater than 30 days. So we see it as kind of the longer term therapy. It’s important to note Brooks that it’s a very expensive procedure. It’s implantable; it’s far more than 10 times the cost of an MCOT and it has frankly a lower diagnostic yield. So I see it as sort of another phase in step diagnosis or step therapy if you will, for a small niche of the industry. I know that there was more speculation around the product when Medtronic launched sort of a next generation version of their device, which was smaller and able to be delivered in a kind of quasi injectable format in the doctor’s office, but it really didn’t change much the capability of the product nor did it change the target market. So we think it’s complementary. They’ve been out for a couple of years with the implantable device and then since early this year with the next-gen product, and it hasn’t hurt our business. As you’ve just heard, we are coming off one of our best organic growth periods ever or at least in a long, long time. So I think it just reinforces the fact that it’s more complementary than anything else. Then you mentioned the heart failure market as well. Again, we don’t play in that market and a couple of these guys have taken steps through acquisitions to get more active there. I think it’s interesting, we’ll watch it as our Wellbridge collaboration evolves over time it will become far more interesting to us. So then if you think about that in terms of what else can they do, obviously some of them have expressed interest in coming into the monitoring business that we’re in through patch product acquisitions and a like and obviously that’s a little bit longer term that takes you into 2015. We are familiar with the products that are being discussed. They are no way near as competitive as the products we have on the market. But I think it is even more important to understand that this is not a product first market, it’s a service first market and we have a very robust battle tested service that is protected through a patent portfolio, which we just discussed, an algorithm stack and a very sophisticated back end software system that does this processing. It’s not easy to replicate. So, I think it reinforces the attractiveness of remote patient monitoring, but it doesn’t pose an imminent threat to our business. In fact, we are flattered that people want to come play with us.

[Brooks O’Neil:]

Perfect. Thank you very much. Congratulations.

[Joseph Capper:]

Thanks.

[Heather Getz:]

Thanks Brooks.

[Operator:]

Thank you. And your next question comes from Jan Wald from Benchmark and Company. Your line is now opened. Please go ahead.

[Jan Wald:]

Thank you. Good afternoon and congratulations on the quarter. It looks like you’re making some pretty good progress. I guess most of the questions that I would have asked have been asked, but let me just try a couple on you. In terms of Radcore, what did they add to your research services portfolio and how are you going to grow out that business over time? Do you think you will have to make more acquisitions to be competitive? Do you think you’ve got enough and now your expanding in Europe from Brussels is going to be what you have to do?

[Joseph Capper:]

I think we have to do both, Jan. Why imaging, right? So, the bigger companies, bigger sponsors are moving to preferred relationships. The larger CROs are moving to preferred relationships and we needed to get more competitive in that area. More often than not we were starting to see big request RFPs for services that included both, what we offer in terms of cardiac core lab services and imaging. So it was a logical one for us to look at and we’ve already bid on three pretty sizable pieces of business, and we’ve already brought in a new piece of business with a new account since we’ve acquired the company. So it made good sense for us to get there. There are other service lines that will make sense for us to look at over time, not quite as imminent as that one was. So the idea of potentially partnering or acquiring assets that build out service offerings further makes sense, as that becomes a more developed services business. Europe is a necessity. We needed to be there, we need to grow that and we are in the process of looking and interviewing business development folks to build out that presence as well. And in Asia we have a few partnerships there that make good sense and worked well for us, but that’s another area that we need to focus on a bit more. So ex-U.S. is going to stay very important to us in adding services over time. It’s really both, Jan.

[Jan Wald:]

Okay, and how do you think we should account for that growth in operating expense in our models? I mean is it going to be material for the next year or is it going to be something that can flow through without seeming very, being very visible?

[Heather Getz:]

The combination of the service expansion, as well as the international expansion?

[Jan Wald:]

Yes.

[Heather Getz:]

Yes. I mean it’s not going to be immaterial, but we think it’s going to flow through and be covered by the additional revenue that it will bring in.

[Jan Wald:]

Okay. I guess it looks like you’re on your way with the Department of Justice, which is a good thing. Can you say anything about what the structure of the settlement might look like or is it too early to say anything?

[Joseph Capper:]

Yes, I would rather not Jan until it’s final. I think we are in the home stretch. The number has been approved by both sides, so I think we are down to the end here, but I’d prefer not to talk really about other terms of the agreement at this point.

[Jan Wald:]

And in terms of the difference in which you are going to operate once you are out from under the Department of Justice investigation, are you going to be able to do more marketing, going to be able to advertise more, go into more commercial settings? What’s going to be the difference that’s going to be visible once you work with the DOJ?

[Joseph Capper:]

Nothing’s going to be different Jan. We continue to operate the company the way we always have throughout the investigation. The company has had a tremendous focus on Medicare compliance, both from a training and process standpoint, so those disciplines if anything will just get stronger within the company, but it doesn’t change the way we market our products.

[Jan Wald:]

Okay, and one last question. Just would you help me with your Wellbridge milestones and just tell me when they might be and when you might in some sense pull the trigger or decide not to pull the trigger on the acquisition or on the partnership?

[Joseph Capper:]

Anything else that we do with them strategically will be evaluated as the pilots’ progress and there is feedback, which we anticipate will be positive. We think it’s a very sound process and system, so we are talking 2015, we are not talking 2014, Jan.

[Jan Wald:]

Okay.

[Joseph Capper:]

We’ll give you more. As that evolves, we’ll give you a little bit more detail. It’s way too early to think about revenue or modeling or anything like that.

[Jan Wald:]

Okay, thanks a lot. And again, good quarter.

[Joseph Capper:]

Thanks.

[Heather Getz:]

Thanks.

[Operator:]

Thank you. And our next question comes from Matthew Farley from Passaic Capital. Your line is now opened. Please go ahead.

[Matthew Farley:]

Hi guys, thanks for taking my question. Can you hear me all right?

[Heather Getz:]

Yes, hi Matt.

[Matthew Farley:]

Hi. Just a question; what was the organic revenue growth in the quarter?

[Heather Getz:]

It was about 7%.

[Matthew Farley:]

About 7%, okay. And the contribution from the acquisitions, is there any way to approximate how much was on the product side versus on the patient services side?

[Heather Getz:]

No. I mean on the product side it was relatively low and then just back out the 8% for the organic and the rest is the acquisitions.

[Matthew Farley:]

Okay, perfect. All right, thank you very much.

[Heather Getz:]

Yes, no problem.

[Operator:]

Thank you. And I’m not showing any further questions at this time. That concludes the Q&A session for today’s call. If you joined the conference call 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.biotelinc.com until Friday, August 15, 2014. Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and everyone have a great day.

[Joseph Capper:]

Thanks folks. We’ll talk to you next quarter. Have a great day.