iRhythm Technologies, Inc. (IRTC) Q3 2023 Earnings Report, Transcript and Summary

Hello and welcome to the iRhythm Technologies Inc. Q3 2023 Earnings Conference Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host Stephanie Zhadkevich, Director of Investor Relations. Please go ahead.

Thank you, all for participating in today's call. Earlier today iRhythm released financial results for the third quarter ended September 30, 2023. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws 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 facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management's intentions, beliefs and expectations about future events, strategies, competition products operating, plans and performance. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q respectively filed with the Securities and Exchange Commission. Also during the call we will discuss certain financial measures that have not been prepared in accordance with US GAAP, with respect to our non-GAAP and cash-based results including adjusted EBITDA, adjusted operating expenses and adjusted net loss. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-Q for a reconciliation of these measures to their most directly comparable GAAP financial measures. This conference call contains time-sensitive information and is accurate only as of the live broadcast today November 2 2023. 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. And with that I'll turn the call over to Quentin Blackford, iRhythm's President and CEO.

Thank you, Stephanie. Good afternoon, and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; and Dan Wilson, our EVP of Corporate Development and Investor Relations joining me on today's call. My prepared remarks today cover business updates during the third quarter of 2023 and progress made against our growth and operational initiatives. I'll then turn the call over to Brice to provide a detailed review of our financial results and updated guidance. Third quarter 2023 results reflected continued execution across multiple channels building on the solid momentum our teams drove in the first half of 2023. Revenue of $124.6 million in the third quarter of 2023 was in line with our expectations, representing growth of 20% year-over-year and came from continued traction within the primary care space, market expansion within existing accounts and sustained volume growth across all service lines. The strength of our core business continued as we realized another quarter of record registrations and volume from new accounts at near record levels. Within the quarter, we were excited to have launched our new Zio monitor platform, the largest launch in the history of our company. This included the eagerly anticipated Zio monitor patch that builds upon the already best-in-class product of Zio XT, together with a new MyZio 2.0 app and an enhanced on-boarding experience for our patients providers. I'm incredibly proud of our teams and the efforts that went into making this a reality but we know that our work is just beginning. Adding to the excitement of this recent launch is a great momentum in the business, together with exiting the third quarter with our new account pipeline the fullest it has ever been. Importantly, volume growth was well balanced across our specialty groups but we were particularly encouraged by the strong contributions from the primary care channel. As a reminder, we have approached the opening of this channel in two manners, one of which is increasing the prescriber base and large enterprise health systems that already had robust cardiology and electrophysiology utilization and the other is by partnering directly with large national primary care networks. The early effect of these efforts has resulted in registration growth from this channel moving faster than our other specialty channels and continues to confirm our belief that a tremendous opportunity exists to more broadly open the primary care space. Encouragingly, we have started to see examples within large national primary care networks, where customers are beginning to proactively monitor their patient populations and patching appropriate patients who meet certain risk criteria such as the mSToPS criteria and who may benefit from early identification of arrhythmias. In some cases, we have seen these large national primary care accounts begin to expand their initial inclusion criteria based upon the early success of their Zio adoption and the high diagnostic yields within their targeted populations. In support of this, we are proud to announce that the results of the mSToPS Cost Effectiveness Study have recently been published. This was an independent external investigator-led health economic analysis of AFib screening from the mSToPS trial. The study was previously shown that two weeks of continuous monitoring with Zio XT led to the detection of more AFib and was associated with improved clinical outcomes at three years. This new analysis models the health economic value over the lifetime of the patient and found that proactive monitoring for AFib in individuals prescribed Zio patch monitors over the three-year period was associated with high economic value based on willingness to pay thresholds. Clinically, we believe that earlier detection of AFib or other undiagnosed arrhythmias could lead to earlier institution of AFib interventions, including ablation and rhythm control not just stroke prevention and avoidance of downstream adverse events such as progressive heart failure. We estimate that approximately 25% of the Medicare Advantage population may be at risk for asymptomatic AFib or other clinically actionable arrhythmias and we believe that it is only a matter of time until monitoring initiatives such as our Know Your Rhythm program are more widely considered and adopted over time. Additionally, we continue to make meaningful progress with payers who continue to recognize the value of monitoring with Zio for their patient populations. During the third quarter, we saw influential payer updates that were driven by CAMELOT data that has continued to highlight the clinical utility of long-term continuous monitoring as a modality and Zio XT more specifically. In one example, a large national payer removed the need for event monitoring as a prerequisite for MCT coverage and instead identified long-term continuous monitoring as a step-through for MCT in the case of AFib. They also now allow for 14-day long continuous monitoring as a step-through to implantable loop recorders. To date, payer updates that we believe have been influenced by CAMELOT could impact over 16 million covered lives in the US going forward and are an important recognition of the value that long-term continuous monitoring brings for patients and healthcare systems alike. Moving to product innovation. As previously mentioned, we achieved a significant commercial milestone in September with the launch of our next generation Zio Monitor patch our next generation long-term continuous monitoring platform and enhanced Zio service. Zio Monitor is gradually replacing Zio XT through our ongoing phased rollout and the platform continues to build upon the high-quality performance of Zio XT that our customers and their patients have come to expect from iRhythm. Zio Monitor is 23% thinner, 62% lighter and 72% smaller compared to Zio XT. The updated form factor was designed with patient comfort in mind and has supported 99% patient compliance with prescribed wear times. This improved patient experience has translated to higher device return rates and lower patient complaint rates compared to Zio XT. We have heard anecdotally that patients love the sleekness of the new monitor for ease of wear while accounts have enjoyed a streamlined registration process in their workflow. In combination with our advanced AI efficient workflow for clinicians updated patient and prescriber apps and actionable clinical reports we believe the new Zio Monitor launch has meant that the best just got better. As part of the launch of the upgraded Zio Monitor, we also released the next version of the MyZio application app, MyZio 2.0 which is focused on enhancing the patient experience. The updated app includes a refreshed user interface as well as new features like easier symptom, logging educational videos and content and a redesigned help center to better address patient questions. We know that patients who use the MyZio app on average log 2x more symptoms than patients who do not use MyZio and we believe that more symptoms logged means improved symptom rhythm correlation and better informed diagnosis. Patient digital engagement has also been associated with higher monitor return rates and operational efficiencies for iRhythm. Although the MyZio 2.0 launch is in the early days we have already seen a substantial increase in the percentage of Zio Monitor patients downloading the app and we believe this will continue to increase over the coming months. At iRhythm the patient is at the center of everything that we do and with that in mind, we also launched additional enhancements to our patient support processes to assist navigating insurance coverage questions and prior authorization requirements to ensure that they are able to get access to the care that they need. We continue to roll out Zio Monitor in accounts throughout the United States with approximately half of all accounts having been transitioned to Zio Monitor thus far. As previously noted to the investment community many new accounts deferred their onboarding during the third quarter while they waited for Zio Monitor to be launched so that they did not have to be trained on Zio XT only to require training on Zio Monitor a couple of months later. As a result we ended September above our normal pipeline levels and are excited to bring these new accounts on board over the fourth quarter. Also on the innovation front this past week, we continued to improve our Zio AT product and its value proposition to customers through the commercial introduction of AFib burden estimates into the daily reports for our current Zio AT service. AFib burden or the proportion of time a patient spends in AFib over the analyzable wear period, has been associated with a higher risk of stroke as well as a higher prevalence of heart failure. While knowing that a patient has AFib is an important first step for their treatment journey, a physician knowing how long the patient is in AFib, and how AFib is behaving can guide, how to treat that patient more rapidly and more accurately. Thus, the addition of AFib burden estimates to the daily Zio AT reports is an important clinical feature that physicians can consider when altering patient treatment pathways during the wear period and when managing patient responses to medications and procedures. This dynamic clinical tool was long requested by our physician customers and demonstrates our continued commitment to physician-led innovation that drives value for our customers and the patients they serve. Turning to additional pillars for iRhythm's long-term sustainable growth, we continue to be excited about the upcoming entry into the second largest cardiac monitoring market in the world. Having received the high medical needs designation from the Japanese MHLW has created significant interest with potential commercial partners that we are currently evaluating as we settle on our plans to enter the market in early 2025. At this time, we continue to engage with the Japanese PMDA on our Shonin submission are working collaboratively with the review team to address their questions, and plan to continue our engagement in person. Our application clearly has their attention and their focus, and we look forward to providing you with additional updates as our discussions progress. To eventually serve this growing global population, we are also thrilled to announce the formal opening of our Global Business Services Center in Manila that took place during the third quarter. In September, we hosted a ribbon-cutting ceremony to open our new permanent office space there, and our Manila team now includes almost 150 team members, who are part of iRhythm's global clinical operations, customer care, finance, human resources, information technology, and revenue cycle management functions. Recruitment and onboarding have continued at a rapid pace, and we have been pleased thus far with the high quality of service that our newest team members have started to provide to patients, customers, and internal stakeholders. This has been a critical step in not only transforming our way of doing business of today, but also ensuring that we can scale efficiently into the business of the future that we aspire to be. We will continue to make progress in driving operational excellence throughout the organization, positioning the company to maintain patient satisfaction, scale globally, and perform more efficiently. Lastly, we would like to provide an update on the status of our interactions with the FDA following our receipt of a warning letter on May 25, which focused on our Zio AT system and alleged non-conformities related to medical device reporting requirements and quality system requirements. Since receipt of the warning letter, we have submitted a thorough response to the FDA's concerns, have had ongoing and collaborative engagement with the FDA, and have previously agreed to make the requested labeling changes that allow us to continue to market Zio AT as a device for ambulatory MCT services. Additionally, we proposed enhanced design features to the product that further address areas of focus and have continued to work with the CDRH product review team regarding changes that occurred under letters to file. Following a recent meeting with the FDA, we have aligned on a path forward which will include submitting a 510(k) as a catch-up for changes previously made to the Zio AT system as letter to file, as well as a 510(k) submission for the design features and labeling updates previously noted. We are currently working on the content of the 510(k) submissions and expect to submit the first 510(k) by the end of the year. While always subject to change until their review is completed, we are pleased with the progress with the FDA and will continue to work collaboratively with them to address their concerns. With that, I'll now turn the call over to Brice to discuss our financial performance.

Thanks, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discussed today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release and on our IR website. Third quarter results demonstrated continued momentum in our core markets, as we reported revenue of $124.6 million, or 20% year-over-year growth. As Quentin mentioned, this was driven by strong volume from new accounts opened in the prior 12 months, continued penetration of existing accounts, and reduced account churn. New store-same store mix, with new store defined as accounts that have been open for less than 12 months, accounted for approximately 33% of our year-over-year volume growth. Home enrollment for Zio services was approximately 21% of volume in the third quarter. Average selling prices during the third quarter were down slightly year-over-year and up slightly quarter-over-quarter. Moving down the rest of the P&L, gross margin for the second quarter was 66.2%, representing a 330 basis point decline compared to the second quarter of 2023, and a 210 basis point decline versus the third quarter of 2022. As previously discussed, we expected temporary pressure in the third quarter. This pressure was primarily driven by costs associated with the transition from Zio XT to the new Zio monitor, including a $3.1 million excess inventory reserve related to the legacy Zio XT product. Additionally, the marketplace reaction to Zio monitor has been very positive, resulting in a faster-than-anticipated transition from Zio XT that is expected to create near-term temporary pressure on our gross margin, as a result of accelerated recognition of the cost of our legacy XT components. Our operations teams have been laser-focused on our ability to ramp capacity for Zio monitor, which over time has a better gross margin profile. While these items were contemplated in our prior guidance, the accelerated transition from Zio XT to Zio monitor has resulted in higher-than-anticipated transition costs. Absent these costs during the third quarter, gross margin would have been very comparable to gross margin we experienced in the second quarter of 2023. Third quarter adjusted operating expenses were $107.1 million, up 7.4% sequentially and up 19.4% year-over-year. Sequentially, increased spend was driven by headcount-related costs to support growth in our business, advancement of current and future product offerings and increases in software and hardware costs to support growth in our infrastructure. As we previously discussed, we have also incurred elevated legal and advisory fees for activities associated with the ongoing FDA warning letter remediation and DOJ subpoena. Compared to the third quarter of 2022, this increase in adjusted operating expenses was primarily due to increased personnel to scale with operations. Adjusted net loss in the third quarter was $24.1 million or a loss of $0.79 per share compared to adjusted net loss of $13.1 million or an adjusted net loss of $0.43 per share in the second quarter of 2023. Third quarter 2023 business transformation costs were $3 million in line with expectations, as we are finalizing our transition to our Global Businesses Services Center. Adjusted EBITDA in the third quarter 2023 was $0.4 million, reflecting a decrease of $4 million sequentially, but an increase of $3 million year-over-year. We continue to stay focused on sustainable improvements to our operating leverage profile. Turning to guidance, we are increasing our 2023 outlook to reflect anticipated full year revenue growth of approximately 19% compared to 2022 representing a range of approximately $487.5 to $490 million. We continue to anticipate that the fourth quarter will be our strongest volume quarter of the year and have been pleased with strong demand for our Zio services thus far this quarter. However, we do anticipate mid single-digit pricing pressure compared to the fourth quarter of 2022, due to a difficult year-over-year comparison in average selling prices. Considering the gross margin pressure in the third quarter, as well as ongoing costs anticipated with the accelerated recognition of Zio Legacy XT circuit boards, we are updating our gross margin guidance to a range of 68% to 69% for the full year. We also now believe that adjusted operating expenses in 2023 will range between approximately $425 million and $429 million. These increased costs consider ongoing legal and advisory fees, tied to the FDA warning letter remediation and DOJ investigation correspondence as well as elevated compensation expense offset by continued thoughtfulness on operating expense management within the organization. We continue to believe that adjusted EBITDA margin for 2023 will range between approximately 0% and 0.5% of revenue. Our adjusted EBITDA guidance continues to reflect focus on the sustainable improvements to our operating leverage profile. As a reminder, adjusted EBITDA will continue to exclude restructuring costs, business transformation costs and stock-based compensation expenses. In 2023, we continue to anticipate incurring approximately $15 million to $20 million of non-GAAP business transformation and restructuring costs related to the ongoing globalization efforts to drive efficiency, improve scalability and provide continued high-quality customer and patient experience. We believe that the expenses incurred related to these activities in 2023 will further enable operating leverage into the future, especially as we grow to serve more patients in our core markets and internationally. Finally, we ended the third quarter in a strong financial position with $158.5 million of cash in short-term investments to drive continued growth in our core business, invest in innovation and lay the foundation for future expansion. With that Quentin, Dan and I would like to now open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question for today comes from Allen Gong of JPMorgan. Allen, your line is open. Please go ahead.

Hi. Thanks for the question. I want to start off with just one question on guidance. You raised to the upper half of the prior range off the back of the quarter. But when we think about the fact that you're rolling out of your monitor and you have kind of deferred these account openings as they wait for the launch, why shouldn't that be a conservative target right where you essentially maybe pushed out some account openings, as you said your pipeline's really healthy into maybe fourth quarter? Or should we expect that to be more of like an early 2024 benefit?

Hey, thanks, Allen. This is Quentin here. Look I think certainly the way you frame it up you're right. There's the potential for that to be the case, but we want to be thoughtful around it. One of the things that we're experiencing frankly is that, the monitor has been so well received in the marketplace upon its launch that we're having a hard time with our existing customers, sort of transitioning them from XT on to monitor at the pace we originally anticipated. It's frankly happening a whole lot faster than what we had originally thought that it could be. And the reality is that, once these existing accounts get some experience with the monitor, or if they're part of a larger enterprise network a national network, regional network, and an account or two gets experience with monitor the entire network wants to convert over. And so we're spending a lot of time converting those existing customers onto monitor, which is not allowing us to focus as much around the whole expansion effort to go deeper within those existing accounts right now. And I view that very much as sort of a temporary matter as we navigate through getting monitor rolled out into the full market, but it does impact the ability to grow at the same rate as you're just focused on converting folks over and training them up versus going deeper in the existing account. I think we get through that in the relative short-term and then the growth potential is really exciting with monitor. To your point, the new accounts the pipeline that is there it's as strong as we've ever seen. I attribute a lot of that to monitor but also to things like CAMELOT that's getting out to the marketplace and articulating the difference in the value proposition that we have with Zio versus these other competitive offerings that are out there. But I hope the color helps. It's nothing, but great news on the monitor side and frankly just bringing our existing accounts on at a little bit faster pace than we had originally expected.

Thanks. And then just a quick follow-up on AT as well. It sounds like you have the situation with the warning letter fairly in hand and it's really encouraging to hear that you have a path forward. But you had previously talked about, how if you do go through the catch-up 510(k) route and it sounds like you're going to need two 510(k) correct me, if I'm wrong so that could maybe delay out Zio MCT even further maybe you try to incorporate some newer features. Do you have any updates on your plans for the next-gen to the MCT device? Thank you.

Yeah. Based upon all the conversations with the FDA at this point, I continue to feel really good around the MCT timeline that we've put out there. I don't think there's any change to those from our perspective. You know to be honest we're having discussions as we speak with the FDA around the catch-up 510(k) pathway and whether that can be submitted in parallel with the design-enhanced features that we're putting onto the product so that the patient notification the light as well as some of the notification features in ZioSuite itself. So we're working with them. This is a bit of a unique scenario, if you will that we're operating underneath a warning letter. Usually, the 510(k)s would be filed in sequence to each other but things could look a little bit different here as we continue to work with them and there's always the possibility it could be in parallel. But I continue to feel good about the overall timelines with MCT right now.

Thank you. Our next question comes from Malgorzata Kaczor from William Blair. Malgorzata, your line is now open. Please go ahead.

Hey, good afternoon. Thanks for taking the question. I wanted to maybe look at 2024 in part because it just sounded like there's a series of meaningful commercial and product catalysts. Obviously Zio monitor maybe improved workflow for the patient provider. I think you talked about improved reimbursement access and even coverage or workflow improvements towards asymptomatic coverage. So I think that's honestly only four or five different drivers. I guess, how do you look at the richness of the series of catalysts? And why shouldn't they drive accelerated growth for revenues in 2024 ultimately maybe potentially even getting you to that 20% plus growth range?

Hey, Malgorzata, it's Quentin again. Certainly, we're excited about what sits in front of us but 2024 we're not going to get too far out there and start to guide around the year itself just yet. But when you think about the exciting things that are coming about to your point you've got monitor that's going to be in the market for a full year and working into a full conversion of it. And frankly, I think that you're going to see some benefits on the return device rate that come with monitor relative to XT, which could be a nice tailwind for us. I think we finally work through the overhang of AT with the FDA as well and get that behind us. The traction we're seeing in the primary care space has been incredibly encouraging to us. And I still believe that there's the opportunity where you're going to see the market expand as primary care becomes much more comfortable with utilizing the Zio product. And I think that's just a matter of education and folks realizing how easy it is to use it. At the same time, as we think about 2024, the original expectations that we had for 2024 frankly had us contemplating a much more competitive MCT product originally as we came into the year. And now we know that that's going to be pushed out a bit and we've talked about that. So we just we need to be thoughtful around those sorts of things. And obviously we're dealing with an incredibly uncertain macro environment and geopolitical matters that we just need to be thoughtful around and we'll see how those come together. But I would tell you we feel incredibly bullish around the momentum in the business. You look through the first three quarters of this year momentum has clearly picked up. It's the strongest we've seen in the business in a long, long period of time. And I think 2024 sets up really nicely for us as well.

Okay. Yes. So maybe we can dive into the Zio Monitor launch itself. I think a lot of folks are suggesting you even reference yourself. It's going to benefit return rates of devices. So again, maybe a little bit more efficient. But do you expect this or have you seen this drive new account adoption or utilization above what you thought so far? And I guess any stats to support that?

Yes. I think it's still a little bit early Malgorzata. Certainly in the market evaluations we've seen very good results with respect to return device rates. We need to see that now play out across the much larger populations that we're beginning to introduce the product onto. But I think we all feel very good about the fact that with the improved form factor the improved wear experience but likelihood of the patient compliance and getting that product back to us is much better than what it was with XT. So we feel very good about where we think that's going to go. We're going to want to see the results show up before we start to guide that way. But I think the opportunity is significant. The other thing I would point to and I think the teams did a wonderful job with this with our myZio 2.0 app is that we're seeing a much higher degree of patient engagement with our app on monitor than we did with XT. And we know that when we get patient engagement on the app that the return rates generally, look much better, particularly in the home enrollment aspect of the product. So in time as we roll monitor out, and get it into the clinic and then on into home enrollment I think that the app experience is something that can benefit us as well.

Thanks guys.

Thank you. Our next question comes from David Saxon of Needham. Your line is now open. Please go ahead.

Great. Good afternoon, guys. Thanks for taking my questions. Just wanted to start with the PCP or primary care strategy. I mean it sounds like that's really driving growth in registration. So can you size that channel for us? How big is it today and where does it go over I guess your LRP? And then second to that it seems like that can be a fairly scalable channel for you guys. So when you think about the primary care channel as it relates to your progress towards profitability like how does that help you guys get there? And I'll have a follow-up.

Perfect. So I'll hit the first part of that and then I'll have Brice speak to the profitability aspect of primary care. I think we've been pretty clear with respect to how we're getting after primary care. I touched on it in my prepared remarks. One is to go right at the existing accounts in these large enterprise networks that we already have a significant presence with the cardiologist and the EP. They understand the ease and value of the product and how easy it is to prescribe and apply and then ultimately get the report back. And we're having a lot of great success with moving upstream in those enterprises to the primary care physician and seeing the prescription take place there. Ultimately I think it has the potential to meaningfully expand the amount of prescriptions within those networks as they see how easy it is to use and then really start to understand better what the patient is presenting and exactly what care pathway it ought to go down. The other is the large primary care national accounts if you will the national networks that are out there the one medical and that sort. We've been really encouraged with the uptake in the adoption that we're seeing there even down the path a bit of how we once thought about know your rhythm if you will of proactively screening populations of people. One of the encouraging things we saw in the quarter was the fact that in one of these large networks they had identified sort of a preset set of criteria that they were going to put a patch on each one of their patients. They had such terrific results with it that they ultimately expanded that out to match that of mSToPS. And we're excited to see what that is going to ultimately generate for us into the future. But I think what's happening is the realization of proactively identifying these targeted populations and then seeing what they can find with this patch is terrific. That has the potential to really expand the market. When you think about the number of patients who are going through the primary care channel today, I mean there's 14 million to 15 million folks already who have heart-related palpitations identified in their medical records. I think there's an easy argument that that we ought to be putting a patch on the majority of those patients considering what they're presenting with. And today, we're talking about a market 5 million to 6 million ACM tests being prescribed each and every year. So, you can start to do the math when you think about expanding that from 5 million to 6 million to the 14 million or even more that show up in the primary care space. That gets really exciting. And frankly in the long range plan that we put together, we did not contemplate that primary care would open up to the 14 million. We firmly believe there's some potential there, but we wanted to see that play out before we started to bake it in the numbers. So, that does not have a big impact in LRP as currently designed, but I think it's a nice tailwind in all of it. I'll let Brice speak to the profitability side.

Yes, David, I think it's a good question. In our minds, as it's currently sort of working through the system with moving up the care continuum for it being primary care then cardiologists, there's not a large difference in the profitability profile. If you think about it we're calling on these accounts anyway. It's just being serviced by a different clinician within the network. So, not a lot of change there. Even these large national PCP sort of organizations, if anything, the profitability may not be slightly better because we're doing really a top-to-top selling method rather than individual accounts. So, the need for the sales force itself is relatively small and it's within the organizations where we're continuing to see. And I will tell you if this comes in the form of more of a revenue share or something else, there may be a different profitability profile. But as we're seeing it manifest in its current form, there's not much deviation. If anything, it could be a little bit more efficient for us depending on the sales model.

Okay. Great. That’s super helpful. Brice may be sticking with you. I think in your prepared remarks just running through the growth drivers you noted reduced account churn. So, I guess on the competitive front historically why have accounts kind of rolled off the Zio platform? And then what have you guys changed recently to reduce that account churn? Thanks so much.

Sure. Of course this has been one of our areas of focus over the last few years and it's deeper penetration of existing accounts but also reduced account churn. And what we've done is we've put what we call a KAM role or a key account manager role in these large accounts that are effectively on site and servicing these accounts on a regular cadence. It's not just the folks out there sort of a hunter-gatherer model. It's not just the hunter out there but it's instead the gatherer making sure that they're servicing those accounts providing feedback, helping train new folks within the clinician offices, et cetera. And we're seeing with those activities actually really nice results with less folks coming off. And frankly, operationally, I think we've been a lot better in the last couple of years as well. When you think about the throughput from our clinical ops organization as well as the timeliness of getting the product into the field. So, there's been several different factors but it's been a focus of our organization and it's a testament to what our commercial team is doing without their actively selling in existing accounts going deeper but also making sure they're serviced the way they should be.

Great. Thanks so much and congrats on the quarter.

Thank you. Our next question comes from Nathan Treybeck from Wells Fargo. Your line is now open, please go ahead.

Hi thanks. Congrats on the quarter. I want to just to clarify can you continue to market Zio AT while you file both 510(k)s? And then will it continue to be marketed as an MCT device? And in the interim while you kind of work on these 510(k) filings do you expect any impact to Zio AT volumes? Thanks.

Yes. So, yes, we absolutely can continue to market Zio AT as an MCT device and we've reached alignment with the FDA on that aspect. With the one aspect and we've talked about this there's some enhanced labeling that we're going to make available and that's actually part of the 510(k) submission that we'll make here before the end of the year. But it's something that we've already aligned with the FDA on. So, yes, to your question can or is Zio AT continue to be marketed as an MCT device? That answer is, yes. And yes based upon everything that we've had discussions around with the FDA, there is every intent that Zio AT will continue to be in the market as we submit these catch-up 510(k)s and the 510(k) with the new enhanced design feature of alerting the patient through the light on the device and ZioSuite, updates with respect to the trigger limit. So we don't expect any disruption in the AT business at all. There is the potential that we could even get on file with Zio MCT while the FDA is reviewing AT. This is something that is more of an internal prioritization and our focus on continuing to build out the MCT capability while we continue to address the concerns of the FDA around AT, and make sure we do that in a satisfactory way. So, nothing's going to hold us back from continuing to progress on MCT while AT stays in the market and it's why we continue to be excited about the potential of that. But our focus is AT first, and we want to get that resolved with the FDA and then we'll move on.

Okay. Thanks for that. And so you spent a good amount of time talking about the mSToPS health economic data. I guess at this point how are you thinking about the silent AFib opportunity you know getting into USPSTF guidelines? And when could this potentially become a more meaningful driver for your business?

Yes. I think we continue to be very excited about what potential is out there to proactively be monitoring and screening, if you will the asymptomatic population. We see the data of mSToPS. We're seeing the data come back in a real world setting with many of these large national primary care networks who are applying some of those criteria. So, we understand the value of it. Getting the USPSTF to move is a significant hurdle and something that I think would really open up some of the doors to enable better screening on a wider basis. But it's not something that we're going to sit back and wait for. We're going to continue to approach the commercial payers in particular around the value proposition of mSToPS. And we know that these at-risk entities, I mean when you look at the value in terms of the incremental cost-effectiveness ratios that most folks will pay attention to, any time you see the ability to impact and many times you'll see $500,00 to $200,000 of incremental cost-effectiveness ratios be something that these payers deem to be of high value, when you come in under that so even less costly which we're at now in the mSToPS publish date around $36,000 it conveys that there is meaningful value to proactively look for these opportunities to identify arrhythmias dangerous arrhythmias and care for them. So I think, it's just a matter of time. I can't tell you exactly, how much time that is or how quickly it goes. We're going to continue to work with the commercial payers. We're going to continue to work to influence USPSTF, but I can't tell you exactly, how quickly it goes. I do think it's a terrific opportunity probably 12 million to 13 million patient opportunity in our estimates if we just do the math on that Medicare Advantage population and the likelihood of who has arrhythmia that they're unaware of.

Thank you.

Thank you. Our next question comes from Richard Newitter of Truist. Your line is now open. Please go ahead. Q – Unidentified Analyst: Hi, guys. You have Sam [ph] on for Rich. I'll just ask the first one on margins and just as we think directionally into 2024 a lot of moving parts in 4Q. How should we think about that just directionally versus maybe the first half or is the 4Q number really where we should be thinking about the jumping off point for margins in the next year?

Yes. So just to clarify, are we talking gross margin or are you talking adjusted EBITDA margin? Q – Unidentified Analyst: Sorry, gross margin.

Okay. Yes, so there are some moving pieces in here and we've been sort of alluding to the fact that we were going to have a bit of temporary pressure in Q3 for the last several quarters, and we saw that experience this quarter. It was a bit bigger, but I think in our mind the navigation to Zio Monitor, which ultimately comes at a better gross margin profile over time this is actually a good thing. Now it's again, it's a bit more costly in the short run but I think ultimately, over time it allows us to scale much quicker than what we would have probably been able to. We will incur these accelerated utilization costs, if you will through the remainder of 2024 and that's when ultimately you know Zio XT will be sun-setted and then ultimately those costs will go away. So there will be some continued extra costs associated with the utilization. We're thinking it's probably 50 to 100 basis points or so. We'll, certainly get much more color on 2024 moving forward but that by no means is the only thing that's happening within gross margin. So the 3.1 we talked about with excess reserves will not reoccur. It's just this accelerated -- realization of the legacy costs. That will stick around for a period of time, but that's a much smaller component and frankly that will be burned through by the end of 2024. So that's what we're thinking now but we'll get much more color on 2024 moving forward.

Great. That's really helpful and then maybe we can talk a little bit about the accounts that are currently using, the new product there. How should we think about growth in accounts that are legacy accounts? I know a lot of the new accounts have come on with Monitor, but in accounts that are existing accounts that have started to use Monitor can you give us any color on what the growth rate for those accounts is how that's transitioned from before and after they adopted? Thanks.

Yeah, I will tell you it's still very early in the days of seeing those results. We've been encouraged to date one of the things Brice commented on in his prepared remarks nearly 70% of our growth is coming from existing accounts. I think that the Monitor in those accounts has the potential to drive that even further as we go, because when you look in the accounts that we're in today we probably have in the mid 30% market share of those existing accounts meaning you have a lot of cardiologists EPs even PCPs who are using our product but there's a whole lot more within those accounts that are still not using the product and they might be using older technologies still on the halter. When you start to see this product and how easy it is to use and the patient reviews that are coming back from it, I mean our MPS scores in the early days on Zio Monitor are north of 90 that's almost unheard of. I do believe that's going to start to have an impact in these existing accounts that are going to drive further adoption even beyond what we've seen to date. So I think we've got to see it play out a bit. As I mentioned the early focus right now is converting these existing accounts off of XT onto Monitor and then the focus will go back to going much deeper and broader and expanding within those accounts but I think Monitor only helps us do that over time.

Thank you. Our next question comes from Bill Plovanic of Canaccord. Your line is now open. Please go ahead.

Thanks. It's John on for Bill tonight. Thanks for taking our question. I want to go back to your comments on the large national primary care networks that are proactively monitoring their patient population. Is this the at-risk pricing model today or eventually will this be shifted to the at-risk pricing model? And maybe could you just explain is the pricing different than if you were applying the past to say a symptomatic patient where insurance would normally cover it?

No I will tell you at this point in time we're not utilizing the at-risk pricing model. Now we do have our first pilot. We'll finally get launched here shortly around the asymptomatic population with an at-risk entity where we start to think more around the traditional know-your-rhythm model that we've you know discussed in the past. But right now with these large national primary care networks we're not sharing in that risk. This is -- these folks understanding the value of better identifying earlier in the care pathway exactly what they're dealing with and then being able to better care for that patient and avoid downstream unnecessary cost. And I think you know when you start to understand these large national primary care networks in many situations they're working with payers to where they can better -- they believe they can better care for the patient itself and capitate a cost to care for that patient. And so anything that they can do to better care for them and eliminate cost of caring for the patient that becomes margin to them. And they see the value in that themselves to where they're willing to go at-risk and apply more devices on a broader population that is well-targeted knowing they're going to find arrhythmias and then prevent the downstream cost associated with it. So we have not had to deploy the at-risk model just yet. I still do think there's a place for that in time, but that is not part of what we're seeing right now.

I appreciate that. And then just on the pricing pressures that you noted especially Q4 too, but could you just talk about your progress in shifting the CMS volumes to San Francisco IBTF? Are you still targeting 50% of volumes by the end of this year? And then if we think of next year will that number grow north of 50%? Thanks again for taking our question.

Sure. Sure. Yeah. So Jonathan nothing has changed with the plan and the move to San Francisco. I will tell you, at the end of Q3 and into Q4 it's a little bit slower than what we had anticipated. I think a couple of different reasons. First of all, we've sort of evaluated what should San Francisco be. And for us I think it's really important for us to be a center of excellence, right? So we need to make sure we're hiring those folks that live up to that algorithm standard and truly serve as the center of excellence that will ultimately allow us to continue to navigate more volume through San Francisco. And we'll plan to do that. It will fall a little bit short of the 50% that we outlined originally, but you can see from our guide we've been more than able to offset that with the volume contribution from the business. And so but nothing has changed in the long-term plan. And do we have the opportunity of going above the 50%? Absolutely we do. And that will still be the plan as long as it makes good economic sense for us to do so.

Thank you.

Thank you. Our next question comes from David Rescott of Baird. David, your line is now open. Please go ahead.

Hey guys. Thanks for taking my questions. Congrats on the quarter here. Just a quick clarification question on some of the Q4 pricing pressure that I think you called out Brice. Is that a kind of year-over-year headwind on pricing? Or is that more or less related to just the higher pricing you had last year given the mix toward the higher reimbursed max?

Yeah, that's exactly what it is David. If you remember a large portion of our volume was going through the Chicago math last year. That was at a roughly $340 or so price point. As you know the national rate being in place this year though, it provides tremendous benefit because it removes the volatility that we've experienced and allows us to utilize all three IDTFs. It is much lower than that $340 that we were able to experience in Q4 of last year. So that's really a dynamic of where the volumes were going through from a CMS perspective last year. The way I like to sort of bridge the gap on this, if you look at the midpoint of our range call it 14.5% revenue growth. If you layer on five to six points of pricing pressure year-over-year which is what we are experiencing that gets you right back into that 20% level and it helps you understand sort of the moving pieces with the guide for Q4.

Okay. Just…

David, I would just add to that. I was just going to say to your point is it more of a prior year issue or anything we're seeing in the business? This year absolutely nothing we're seeing here in the business say from Q3 into Q4. Everything's right in line. To Brice's point, it's much more about last year and the higher MAC rate that we were dealing with. But I would just point out as well most of these discussions with the large national commercial payers these discussions have been had or in the midst of and nothing that gives us any meaningful concern around pricing heading into 2024 either. So I think we feel good around the pricing environment. And finally after years of having navigated this from a reimbursement perspective we see some pretty steady and stable pricing and feel good about that on a go-forward basis.

Okay. So net-net I guess outside of any changes to maybe what national reimbursement in 2024, nothing new on the pricing front. Is that right?

Yeah, nothing new on the pricing front and frankly I think CMS just dropped their final rule in the midst of our call right here and it looks like everything's right in line with the proposed rule from everything that we can tell. So I don't expect any meaningful noise around price as we head into 2024 and that's great news.

Okay. Great. And then just a follow-up on margins next year. Appreciate the comments kind of on the gross margin side. When you think about the $15 million to $20 million or so in this adjusted OpEx that's getting worked through this year are there still opportunities into 2024, either that you're still working through or new opportunities to get into where you can work on improving kind of some of the underlying margin aspects of the business and really any colour on how we should think about maybe margins improving into 2024 more on the OpEx or just EBITDA side?

Yeah. So there are absolutely other opportunities. I will tell you us having the GBS setup now it allows us an area for us to look at other opportunities where there are functions that could have some presence over there. And so really this year was the foundational year of setting up the GBS, but also putting in place some outsourcing opportunities and some other levers that that $15 million to $20 million allowed us to stand up. And so that will allow us leverage well into the future and we're excited about that. For me I think it's important to understand, over the last two years, we've created about 1,100 basis points of adjusted EBITDA benefit from 2022 and then into 2023 with where we are from a guidance perspective, we're seeing major movement and major leverage and we're well on our way. And we absolutely believe that 15% range in the long run is achievable. And again, we'll do our best to drive that out as quickly as we possibly can.

Okay, great. Thanks.

Thank you. Our next question comes from Marie Thibault from BTIG. Marie, your line is now open. Please go ahead.

Hey, good afternoon. This is Sam on for Marie. Thanks for taking the questions. Maybe I can just start here on CAMELOT and Quentin maybe some of your comments on changes in payer policies. Just try to understand how widespread that is maybe those changes in prior authorizations and maybe if that's enabling quicker pull through of patients onto the Zio?

Well, I think you go back to my prepared remarks. It's early days. But the early success that we've had already has the potential to impact more than 16 million covered lives just by reducing or removing sort of the prior auth required of a halter before you step onto a long-term monitor. That's encouraging. And I think CAMELOT data is very, very clear, not specific only to long-term cardiac monitoring relative to these other modalities but specific to Zio in particular. And when the payers see that and when the at-risk entities see that it gets their attention. And we're having more conversations than we'd ever had around why exactly is Zio different and better than the competitive offerings that are out there. Historically, it's been long-term cardiac monitoring is one and the same and they're all the same. We're having more conversations today than ever around why it's unique and why it's different. And when we have the opportunity to get our CMO to sit down with the CMO in these plans, I like our chances. I think we've seen some incredible success when we're able to really articulate the differentiation around it and couldn't be more bullish on what CAMELOT's doing into the future. As a matter of fact, we're not stopping with CAMELOT, as it is today. I think there's the opportunities to expand that into other data sets that we can start to articulate our value as well and make this an even stronger argument. So you're going to continue to see us invest in those ways.

Got it. Well understood. And we'll be certainly looking out for those new data sets. Maybe I can just use my follow-up here on international and I might have missed this in the prepared remarks but – have you gotten any initial feedback yet on the Japanese regulatory submission? I know it was pretty recent so it might still be too early but any feedback you've heard from there? And is late 2024 early 2025 still the right time to think about maybe some initial revenue contribution once you start to build reimbursement there? Thanks.

Yes, it's a great question. And the reality is yes, we absolutely are engaged with the Japanese regulatory authorities as we speak. They came back very quickly with our submission, which I think articulated and sort of identified just how excited they are to get this new product into their market. And again, having the high medical needs designation is significant in that market. And I want to reiterate, it's not high medical needs specific to long-term patch monitoring. This is high medical needs specific to Zio in particular. And so I think it has their attention. We're engaging with them. As a matter of fact we'll be in person with them later this year as we continue to work through this. But they're very much engaged and the questions are going back and forth as we speak right now.

Very helpful. Thanks for taking the questions.

Thank you. Our next question comes from Suraj Kalia from Oppenheimer. Your line is now open. Please go ahead.

Good afternoon, Quentin, Brice, an you hear me all right?

We got you.

Perfect. Congrats on the quarter. So two questions Quentin, I'll put them in right away. First in terms of the IDTF in Philippines, Quentin, how should we think about the commercial scripts going out there throughput over time? And part of the reason I ask is if you look at SG&A, currently it's pretty elevated. Just trying to understand how you're thinking about the synergies and the timing of these synergies. That would be one question. And Brice if I may follow-up on an earlier question I think someone asked maybe I didn't get this, but what percent of your current US scripts are through the PCP channel? Gentlemen, thank you for taking my questions.

Sure. Thanks, Suraj. So with respect to the IDTF in the Philippines or off-shoring that is maybe the better way to think about it. One we work with all of our payers to get consents before we'll do anything offshore with respect to clinical operations. So we're very specific payer by payer in terms of what we take offshore, what we keep here. And frankly anything government related we don't take it offshore. It's all done here in the US. And so we're very mindful of that. But it does provide a very nice cost synergy for us. Importantly, though the clean offs or the IDTF itself does not show up in G&A. That primarily shows up in cost of sales. So your point is still a relevant one on G&A being a high component of the overall spend profile. That gets into other back office functions like RCM, finance, IT, HR all things that we've begun to leverage the GBS for and will drive some nice benefits for us in the cost footprint over time. But those are more of what's making up the higher G&A spend as we speak. In terms of the timing of the synergies I think that we'll let these play out over time and we'll begin to roll those into our guidance as we speak. We're beginning to see a really nice benefit in 2023. But at the same time we had some duplicative costs this year as we stood those up. So you didn't see the full benefit play through. But those are going to be really nice margin drivers for us over the planning horizon that we've laid out. With respect to what's the last part? No, the PCP channel contribution. We haven't commented on that specifically. I will tell you it's increasing nicely for us. I do think there will be a point in time in the future here where we'll call it out and give you some more color around exactly what it is. I don't know if it's something we're going to comment on each and every quarter but maybe we give you a data point once a year so you can track our progress. But we have not commented on that to-date.

Appreciate it. Thank you.

Thank you. We currently have no further questions for today. So I'll hand back to the management team for any further remarks.

Terrific. Well thank you all for joining us today. I can tell you we're extremely pleased with our results of the third quarter and the momentum that's being built in our business through the first nine months of the year. As discussed our teams have been hard at work and they've delivered many significant milestones during the quarter. I could not be more proud of their hard work. The underlying momentum in our business it's never been stronger than what we see it today and the future of our company has never been brighter than what it is right now. We look forward to connecting with many of you over the next couple of months as we wrap out an outstanding 2023 and begin to look ahead into 2024. Thanks a lot. Take care.

Thank you for joining today's call. You may now disconnect your lines.