iRhythm Technologies, Inc.
Q3 2020 Earnings Call Transcript

Published: 7 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the iRhythm Technologies, Inc. Third Quarter 2020 Earnings Conference Call. I would now like to hand the conference over to your speaker today, Ms. Leigh Salvo. Thank you. Please go ahead, ma’am.

[Leigh Salvo:]

Thank you, Sam, and thank you all for participating in today’s call. Joining me are Kevin King, CEO; Doug Devine, CFO; and Dan Wilson, EVP of Strategy, Corporate Development and Investor Relations. Earlier today, iRhythm released financial results for the third quarter ended September 30, 2020. A copy of the press release is available on the company’s website.

[Kevin King:]

Thanks, Leigh. Good afternoon and thank you for joining us. In my prepared remarks today, I’ll discuss the key highlights and accomplishments of our third quarter and provide our current view of the market environment as we close out the year. Doug will go into more financial details before we open the call up for your questions. The iRhythm team continues to rise to the challenges presented by the current environment, and we not only continue to deliver high-quality patient care each and every day, we are also building a stronger company for the future. The strength of the company starts with our employees, and I am thankful for their resilience, commitment and passion they bring every day. Our future and our ability to make a positive impact on the lives of patients, has never been brighter. Overall, the positive recovery trends we experienced in Q2 continued throughout the third quarter and helped lead to significant growth. Total revenue in the third quarter was $71.9 million, reflecting a year-over-year growth of 31.6% and sequential growth of 41.4% over the second quarter.

[Doug Devine:]

Thanks, Kevin. The third quarter of 2020 showed steady growth and gradual recovery of the business environment. The third quarter achieved some significant milestones. The company executed a $220 million capital raised to provide balance sheet security and fund the future growth and achieved positive adjusted EBITDA for the first time more on that later. First, let’s look at financial highlights for the third quarter of 2020. Revenue increased 31.6% year-over-year and was up sequentially 41.4% quarter-on-quarter. Gross margins were 74.7%, roughly flat year-over-year and up 510 basis points quarter-on-quarter. We experienced strong recovery on ZIO XT and continued expansion of ZIO AT, and cash and short-term investments were at $327 million at quarter end.

[Operator:]

[Leigh Salvo:]

Operator, this is Leigh. I want to let the audience know that we might be having some technical difficulty as we’re not seeing anyone queuing up for questions. Operator, can you please re-queue?

[Operator:]

Yes, okay. Alright. We have a question from David Lewis from Morgan Stanley. Your line is open.

[David Lewis:]

Good afternoon. Kevin, maybe just two questions for sort of both of you, I guess. The first would just be any update on the reimbursement process, Kevin, other than the commentary you’ve already provided sort of in the public domain would be question number one. And then question number two for me would just be, as you think about – it’s early, but as you think about 2021, I know there’s a lot of dynamics moving around from reimbursement from a revenue perspective. But if you think about the underlying volume of the business, I’m just trying to think about how we should think about sort of ‘21 over a baseline 2019? And is sort of 25% volume growth for this business sort of the right structural growth rate that you’re seeing? Thanks so much.

[Kevin King:]

Yes, Dave. Hi, it’s Kevin. Really don’t have any other updates on reimbursement than what we said here in the prepared remarks and the comments that we’ve had since the open period closed. We remain extremely confident in where we sit. We’ve provided all of the necessary information and feedback, and we’re looking, going forward, to December 1 when the final ruling takes place. Regarding 2021 reimbursement and volume, I think on reimbursement or pricing side, if you will, the data that we gave at the time of the initial ruling, I guess, the RVU, and we did the backwards walk to 2019, same mix and so forth was, I think, high single digit delta on price. I think that still continues to make sense. The progress that we’re making with our commercial contract conversions, be they indexed or non-indexed, is very much in line with where we were with what we had stated before. So I feel comfortable with that number. And then as far as the volume growth, a lot of this is still so dependent on COVID recovery and resurgence. David, as you know, yesterday, we hit 100,000 new cases, and this is kind of rattling the bones of the health care system right now. If it weren’t for COVID, I think that’s probably a reasonable range in that kind of mid-20% category, maybe a little bit higher than that. Well, we’ll have to see where the roll-ups are, but definitely a forward-looking positive growth trend from our side. There doesn’t seem to be anything in front of us, but open field.

[Operator:]

Your next question comes from the line of Robbie Marcus of JPMorgan.

[Robbie Marcus:]

Thanks for taking my question and congrats on a really nice quarter here.

[Kevin King:]

Thank you, Robbie.

[Robbie Marcus:]

Kevin, I was hoping you could talk about sort of where you are in terms of account penetration? Are you seeing the growth from adding more centers? Is it adding more docs within those centers? Is it having doctors who are already prescribers, prescribe more? Is it all of the above? Just trying to get a sense of – is the low-hanging fruit all picked already or is there still more to go here because the growth is pretty impressive?

[Kevin King:]

Yes. What Doug said in his prepared remarks, right, for this particular quarter, new store growth accounted for 45% of the growth in the quarter, 55% being same-store sales. And we count same stores as kind of brick-and-mortar addresses, not necessarily multiple sites – sites that have multiple locations would be multiple stores, if you will. We’ve referenced in the past, for example, Stanford has 10 locations. Stanford, there would be 10 same-store locations. It wouldn’t necessarily just be in that through the one. So I think we’re still under-penetrated in the market. It’s probably less than 20% overall penetrated in terms of volume, maybe slightly higher than in terms of accounts. But I don’t see anything in our regular sales operations calls that would lead me to believe that the funnel of opportunities for new account growth is diminishing in any way, shape or form. I think we still have a long runway there. And of course, ZIO AT is helping us there as well because now we are able to go after accounts that were previously un-addressable because they had a demand for more of a full line. And when we can address the market with long-term continuous monitoring plus the mobile cardiac telemetry capabilities, that adds to the pie here.

[Robbie Marcus:]

Great. Maybe a quick follow-up for Doug, it was great to see, first, quarter with adjusted EBITDA profitability, probably would have still hit that even ex some of the hold back on spend due to COVID. How should we think about profitability here? Should it teeter back and forth depending on the quarter or do you think this is adjusted EBITDA, profitability is here to stay? How should we think about the expense ramp going forward? Thanks.

[Doug Devine:]

Yes. Well, I think – I mean, you did see a, I mean, obviously, a pretty significant swing in the EBITDA in Q3 as we saw a substantial recovery in revenue. And you did not see any meaningful – and as I shared in my prepared remarks on the cash OpEx expenses, we were actually down a bit – down slightly quarter-on-quarter. So you should expect that – and I also highlighted in there that we had about $8 million of reductions that are COVID-related in the quarter, but that still leaves you nicely positive. You should expect that we are going to start ramping up OpEx – I mean the cash OpEx spending over time. But given the – given where we are in the positivity, I wouldn’t expect big quarter-to-quarter fluctuations. And we’re, of course, going to be managing our expenses along with the pace of the development of the business.

[Robbie Marcus:]

Great. Appreciate it. Thank you.

[Kevin King:]

You bet.

[Operator:]

Your next question comes from the line of Margaret Kaczor of William Blair. Your line is open.

[Margaret Kaczor:]

Hey, good afternoon, guys. Thanks for taking the question. Maybe first off, I wanted to touch on the asymptomatic population. You guys have the mSToPS data obviously, SCREEN AF, GUARD-AF, and the rest are ongoing. But is mSToPS or the next few weeks enough to at least start to move down the pathway of changing clinical society guidelines or payer approvals? And really to think about it, what time frame should we think about asymptomatic becoming more material as a growth driver?

[Dan Wilson:]

Hi, Margaret. Thanks for the question. It’s Dan. So I would say we have two very important trials within the next couple of weeks, mSToPS and SCREEN AF. Add to that, GUARD-AF, a little more longer term and we think the clinical evidence supporting what we believe is a very compelling value proposition is really going to start coming together. It will take a lot to impact clinical society guidelines, and I think that’s potentially a longer-term aim for us. But certainly, initially, with mSToPS, SCREEN AFs and other trials, we will look to go-to-market with that evidence and try to bring mSToPS-like models to the real-world and really targeting tighter. So we’re excited about what’s on deck, but recognize that this is not a market that exists today. So there’s certainly some market development work that will need to go into it. But we believe everything is lining up really well to have this be meaningful opportunity over time.

[Margaret Kaczor:]

Okay. And then just to follow-up a little bit on the fourth quarter and maybe ‘21, similar to David’s comments. But you mentioned some sequential improvements in revenues going into Q4. In the meantime, we’re seeing these COVID waves, and equally importantly, you guys actually had really, really strong numbers in the third quarter. So I guess, walk us through what happened in Q3 that drove that upside? Is it those existing accounts doing better or new accounts may be coming in better? And why can or can’t that happen in Q4, what’s being assumed in that number? Thanks.

[Kevin King:]

Yes, Margaret, I think I will go back with – Doug and I can address this here. So in the – compared to the second quarter, the third quarter had a higher recovery of new account additions that we didn’t see in the second quarter. The second quarter was closer to a complete lockdown, if you will. And I think we described that previously. So that certainly helped. And then we saw volume recovery in the third quarter of our existing accounts as rates of new infections began to fall in the June time frame and tick their way down until we got to about late August, early September, and things started to sort of peak back up again. So prescribing volumes, patients’ willingness to see their doctors virtually, etcetera, those things helped quite a bit. And I think it’s a combination of those two things that took place in the third quarter. Going into the fourth quarter, here, we are having to rethink the COVID resurgence that we are seeing right now with, yesterday, as I said, over 100,000 cases, but we are peaking back up into a third wave. And from everything we can see, the third wave looks more significant than the first two. Now that’s on the downside. On the plus side, I think hospitals are better prepared. I think they’ve got better safety protocols in place. We have got the advantage of home enrollments, well established. Our sales teams are getting better and better at virtual engagements with accounts, whether they are existing accounts or new accounts. And then all of the media and peer-to-peer educational things that we have are also helping us to get on customers. And the best crystal ball we have right now looking to the fourth quarter is it will probably be about the same level growth that we had in the third quarter. But it is really hard to tell whether or not it would be much – significantly much better than that. And depending upon how the resurgence hits regions of the country, it could possibly be worse. And for that reason, we are not being so specific on guidance or in sort of giving a more of a broad paint brush view of where we see things right now. Doug, do you want to add anything to – into those comments?

[Doug Devine:]

Yes. I think, as we mentioned, we are giving the guidance here of mid-single digits from Q3 ’19 to Q3 – into Q4 of ‘19, the company grew 8%. As we have already highlighted, the sales productivity, the selling process has improved in Q3 ’19 significantly over Q2 ‘20, but – I mean Q2 ‘20, but it’s still not at a – still not back to a full pre-COVID productivity level. So I would already be probably backing off that 8% a little bit. And then as just Kevin was highlighting, depending on the size of this third wave and how it impacts the health care system, you might have to back off a little bit more.

[Margaret Kaczor:]

Okay. So is it fair to say that you guys are kind of assuming a slightly bearish scenario and then also offsetting it a bit with some of the DTC efforts and kind of continued ramp of the new accounts but not assuming too much?

[Kevin King:]

Yes. And it’s not anything competitive. This is all how – in our view, how contracted will the market be going forward. To the extent that it’s not contracted, then we will do remarkably well. But I would rather error on the side of caution, knowing what we are seeing right now is a more negative trend towards a greater number of daily cases. And that is – over the last nine months, that’s given us cause for concern, because over the last 4 to 5 months, we have been seeing declining rates and improving volumes. So now it’s going to be a crossover, go the other way, possibly go the other way. Does that make sense to you, Margaret? Yes, yes.

[Margaret Kaczor:]

Yes. That’s very clear. Appreciate it guys.

[Kevin King:]

Okay.

[Operator:]

Your next question comes from the line of Kaila Krum of Truist Securities. Your line is open.

[Kaila Krum:]

So first, just to follow-up on the last question, I mean is there a way to just put sort of a finer point on how October has tracked thus far? And what you’re considering as you look at the remaining 2 months of the year? I think you guys gave some good detail around these accounts that you mentioned that have remained below prior trends. I mean do you simply expect that they will remain stable through the end of this year? Do they have to improve? Just would love a little bit more detail, I guess, on that front?

[Kevin King:]

Well, it’s a great question, Kaila. I don’t know if I have – I don’t have the October-specific information right in front of me. Maybe in the after-call, we could try to pull some of that up for you, unless Dan, you feel comfortable, or Doug, you’ve got it handy. October, I mean, it’s variation – or October tends to be a stronger month because it has more days than November or December. So that’s a little bit of a hard thing to extrapolate out, right. We’ve got the Thanksgiving two days, and then we have got the whole Christmas week when things are less. So Kaila, maybe we can get you that information, or Doug, if you want to add some commentary?

[Doug Devine:]

Yes. I mean I will add a couple of quick comments right now. So first, when you look at Q3, it was definitely an upward trend that July was better than June, and then August sequentially better, and then September sequentially better. And definitely, I am talking about per day rate given the different number of workdays. I mean October continued the pattern of what we were seeing in September. And as Kevin has highlighted, we have got holidays in both November and December. And so we are expecting our daily rates to remain strong, but all of that is fully taken into consideration in our guidance of mid-single digits there. So we have looked at all the month-to-month variations to arrive at that conclusion.

[Kaila Krum:]

That makes sense. And then, I guess, just one on reimbursement, I know you guys touched on it. I think we all thought that we would be done talking about it by now, but I have to ask because we get the question. Just any updated view on the conversion factor? And again, I say that because it seems like there are some moving parts, and I realize that there is a lot of factors that will go into this. But just would love to get your updated view there? Thank you.

[Kevin King:]

Sure. Kaila, I don’t have any updates on conversion factors. We have been focused on our own work with CMS and the RVUs and our own recontracting effort with commercial carriers. I think the comments that we mentioned before are probably the same or are the same. I don’t have any new information about whether or not that conversion factor will revert back up. Dan, do you have any – have you heard anything from anyone?

[Dan Wilson:]

No, your comments are right.

[Kaila Krum:]

Thank you, guys. I appreciate it.

[Operator:]

Your next question comes from the line of Suraj Kalia of Oppenheimer.

[Suraj Kalia:]

Thank you for taking my questions. Kevin, can you hear me alright?

[Kevin King:]

Suraj, how are you?

[Suraj Kalia:]

Good. Perfect. So Kevin, many calls happening at the same time, so please forgive me if you have already answered this. There was a comment made about billing of ZIO – or ZIO AT causing a pull-through effect and also doing good on a stand-alone basis. As we stand today, Kevin, ZIO AT, is it still using 0297T? And are one or two monitors being used per case?

[Kevin King:]

ZIO AT uses the MCT code, I think it’s 93224, if I’m not mistaken, but it’s not the temporary code. ZIO AT is in the MCT category, ZIO AT – go ahead.

[Suraj Kalia:]

No. Go ahead, please.

[Kevin King:]

No, go ahead. Does that answer your question on the coding?

[Suraj Kalia:]

Yes. I guess the question – what I was really trying to get at, are you using one monitor or two monitors in the standard MCOT code? I mean that really was the gist of the question, perfectly.

[Kevin King:]

So the vast majority of prescriptions that are written for ZIO AT by physicians are for 14 days of monitoring. In some cases, 28 days of monitoring are used and two monitors are applied sequential to one another. It’s physician decision and based upon the competence of the diagnostic yield that we have with 14 days, which we previously reported to be about 84%. Higher than the traditional MCT for the life critical arrhythmias or ventricular tachycardia, complete heart block, things of that nature, even first AF detection is like 5 days sooner than the literature for MCT.

[Suraj Kalia:]

Fair enough. And Kevin, the last question from my side, mSToPS. Just taking a step back, Kevin, thinking like an engineer, the mSToPS is basically on the ZIO platform. Your partnership with Verily, let’s say, in the future, you develop a variable. Can the mSToPS algorithm everything be adapted for that? How easily would it be transferable to a potential variable for asymptomatic patients? How would be – is it even possible?

[Kevin King:]

Well, that is the work that’s being done in our collaboration with Verily is to ensure that there’s a high degree of physician confidence and a high degree of correlation between ECG measurements and other types of tools that could be used. If you think about the use of today’s pulse plethysmograph measurements on things like Apple watches or Samsung watches, those measurements are fairly inaccurate, largely because they lack the artificial intelligence tools and the size of a data repository needed to develop an algorithm. So we would not bring anything to market if it wasn’t equal to or better than what we can do with ZIO XT. Otherwise, we’re happy with the platform.

[Suraj Kalia:]

Fair enough. Thanks, Kevin.

[Kevin King:]

Okay.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to our CEO, Mr. Kevin King, for closing remarks.

[Kevin King:]

Thank you, operator. Thank you, everyone, for joining our third quarter 2020 earnings call. We appreciate you taking the time to listen to our messages, and also to answer – to help answer some of your questions. My guess is from the subdued nature of the call, everybody has election fatigue. So I wish you all well, and I hope you all stay safe out there during this period of time. We are always available to speak with you in other venues, and look forward to reporting out our full year complete earnings early next year. Take care, and have a great holiday season. Bye-bye.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.