iRhythm Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Welcome to the Irhythm Technologies Inc. Q3 2023 Earnings Conference Call. My name is Alex. I'll be coordinating the call today. I'll now hand it over to your host, Stephanie Zadkovich, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the Q3 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 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. These are based upon our current estimates and various assumptions and reflect management's intentions, beliefs and expectations about future events, 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.

Speaker 1

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 report on Form 10 ks 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 U. S. GAAP with respect to our non GAAP and cash based results, including adjusted EBITDA, adjusted operating expenses and adjusted net loss.

Speaker 1

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 of, 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 direct 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, And with that, I'll turn the call over to Quintin Blackford, iRhythm's President and CEO.

Speaker 2

Thank you, Stephanie. Good afternoon, and thank you all for joining us. Bryce Bobzine, our Chief Financial Officer and Dan Wilson, our EVP of Corporate Development and Investor Relations Join me on today's call. My prepared remarks today cover business updates during the Q3 of 2023 and progress made against our growth and operational initiatives. I'll then turn the call over to Bryce to provide a detailed review of our financial results and updated guidance.

Speaker 2

Q3 2023 results reflected continued execution across multiple channels building on the solid momentum our teams drove in the first half of twenty twenty three. Revenue of $124,600,000 in the Q3 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 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 the new MyZio 2.0 app And an enhanced onboarding experience for our patients and 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.

Speaker 2

Adding to the excitement of this recent launch is the great momentum in the business together with exiting the Q3 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 2 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 endSToPS criteria and who may benefit from early identification of arrhythmias.

Speaker 2

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 2 weeks of continuous monitoring with Zio XT led to the detection of more AFib and was associated with improved clinical outcomes at 3 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 3 year period was associated with high economic value based on willingness 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.

Speaker 2

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's 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 Q3, 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 16,000,000 covered lives in the U.

Speaker 2

S. 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.

Speaker 2

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 My Zio patient app, My Zio 2.0, which is focused on enhancing the patient experience.

Speaker 2

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 2 times more symptoms than patients 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.

Speaker 2

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 Q3 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 Q4. 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.

Speaker 2

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 It's 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 2nd largest Having received the high medical needs designation from the Japanese MHLW has created significant interest with potential commercial partners 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 shonen submission, Are working collaboratively with the review team to address their questions and plan to continue our engagement in person.

Speaker 2

Our application clearly has their attention and their focus, 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 Q3. 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, 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.

Speaker 2

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 nonconformatives 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 This will include submitting a 510 as a catch up for changes previously made to the ZUAT system as a letter to file as well as a 510 submission For the design features and labeling updates previously noted, we are currently working on the content of the 510 submissions and expect to submit the first 510 by the end of the year.

Speaker 2

While always subject to change until their review is completed, we are pleased with the progress with the FDA, and we'll continue to work collaboratively with them to address their concerns. With that, I'll now turn the call over to Bryce to discuss our financial performance. Thanks, Quintin.

Speaker 3

As a reminder, unless Otherwise noted, the financial metrics that I discuss 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. 3rd quarter results demonstrated continued momentum in our core markets as we reported revenue of 124,600,000 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 opened for less than 12 months accounted for approximately 33% of our year over year volume growth.

Speaker 3

Home enrollment for Zio Services was approximately 21% of volume in the 3rd quarter. Average selling prices during the Q3 were down slightly year over year and up slightly quarter over quarter. Moving down the rest of the P and L, Gross margin for the Q2 was 66.2%, representing a 330 basis point decline compared to the Q2 of 2023 And a 2 10 basis point decline versus the Q3 of 2022. As previously discussed, we expected temporary pressure in the Q3. This pressure was primarily driven by costs associated with the transition from Zio XT to the new Zio monitor, including a $3,100,000 excess inventory reserve related to the legacy Zio XT product.

Speaker 3

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 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 Q3, gross margin would have been very comparable to gross margin we experienced in the Q2 of 2023. 3rd quarter adjusted operating expenses were $107,100,000 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.

Speaker 3

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 Q3 of 2022, This increase in adjusted operating expenses was primarily due to increased personnel to scale with operations. Adjusted net loss in the 3rd quarter was $24,100,000 or a loss of $0.79 per share compared to adjusted net loss of $13,100,000 or an adjusted net loss of $0.43 per share in the Q2 of 20 3rd quarter 2023 business transformation costs were $3,000,000 in line with expectations as we are finalizing our transition to our Global Businesses Services Center. Adjusted EBITDA in the Q3 2023 was $400,000 reflecting a decrease of $4,000,000 sequentially, With an increase of $3,000,000 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 $487,500,000 to $490,000,000 We continue to anticipate that the Q4 will be our strongest volume quarter of the year and have been pleased with strong demand for our Zio services thus far this quarter.

Speaker 3

However, we do anticipate mid single digit pricing pressure compared to the Q4 of 2022 due to a difficult year over year comparison and average selling prices. Considering the gross margin pressure in the Q3 as well as ongoing costs anticipated with the accelerated recognition Of Zio legacy XD 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 $425,000,000 $429,000,000 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 0.5% of revenue. Our adjusted EBITDA guidance continues to reflect focus on the sustainable improvements to our operating leverage profile.

Speaker 3

As a reminder, adjusted EBITDA will continue to exclude Structuring costs, business transformation costs and stock based compensation expenses. In 2023, we continue to anticipate incurring approximately $15,000,000 to 20,000,000 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 Q3 in a strong financial position With $158,500,000 of cash and 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.

Speaker 3

Operator?

Operator

Thank you. Please ensure you're unmuted locally when asking your question. Please limit yourself to one question and one follow-up question only. Thank you. Our first question for today comes from Alan Gong of JPMorgan.

Operator

Alan, your line is now open. Please go ahead.

Speaker 4

Hi. Thanks for the question.

Speaker 5

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 new 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 is really healthy Into maybe Q4 or should we expect that to be more of like an early 2024 benefit?

Speaker 6

Hey, thanks, Alan. This is Quintin 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, 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 onto monitor at the pace we originally anticipated.

Speaker 6

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, national network, regional network and an account or 2 gets experience with Monitor, the entire network wants to convert over. And so We're spending a lot of time converting those existing customers on to 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.

Speaker 6

To your point, the new accounts, the pipeline that is there is the Strongest we've ever seen. I attribute a lot of that to Monitor, but also to things like Camelot that's getting out in 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 And frankly, just bringing our existing accounts on at a little bit faster pace than we had originally expected.

Speaker 5

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 five 10 ks route and it sounds like you're going to need 2 510s, correct me if I'm wrong. So that could maybe delay out Zio CT even further, maybe you try to incorporate some newer features. Do you have any updates on your plans for the next gen, the MCT device?

Speaker 5

Thank you.

Speaker 6

Yes. Based upon all the conversations with the FDA at this point, I continue to feel really good around the MCT timeline that we I don't think there's any change to those from our perspective. To be honest, we're having discussions as we speak with the FDA around the catch 510 pathway and whether that can be submitted in parallel with the design enhanced features that we're putting on to the product, so that the patient notification, the light, as well as some of the notification features in Zio Suite itself. So we're working with them. This is a bit of a unique If you will that we're operating underneath a warning letter, usually the 510s 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.

Speaker 6

But I continue to feel good about the overall timelines with MCT right now.

Operator

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

Speaker 7

Hey, good afternoon, guys. Thanks for taking the question. I wanted to maybe look at 2024 in part because it just sounded like there's There is a meaningful commercial and product catalyst. Obviously, CO 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.

Speaker 7

So I think that's Yes. On the 4 or 5 different drivers, I guess how do you look at the richness of the series of catalysts? And why shouldn't they drive accelerated growth to revenues in 2024, ultimately, maybe potentially even getting you to that 20% -plus growth range?

Speaker 6

Hey, Margaret. It's Quentin again. Certainly, we're excited about what's in front of us with 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.

Speaker 6

And frankly, I think that you're going to see some benefits on the return device rate that come with monitor relative to XT, Steve, which could be a nice tailwind for us. I think we finally worked 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.

Speaker 6

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 need to be thoughtful around those sort 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 1st 3 quarters of this year, the momentum has clearly picked up.

Speaker 6

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.

Speaker 7

Okay. So maybe we can dive into the XeoMonitor launch itself. I think a lot of folks are suggesting you even reference 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 steps to support that?

Speaker 7

Thanks.

Speaker 6

Yes. I think it's still a little bit early, Margaret. Certainly in the market evaluations, we've seen very good results with respect to return to price rates. We need to see that now play out across the much larger population that we're beginning to introduce the product on to. But, I think we're also very good about the fact that with the Improved form factor, the improved wear experience, the likelihood of the patient compliance and getting that product back to us is much better than what it was with XT.

Speaker 6

So we 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.

Speaker 8

Thanks, Alex.

Operator

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

Speaker 9

Great. Good afternoon, guys. Thanks for taking my questions. Just wanted to start with the PCP or primary carrier strategy. I mean, it sounds like that's really driving Growth in registration.

Speaker 9

So can you size that channel for us? How big is it today? And how 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.

Speaker 9

And I'll have a follow-up.

Speaker 6

Perfect. So I'll hit the first part of that and then I'll have Bryce 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 cardiologists and the EP.

Speaker 6

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 Span 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 Taking 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 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 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.

Speaker 6

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 14,000,000 to 15,000,000 folks already Who have heart related palpitations identified in their medical records. I think there's an easy argument 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, 5,000,000 to 6,000,000 ACM tests being prescribed each and every year. So You can start to do the math when you think about expanding that from $5,000,000 to $6,000,000 to $14,000,000 or even more that show up in the primary care space.

Speaker 6

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 14,000,000 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 the LRP as currently designed, But I think it's a nice tailwind in all of it. I'll let Bryce speak to the profitability side. Yes.

Speaker 3

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 cardiologist, 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.

Speaker 3

And 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 speaking C2C. 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.

Speaker 9

Okay, great. That's super helpful. Bryce, maybe 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?

Speaker 9

And then what have you guys changed recently to reduce that account churn? Thanks so much.

Speaker 3

Sure, of course. This has been one of our areas of focus over the last few years and it's deeper penetration in existing accounts, But also reduced account churn and what we've done is we've put what we call a CAM 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, 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.

Speaker 3

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.

Speaker 9

Great. Thanks so much and congrats on the quarter.

Speaker 4

Thanks.

Operator

Thank you. Our next question comes from Nathan Traybak from Wells Fargo. Your line is now open. Please go ahead.

Speaker 4

Hi, thanks. Congrats on the quarter. I wanted just to clarify, can you continue to market the ZOAT while you filed both 5 10ks and then will it continue to be marketed as an MCT device? And in the interim, while you kind of work on these 510 filing. Do you expect any impact to the OET volumes?

Speaker 4

Thanks.

Speaker 6

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 submission that we'll make here before the end of the year, but it's something that 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 ZuAT will continue to be in the market. As we submit these catch up 510s and the 510 with the new enhanced design feature of alerting the patient through the light on the device and Zio Suite Updates with respect to the trigger limit.

Speaker 6

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 ZiomCT 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 Make sure we do that in a satisfactory way. So nothing is going to hold us from 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.

Speaker 4

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 silane APB opportunity getting into USPS guidelines? And When could this potentially become a more meaningful driver for your business?

Speaker 4

Thanks.

Speaker 6

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 that BIM stops. 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 these criteria, so we understand the value of it. Getting the USPS TF2MOV 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.

Speaker 6

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, anytime you see The ability to impact and many times you'll see $50,000 to $200,000 of incremental cost effectiveness ratios Be something that these payers deemed to be of high value. When you come in under that, so even less costly, which we're at now in the Instop's Published 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.

Speaker 6

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 12,000,000 to 13,000,000 patient opportunity in our estimates, if we just do the math on that Medicare Advantage population and the Likelihood of who has, arrhythmias that they're unaware of.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from Rich Newitter of Turoeste. Your line is now open. Please go ahead.

Speaker 10

Hi, guys. You have Sam on for Rich. Thanks for taking our questions. I'll just ask the first one on margin. And just as we think Directionally into 2024, a lot of moving parts in 4Q.

Speaker 10

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 Next year.

Speaker 3

Yes. So just to clarify, are we talking gross margin or are you talking adjusted EBITDA margin?

Speaker 10

Sorry, gross margin.

Speaker 3

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.

Speaker 3

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, Zio XT will be sunsetted 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 give much more color on 2024 moving forward.

Speaker 3

But that by no means is the only thing that's happening within gross margin, right? 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.

Speaker 3

So that's what we're thinking now, but we'll give much more color on

Speaker 8

Great. That's really helpful.

Speaker 10

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 I've 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.

Speaker 10

Yes.

Speaker 6

I will tell you, it's still very early in the days of seeing those results. We've been encouraged Today, one of the things Bryce 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 into accounts that we're in today, we probably have in the mid-thirty 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 NPS scores in the early days, on Zio Monitor are north of 90. That's almost unheard of.

Speaker 6

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 got to see it play out a bit. As I mentioned, the early focus right now is converting these existing accounts off of XT on the 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.

Operator

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

Speaker 11

Hey, Quenza and Bryce. It's John on for Bill tonight. Thanks for taking our questions. 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 it be shifted to the at risk pricing model?

Speaker 11

And maybe could you just Blaine, is the pricing different than if you're applying the past due, say, a symptom medication where insurance would normally cover it? Thanks.

Speaker 6

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 will 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 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 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.

Speaker 6

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 sort of 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 costs 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

Speaker 11

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?

Speaker 11

And then as we think of next year, will that number grow north of 50%? Thanks again for taking our questions.

Speaker 3

Sure. Sure. Yes. So, Jonathan, nothing has changed with the plan in the move to San Francisco. I will tell you, At the end of Q3 and into Q4, it's

Speaker 6

a little bit slower than what we had anticipated. I think a

Speaker 3

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 iRhythm 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.

Speaker 3

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.

Speaker 11

Thank you.

Operator

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

Speaker 12

Hey, guys. Thanks for taking the questions. Congrats on the quarter here. Just a quick Clarification question on some of the Q4 pricing pressure, I think you called out prices. 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 reimbursement MAX?

Speaker 3

Yes. That's exactly what it is, David. If you remember, a large portion of our Volume was going through the Chicago MAC last year. That was at a roughly $3.40 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 3 IDTFs.

Speaker 3

It is much lower than that $340,000,000 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, and 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 percent revenue growth. If you layer on 5 to 6 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. David, I would just add. Okay.

Speaker 3

Go ahead.

Speaker 6

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 Bryce's point, it's much more about Last year in 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 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.

Speaker 12

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?

Speaker 6

Yes, 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 is right in line with Proposed rule from everything that we can tell. So I don't expect any meaningful noise around price as we head into 'twenty four and that's great news.

Speaker 12

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 $15,000,000 to $20,000,000 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 color on how we should think about Maybe margins improving into 2024 more on the OpEx versus EBITDA side?

Speaker 3

Yes. So there are absolutely other opportunities. I will tell you us having the GBA set up now, 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 $15,000,000 to $20,000,000 allowed us to stand up. And so that will allow us leverage well into the future and we're excited about that.

Speaker 3

For me, I think it's important to understand over the last 2 years, We've created about 1100 basis points of adjusted EBITDA benefit from 2022 and then into 2020 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.

Speaker 10

Okay, great.

Operator

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

Speaker 13

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 Trying to understand how widespread that is, maybe those changes in prior authorizations and maybe if that's enabling a quicker pull through of patients onto Zio?

Speaker 6

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 16,000,000 covered lives just by reducing or removing sort of the prior auth required of a halter Before you step on to 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 1 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.

Speaker 6

And when we have the opportunity To get our CMO to sit down with the CMO and 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 is doing into the future. As a matter of fact, we're not stopping with Camelot as it is today. I think there's the opportunity to Stand that into other datasets 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.

Speaker 13

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. I might have missed this in the prepared remarks, but Have you gotten any initial feedback yet on the Japanese regulatory submission?

Speaker 13

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 And once you start to build reimbursement there? Thanks.

Speaker 6

Yes. It's a great question. 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.

Speaker 6

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 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.

Speaker 13

Really helpful. Thanks for taking the questions.

Operator

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

Speaker 8

Good afternoon, Quintin, Bryce. Can you hear me all right?

Speaker 6

We got you.

Speaker 8

Perfect. Congrats on the quarter. So two questions, Quentin. I'll put them in right away. First, in terms of The IDTF in Philippines, Quintin, how should we think about the commercial scripts going out there, throughput over time?

Speaker 8

And part of the reason I ask is if you look at SG and A, currently, it's pretty elevated. Just trying to understand How you all are thinking about the synergies and the timing of these synergies? That would be one question. And Bryce, if I may follow-up on an earlier question, I think someone asked, maybe I didn't get this, but what percent Gentlemen, thank you for taking my questions.

Speaker 6

Sure. Thanks, Suraj. So with respect to the IDCS in the Philippines or offshoring 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 or what we keep here.

Speaker 6

And frankly, anything government related, We don't take it offshore. It's all done here in the U. S. And so we're very mindful of that, but it does provide a very nice cost synergy for us. Importantly though, the clin ops or the IDCS itself does not show up in G and A.

Speaker 6

That primarily shows up in cost So your point is still a relevant one on G and 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 It 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 and 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.

Speaker 6

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.

Speaker 6

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.

Speaker 8

Appreciate it. Thank you.

Operator

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

Speaker 6

Terrific. Well, thank you all for joining us today. I can tell you we're extremely pleased with our results of the Q3 and the momentum that's being built in our business through the 1st 9 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.

Speaker 6

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.

Operator

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

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Earnings Conference Call
iRhythm Technologies Q3 2023
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