iRhythm Technologies, Inc. (IRTC) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the iRhythm Technologies Inc. First Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Leigh Salvo, Investor Relations. Please go ahead.

Thank you, and thank you all for joining our call today. Joining me are Kevin King, President and Chief Executive Officer; and Matt Garrett, Chief Financial Officer. Earlier today, iRhythm released financial results for the quarter end March 31, 2017. A copy of the press release is available on the Company's website. Before we begin, I'd like to remind you that management will make statements during this call that includes forward-looking statements within the meaning of the federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements including, without limitation, our examination of operating trends and our future financial expectations, which includes expectations for hiring, growth in our organization and reimbursement, guidance for revenue, gross margins and operating expenses in 2017, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risks factor section of our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q with the Securities and Exchange Commission. IRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 3, 2017. And with that, I’ll turn the call over to Kevin.

Thanks Leigh, good afternoon and thank you all for joining us today. We are off to a solid start in 2017 with our first quarter results reflecting continued strong execution across all areas of our business and positive momentum for ambulatory cardiac monitoring service. Revenues were $21.4 million for the quarter reflecting a growth of 67% versus prior year. Growth was driven by continued adoption of our Zio Service, reflecting improvements in sales force productivity, as well as continued success in our in-network contracting efforts. Our gross margin was 70% in Q1 versus 64% a year ago. On the heels of our strong first quarter results and continued momentum, we are raising our 2017 revenue guidance to $88 million to $92 million. Matt will go into more details on our Q1 financials and our outlook in his section. We are pleased with the expanding market penetration of our Zio Service and the positive impact we are making on the early diagnosis and treatment of cardiac arrhythmias. We continue to estimate the U.S. annual volume of ambulatory monitoring test to be approximately $4.6 million tests, a $1.4 billion market opportunity. Our patented and proprietary technologies uniquely combined and easy to wear biosensor with powerful algorithms and analytics engine that distilled data from millions of heartbeats into clinically actionable information for physicians to diagnose and manage patients with arrhythmia symptoms more quickly and efficiently than traditional technologies. We continue to make notable progress on each of the components of our growth strategy. I would like to take a few minutes to cover some of the recent highlights in each of these areas and our priorities for the remainder of 2017. Starting with our sales force, the consistent growth in demand for our Zio Service across the country has enabled us to confidently expand our sales organization and infrastructure. As noted previously, one of our key priorities is to build our organization to meet the anticipated future demand for our Zio Service and to establish a sales infrastructure that can sustainably support our business as it scales and matures. On our last call, we highlighted the importance of building out our leadership and support infrastructure within the sales organization. While taking a disciplined and measured approach to hiring, we have successfully executed according to plan in bringing additional sales leaders and other key assignments on board. We are now ready to execute on the second phase of this year's expansion and that shifted our focus to our sales force. We continue to expect to hire an additional 15 to 20 sales reps this year ending 2017 with a total headcount of 90 to 100 people including sales management. Turning to our increasing reimbursement coverage and contracts, our low cost high value positioning has been central to our success in securing governmental and commercial reimbursement coverage policies. Today our Zio Service is covered by the vast majority of our U.S. health plans. Positive coverage policies are an important first step toward obtaining in-network contracting with any health plan. As specific coverage policies for our Zio Service come into effect, we subsequently move to obtaining in-network or contracted status. The time between coverage policy approval and in-network contracting and our experience is highly variable and ranges from six to 24 months depending upon the type of health plan. We will continue to pursue expanded reimbursement coverage and contracted by highlighting the unique attributes of the Zio Service and are on target to achieve our goal of exiting the year with approximately 240 million to 250 million contracted in in-network health plan beneficiaries representing a 20% to 25% year-over-year growth. Our team is highly engaged in negotiating payer contracts that will increase and simplify access to the Zio Service. Our success in growing reimbursement coverage is in large part due to the extensive clinical data available in peer-reviewed publications, as well as the acknowledgement and support we have from leading health organizations worldwide. To-date we have 18 peer-reviewed publications and are proud that our service is the first and only long-term continuous monitoring system that is backed by extensive clinical data in peer-reviewed publications. We are encouraged by the mounting recognition that our Zio Service is receiving as a market leader in a detection and management of arrhythmias. I'd like to highlight two documents that were recently published by leading health organizations indicating our Zio Service is becoming a standard of care. First, the American College of Cardiology, the American Heart Association and the Heart Rhythm Society jointly issued a new guideline that recommends the use of cardiac monitors such as Zio when evaluating patients for syncope or fainting. The 2017 guideline or the evaluation and management of patients with syncope classified external patch recorders such as Zio as a unique category of cardiac monitor able to continuously record and store data for up to 14 days. The guideline highlights the technology like our Zio Service could replace external loop recorders also referred to as event recorders. Additionally in the U.K., the National Institute for Health and Care Excellence or NICE issued a publication citing evidence of the low diagnostic yield of Holter monitors and highlighted studies that demonstrate the high diagnostic yield of our Zio Service. NICE also noted that extending monitoring up to 14 days with Zio, could reduce hospital inpatient and outpatient admissions and associated cost to the U.K.'s National Health Service. Together we believe these publications further signal the important shift we are experiencing in the standard-of-care towards Zio and away from older technologies such as Holter and event monitoring for the detection of cardiac arrhythmias. We believe the ACC, AHA, HRS guideline and the NICE briefing confirms significant role that Zio extend a continuous monitoring, complain or arrhythmia diagnosis and an accelerating patient care. Another strategic pillar is to continue expanding indications in clinical uses. We continue to make investments to demonstrate the utility and comparative effectiveness of our Zio Service across a variety of clinical use cases. We are pleased that an abstract involving our Zio Service was accepted as a late-breaking clinical trial oral presentation at the third European Stroke Organization Conference in Prague on May 18. This randomized controlled study compares the detection rates of atrial fibrillation between our Zio Service and standard-of-care Holter monitoring in patients following stroke. We look forward to this presentation of the results at this meeting. Looking ahead we plan to continue to invest in building a unique innovative product portfolio that addresses unmet needs in the ambulatory cardiac monitoring market. We have invested heavily in our patented biosensor, powerful algorithms and analytics engine, coverage policies and in-network contracts, in our information systems infrastructure that enables expansion of our Zio Service within large integrated delivery systems. I'm encouraged by the progress we're making each and every day towards making our differentiated service the first line standard-of-care in a diagnosis and treatment of cardiac arrhythmias. And with that, I'd like to turn it over to Matt Garrett our CFO for a more detailed review of our financial results and guidance.

Thank you, Kevin. We are certainly encouraged by the financial progress achieved in the first quarter of 2017 and the foundation it sets for momentum throughout the remainder of the year. Examples of this momentum include revenue growth of 67%, gross margins of 70.4%, and improving CAGR and reimbursement landscape for our products and a continuation of our disciplined approach to operating spend which includes ongoing investments to support and drive growth in our business now and in the future. Looking at first quarter 2017 results in more detail. Revenue for the three months ended March 31 was $21.4 million, an increase of 67% year-over-year. This increase was primarily due to volume increases in our Zio Service as a result of sales force productivity gains and continued success in our in-network contracting efforts. This improvement benefits our revenue mix and patient volumes because providers are less concerned with the complexities of reimbursement which in turn allows us to expand our market opportunity in two specific ways. First, with new accounts that otherwise may not have been willing to accept the risk of significant out of never built to the patients, and secondly, with existing accounts that may have previously toddled back or brought expansion in their networks, that are normal willing to do so. Turning our attention to the rest of the P&L. Gross margins for the first quarter 2017 was 70.4% compared to 63.8%, nearly a 7 point over the same period in 2016. Margin expansion continues to be driven by three variables. The impact of the mix shift to our contracted claims which improves ASPs, continued gains and reduction of our device related manufacturing costs, and finally productivity gains through our machine learned algorithms associated with report generation. We continue to invest heavily in our machine learn algorithm developments that will help us achieve our targeted long-term goals of achieving 75% to 80% gross margins. These investments will continue to create some headwinds to any material sequential margin improvement in the near term. Operating expenses for the first quarter of 2017 were $19.8 million an increase of 52% compared to 30.1 million for the same period of the prior year. This increase in operating expenses was primarily due to sales, general administrative expenses related to our expansion of our sales force, sales operations, continued investments in research and development, stock compensation and other incremental costs associated with being a public company. The net in the first quarter was $5.3 million, or a loss of $0.24 per share compared with a net loss of $6.1 million or a loss of $4.34 per share for the same period in the prior year. Turning to our guidance for 2017, based on the continued strength of adoption of our Zio Service, we are raising our expected 2017 revenue to a range of $88 million to $92 million, up from $85 million to $90 million provided on our last call. This represents annual growth of 37% to 44%. Gross margins for 2017 is expected to range from 70% to 72% up from 69% to 71% and operating expenses are projected to range from $85 million to $88 million up from $82 million to $86 million including a targeted range of $11.5 million to $13.5 million for R&D and 72.5 to 75.5 for SG&A. Our success in obtaining coverage and contracting policies has driven large scale investments in our sales force. As Kevin noted, we have substantially completed hiring to infrastructure to support our sales organization and we are now shifting our focus to the hiring of quota carrying reps. We remain on track to add 15 to 20 reps this year and end the year with a total sales organizational headcount between 90 and 100 people. To reiterate, our expectations for our sales expansion model we've seen historically that it takes approximately three to six months for our new sales hire to begin contributing and on average three to four years to reach peak productivity which we currently view as approximately $2 million per year. Even with broad contract in an accelerating awareness, there can be considerable lag in reaching meaningful volume growth as we work towards converting physicians to our Zio Service. As Kevin mentioned in his prepared remarks, we are very pleased with the progress we made this quarter and we look forward to updating you on our progress on future calls. That concludes our prepared remarks for today. Joining me for Q&A is Kevin King, our President and CEO and Derrick Sung, our Executive Vice President of Strategy and Corporate Development. We would now like to open the call up for your questions. Operator?

[Operator Instructions] And our first question comes from the line of Mike Weinstein with JPMorgan. Your line is now open.

Good afternoon, everybody. First off, congratulations on an outstanding quarter. Kevin, I was hoping you could spend a few minutes on what is arguably the gating factor at this point. You made so much progress on reimbursement and contracting over the last couple of years. Maybe the biggest obstacle at this point is still awareness and that there are so many cardiologists and interns even to get to that you have to - you have to get the word out. So can you just talk a little bit about what you're doing to build broader awareness in the general clinical community and how your approach you think evolves over time?

Sure. Mike thanks for the comment on the quarter and I would be happy to talk about gating factors. First and foremost on building awareness is building out the sales channel. We entered the year with about 66 sales people, and here in the first quarter, we largely finished the bringing on board support infrastructure, the managers and the other folks that need to help us to bring on these remaining hiring. A lot of feed on the street is important to us in terms of building awareness with physicians. These clinical studies that are ongoing is another factor that we use extensively, attendance at major shows, tradeshows, although less important, does play a role. We’ll be at the Heart Rhythm Society meeting next week. We’re expecting large turnouts there. And then of course digital media. We’ve got a pretty active digital media effort for communicating news and information about the business. The awareness also has to go within an organization, Mike. So when we open up an account or have an accounts that may have as many as say 15 or 20 cardiologists, we may have relationships with one or two of those cardiologist, but not yet all of them. So this is where the sales force really needs to build deep relationships and spend time in these large accounts. Several of these accounts can be spread across large brick-and-mortar facilities. It's really selling time - face to face selling time that brings that awareness.

Kevin, anything you saw new in the quarter either from a reimbursement standpoint, any incremental pushback that we should be aware of? We haven't heard of it. Obviously want to ask. And then second, anything you're hearing new competitively.

Nothing certainly on the reimbursement side to the downside. In the prepared remarks, we talked about continuing to make progress with the contracting rates and we are quite pleased with that progress. The competitive landscape is interesting, Mike and we believe status quo was largely the competitor here. Holter monitoring and event monitoring has first line test have been established now for well over 25, 30 years. And we find physicians in particular really busy overloaded stressed in their ability to absorb a new technology is somewhat limited. That's our challenge. That's our competition as status quo, getting them to understand our value proposition, getting them to embrace the technology and its value that it is better for their patients, it drives a faster time to diagnosis, it drives a more accurate diagnosis, and it's basically higher value at lower cost. That's it. There are a number of patch like competitors that have come onto the scene, I can't say that we've seen any of them impact our business. In fact I actually think that it's helping our business in that it really takes the four elements we've describe before. A patch is just one quarter of the solution. You need the ability to curate data for physicians. You don’t believe physicians want to curate their own data. They're too busy, they’re too pressed for time. You need to have contracts, and the ability to alleviate the financial burden on patients. And then you need that infrastructure that we've built at the large systems level in order to allow for prescribing and results reporting, data entry, analytics and so forth. So no one is approaching that level of comprehensiveness aside from a few patches that we’re seeing on the marketplace.

Okay. Last question for me, and then I’ll jump in. Can you just spend a minute on the Stroke trial that's going to get presented in Prague? Can you tell us what you know about the design of the trial and what the primary end point is?

Sure Mike, this is Derrick. So that trial is going to be provided at - it is going to be presented at the European Stroke Organization conference on May 18, I believe at 10:30 in the morning. It’s been accepted as a late breaking study. So obviously results are very good. In terms of study design, the study does compare the detection rates of AF between our field services with standard of care Holter monitoring in patient following stroke. So I think that's the extent of the detail that we can publicly provide but we are looking forward to that presentation on May 18.

It’s a prospective study.

It is prospective, and it is randomized.

Perfect. Thank you guys, that’s helpful.

And our next question comes from the line of David Lewis with Morgan Stanley. Your line is now open.

Hi, guys. This is actually Scott Wang filling in for David. Congrats on a great quarter. Just a couple of follow-ups for me. I think first a strategic question for Kevin. I think the number of investors are curious on the implications of the upcoming [indiscernible] and life launch merger, and its impact on the market. And I was wondering, Kevin, if you can give us your thoughts on that transaction and whether you see any kind of shifting competitive dynamics or market dynamics as a result of that acquisition.

Hi Scott, it’s Kevin. I don't think I can comment on an aqua pending acquisition like that to any great extent.

But I guess, Kevin, do you see them posing more of a competitive risk, or do you think that or does it seem like the market is just big enough that it's more about a market adoption story at this point?

Look, at highest level that deal is a consolidation play and to some extent, it's a consolidation play centered around older technologies. Holters, event monitors, and things of that nature. They do you have an MCT business both of them and at the segment, we don't compete it. I think it's more right now that the technology - the standard of care is moving more towards the technology that we have, and away from what others have traditionally sold in the marketplace. So I'm not necessarily thinking that this is a technology play but more just a straight market consolidation.

Got it. And a couple of follow-ups…

And just to your earlier point, it is a very large market.

And a couple of follow ups for Matt if I may. Historically, Matt, iRhythm growth rate has been more weighted towards volume with additional contribution from pricing. Typically I think it's been around 80-20. Can you comment on the growth trends you saw this quarter? Whether that ratio still kind of holds and whether you saw more volumes coming from existing accounts or from new account penetration.

Thanks for the question. Historical guidance as you know has been 80-20. With 80% of our growth coming from volume and 20% price. That said, based upon the positive mix shift in our business, we did have a slight increase to our price mix as related to that shift. But nothing that we believe changes the overall guidance moving forward. And we’re maintaining our guidance at the 80-20 sort of mix. And another question, it’s the coverage year we also maintain that same store/new store mix in that 40-60, 60-40 range which we think is very healthy for us as a business.

Got it. And then last question for me. Matt or Kevin, you guys delivered a better quarter than consensus expectations and raised your guidance by more than bit. Can you help us think through kind of the sales force expansion plan in the back half of the year, and whether 1Q results give you greater confidence in perhaps ramping more reps than the 15 to 20 that you’ve guided to? What kind of factors should we be thinking about in terms of how we should think about the overall eventual growth rate of that sales force? Thanks.

Scott, I think the number that we have provided here of 15 to 20 additional people is a good number for you to use. We're essentially on plan for the management and infrastructure hires. We're starting just a little bit early on the sales force hires, maybe a month earlier than what we have planned for. That said, new sales force hires won’t necessarily be that productive this year as Matt said in his prepared remarks. So I would think that the 15 to 20 is a good number for you to model around.

Got it. Thanks so much.

[Operator Instructions] The next question comes from Jason Mills with Canaccord Genuity. Your line is now open.

Hi, good afternoon and congrats as well on a great quarter. Maybe Matt or Kevin starting with you guys the productivity of the sales force while it didn't quota-carrying reps didn't expand and maybe the last couple quarters for the last couple quarters. It was significant and if I go back in my model it looks like Matt your point about two years ago you had quite a bullish. So is that the model about which you speak where you got these folks that are now sort of two years plus in the model that are generating almost to person man and woman that 2 million run rate or productivity peak that you're seeing are you seeing that with those folks that there were hired in March back in 2015?

Jason, it’s Kevin, Matt and I can take this together. Look I think at the highest level your comment is right that more seasons or more tenured reps have higher productivity than newer ones and yes we did have a bolus of people back in.

It was 2015.

2015 so they’re now coming up on about a year and a half worth of sales and yeah more probably they should be more productive than recent hirers they made in 2016. So that I think is directionally correct.

Jason, this is Matt. The only thing I would add is we clearly do see a little bit improvement to productivity and that's why we’ve raised a long term expectations. I think six months ago we were about 1.4 million to 1.5 million productivity to wrap up in new stream for and we raised that to 2 million so I think that’s the way you should think about it trying to get – anyone new ones and that is probably not something we’re going to get into.

And Derrick the tag on to that the $2 million is our best estimate we don't know what the ceiling is as we’ve never reached the ceiling. So it's potentially higher than that.

Right so it implies that you got some folks that are doing 2 million that could go higher but you don't have the time at this point in time to judge that at this point makes sense. So without giving away too much of the secret sauce with respect to who what sort of reps you’ve seen the most success with. Let’s me the ask the question this way do you see the type of rep that has been productive for you hereto do you see a healthy number of them out there coming through your screen process trying to get a sense for what you're seeing in terms of the hiring process and how optimistic you are about hiring reps that have been successful for you in the past?

You mean Jason coming from the same industry or same phenotype so to speak.

I would say same phenotype because I don’t imagine you’ll give us too much I wouldn’t about what industry or the specific companies are coming from. But if you are seeing the same phenotype of sales reps that hereto for have been the most successful?

The answer is yes and we can we can maybe elaborate a little bit here so in the quarter where we just finished in this past month we’ve been hiring sales managers. These sales manages are highly skilled at change management highly skilled at understanding complex business transactions that have a blend of clinical and financial. And that's kind of phenotype that we are most successful with on the selling side as well. We’re fortunate and I knock on wood here we’re fortunate that we have more candidates than we do positions. So we're highly selective in our hiring not only in sales, but across the whole company at this particular point. So it's a good position and it feels good to be the where we are.

Sure just a couple more from me and I'll get back in queue perhaps one for Derrick, wondered if you could give us an update Derrick on the mSToPS study and the enrollment there, potential readout of that clinical study as well as the maybe any update on the new product that you have coming out with timely transmission and you talked about that being sort of leader this year at some point. And then sort of how that new product once it is launched will be marketed just opposed to this new indication that you talked about Kevin at the early at the offset of your call expect a syncope and the expanded indication there?

Sure Jason so with regard to your first question around continues to enroll right now would be first we would 20 with regard to your second question on the mSToPS study that trial continues to enroll as between us and right now our best guess would be that of course with that wood still come sometime in 2018. With regard to your second question we have said that we expect a next generation device sometime in the back half of this year. I don’t think we’re going to go into any more detail beyond that at this point in time I think it would be a little premature to go into some of the details that you ask around marking strategy et cetera but that continues to be our expectation for the latter half of this year.

Okay. So just to be Derrick there doesn't seem to be any change to either your mSToPS timing expectation or your new product expectations is that right?

That’s correct.

Okay.

We're essentially tracking to plan for both studies products, sales force expansion other types of things that we socialize that's far this year or what we might have mentioned last year?

Okay. One last just a housekeeping you’ve mentioning new store same-store mix and you said 40:60, 60:40 at the same time. So could just clarify the mix new store same-store in the quarter?

Yes sure, Jason. The point of that was to say again we’ve not provided specific numbers other than to say we feel very comparable in the range whenever new store or same-store it means one way 40:60 or 60:40 the other so.

I see you’re giving away yeah.

So just to say it in other way some way in around 50:50 remains the kind of the gold standard and we’re very comfortable with where we’ve been and where we are right now with that mix?

Okay, that's clear. Thanks guys, great quarter.

And I’m showing no further questions at this time. So with that said, I’d like to turn the conference back over to CEO Mr. Kevin King for closing remarks.

Right, thank you, operator. Thank you everyone for joining us on our Q1 2017 earnings call. We appreciate your interest and support in the company and look forward to updating you as we progress through the rest of the year. Thank you.

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