iRhythm Holdings, Inc. (IRTC) Earnings Call Transcript & Summary

Okay. I want to thank everyone for being here. My name is Allen Gong. I'm on the medical supplies and devices team with JPMorgan. It's my pleasure to introduce Kevin King, the President and CEO of iRhythm, for prepared remarks. Afterwards, we'll be hosting a breakout in the Yorkshire room. Kevin?

Thank you. Hi, everyone. Are you able to hear me in the back? Great. Thank you for coming. It's great to be back here. I think this is our fifth year presenting and third year as a public company, so we're really excited. By now, you've seen safe harbor statements. It's 3:00 in the afternoon. I refer you to irhythmtech.com if you have questions about risk factors, forward-looking statements, et cetera. My presentation today is going to be divided up into 3 sections. I'm going to speak with you about how we view our markets or the attractiveness of our markets. I'll talk to you about what we believe are the key differentiating factors associated with our technologies. And then I'll talk to you about our financial and operating performance of the company in the past year. I think by now many of you know that iRhythm is redefining the way cardiac arrhythmias are diagnosed. We do this through a combination of wearable biosensors that are worn by patients for up to 2 weeks. They collect massive amounts of heart rate, heart rhythm and activity information about patients. We combine that information with health information about the patient and curate that information, roughly 20,000 to 30,000 pages of data per patient into a highly simplified and actionable report for physician decision-making associated with about 14 different arrhythmia types. The market that we participate in today is thought of in a funnel shape, beginning at the top of the funnel with identification of patients, moving down to the diagnosis and then subsequent follow-up and management of those patients. For the first few minutes, I'll talk about the bottom of the slide, which is the existing marketplace, which today is estimated to be about $2 billion in size or roughly 5.5 million tests per year -- ambulatory monitoring tests per year. And then later on, I'll come back and talk about the high-risk asymptomatic identification market segment. This existing market segment today is largely penetrated by legacy technologies and the proportion shown on the right-hand side. Roughly 60% of the volume has been Holter monitors. These are technologies that have been in existence for as long as 60 years. Event monitors are about 30%, and mobile cardiac telemetry is about 10% of the 5.5 million tests done per year. Our 2 applications, ZIO XT and ZIO AT, are used to replace those incumbent technologies as shown on the right-hand side. Cardiac arrhythmias within the U.S. health system are incredibly prevalent and burdensome. In terms of prevalence, millions of patients have been diagnosed with cardiac arrhythmias. And these arrhythmias increase with age and a variety of risk factors, some of which are genetic, some of which are lifestyle, some of which are associated with the structural configuration of the heart. In addition to that, it's estimated that there are 10 million patients that have cardiac risk factors but are yet to be diagnosed for atrial fibrillation, which is one of the leading causes of stroke in the United States. And then over the next 30 years, the incidence of atrial fibrillation in the population will double from 6 million to 12 million patients. So a very, very highly prevalent condition, a set of conditions in the marketplace associated with these dozen or so different types of arrhythmias. The utilization of services in the United States is very high for these types of patients as well as many as 3 quarters of 1 million hospitalizations occur each year due to AF only, atrial fibrillation only. About 16% of primary care visits are associated with patients that present with palpitations, and as many as 25% of emergency department visits are associated with those types of patients as well for palpitations. So highly prevalent, highly important and lastly, highly -- and costly. The financial burden for atrial fibrillation is estimated to be $6 billion a year, $34 billion a year in terms of annual cost of stroke. And about 25% of patients present with stroke as their first symptom. So there are really essentially no early warning signs other than the ability to diagnose based upon the risk factors. Now when we think about adoption of our technology, the replacement of these Holter monitors, event monitors and MCT, it's not just clinical superiority that drives the acceptance of technology. We have to phase into physicians and health care professionals that are highly dissatisfied with their jobs and are facing burnout. Increasingly, physicians tell us that they have too much information and they are overloaded constantly throughout the day and they're spending less and less time with their patients. In order for them to adopt a new technology like our platform, our ZIO platform, we have to make sure that the effort they put in is significantly less than the value that they get out. They're very, very hypersensitive to this. And if we ask them to increase their workload, they'll use less of us, and if we reduce their workload for them, they will use more of us. And hence, when we describe our business and our strategy, we're always talking about being clinically proven as measured by 31 peer review publications, but also by being complete. Our ability to provide a complete solution that allows customers to provide a diagnosis for their patients with very little effort and return for a high-value service. The way in which we do that is through a single, scalable digital platform that consists of 5 separate but interrelated layers, where each layer interacts with one another. The bottom layer that we have is our data repository. This is a data repository that has more than 600 million hours of expertly curated heart rate, heart rhythm patient activity and demographic information that works seamlessly with our proprietary data analytics layer, which is our artificial intelligence layer. Sitting above that is an information system that spans an entire enterprise for online ordering, results reporting, interfacing into electronic medical record systems, claims, beneficiary eligibility and things of that nature. Above that is our patented biosensor technologies, the ZIO XT and the ZIO AT wearable. And then last but not least, is the clinical evidence that we've built using this platform, roughly 30 peer review publications and over 300 million contracted in the network covered lives for the service. Each of these layers have been built organically by the company over the last 10 years and each of these layers have been refreshed in one way or another, and I'll speak to a few of those as we go forward. On the peer review publication side. A recent study came out in the interventional cardiac electrophysiology that compared ZIO to patients with pacemakers and patients with pacemakers also to 3 other competing modalities. One being an event monitor, a second one is a product that's used in Europe called a Nuubo Vest. And then lastly, CAM monitor, which is another patch-based solution. The important takeaway here was that ZIO was as accurate as the implantable pacemaker in detecting atrial fibrillation burden and it outperformed all of the other 3 competing modalities. In fact, the percent failure to detect clinically AF for iRhythm was 0. So essentially, we were perfect relative to detection of atrial fibrillation as compared to a pacemaker. Event monitors had a spread of almost as much as 40%. So patients were told they had atrial fibrillation and they didn't or they were told they didn't have atrial fibrillation and they did. And their frequency of spread above and below that line was about the same. Likewise for the Nuubo Vest, the spread was about 24%, and for the CAM monitor, it was plus or minus 10%. So in 10% of the patients, they were told they have AF and they don't. And vice versa, they don't and they do. And in ZIO, ZIO's correlation to the pacemaker was 0.9999 in terms of an R-squared value. So another good example of iRhythm's ZIO service being clinically proven. I mentioned our artificial intelligence algorithms last year, I think it was in January of last year. We published a paper in nature and medicine on our deep neural network. These are artificial intelligence algorithms. It's important to note that when we are collecting information about patients' cardiac arrhythmias or the potential for cardiac arrhythmias, we are identifying whether or not a patient has an arrhythmia, 1 of 12 different types. When did it occur? What was the patient doing? How long did it last? Did the patient know about the situation? And how frequently did they occur each and every time? We have to do that across 14 days' worth of data or the 30,000 pages of data. Way too much information for mere mortals. We've invested in artificial intelligence tools. And essentially, this paper highlighted that the ZIO AI algorithms were as good as, if not better than expert cardiologists in the interpretation of these arrhythmia types across, I think it was about 35,000 patients that we did in this study. I mentioned another layer in our technology platform called the information systems layer. We're introducing a new digital information system called ZIO suite. This replaces our legacy ZIO reports information system for online ordering, results reporting, eligibility, et cetera. It streamlines clinical workflows. It is both in desktop and in mobile form. Physicians can use their cellphones to order, see results, contact patients as well as have easier interpretation in the office or any other type of device that they have. This capability of an information system allows us to ensure that all patients and all service providers have the identical experience with ZIO, independent of location. Some of our largest accounts include 10 different locations. Physicians are scattered across 7 or 8 different departments, and there may be 400 or 500 physicians in a particular large account. And each and every one of those physicians is guaranteed the same experience because of our information system and because of the commonality of our wearable biosensors. Last October, we brought to market in full force our ZIO AT offering that is now added to ZIO XT. Go back to the earlier slide when I was talking about Holter monitors, event monitors and MCT. ZIO AT allows us to provide real-time monitoring capabilities for high-acuity patients, and allows us to be a single vendor or a single supplier to large integrated delivery systems in combination with ZIO XT. And what we're seeing here on the right-hand side of the chart is our 120-day volume pre- and post ZIO AT launch. So this is information gleaned from all of our AT accounts across all of 2018 and the early pages here in 2019. And what you see is that the ZIO XT volume grew in that 127-day period, 27%. And the combined growth for both ZIO XT and ZIO AT over the 128-day period of time is 48%. Now bear in mind that our business is growing at roughly 45% per year. And in these particular accounts, we're seeing that level of growth in about 120 days. So tremendous pull-through of both ZIO XT as well as growth with the new product ZIO AT. We often get asked how well is ZIO AT performing. And this is a comparison of ZIO AT's performance compared to peer review publication data. This is not a head-to-head study, but this is our data compared to data that's been presented by MCT. So in terms of diagnostic yield, this is the ability to find clinically significant arrhythmias in those high-acuity patients and ZIO AT's diagnostic capability is about 20 points higher than the peer review published data for MCT of about 61%, it's about 83%. Importantly, and we believe because of our algorithm's superiority, the days to detect these high-acuity, clinically significant arrhythmias is shorter by a factor of 2 or greater. So ventricular tachycardia is found in about 4 days compared to 9; atrial fibrillation and atrial fibrillation flutter, about 3 days compared to 6 days; and super ventricular tachycardia, 5 days versus 9 days. A big part of our capability here is driven by what we would call 0 manual touches. So the need for patients to interact with our device, the patch, if you will, is essentially 0. It's placed on the patient, the gateway that interfaces between the patch and our cellular network is fully charged and it lasts for the duration of wear. And so the patient has to do essentially nothing. And on the traditional MCT space, we estimated it to be about 23 touches over that period of time. So very high compliance, driven by the benefit of iRhythm doing all of the work for the patient as opposed to the patient needing to participate. So back to this TAM expansion side. The layer above the symptomatic initial diagnosis and above the ongoing management is a population of patients that is estimated to be about 10 million patients in size. And these patients present with risk factors but are asymptomatic for atrial fibrillation, and atrial fibrillation is one of the leading causes of stroke. And so we have been working diligently to try to identify these patients. We have a number of studies I'll speak to in a moment. But suffice it to say, if atrial fibrillation is present and left diagnosed, your risk of a stroke is 5x greater than if you did not have atrial fibrillation. And we know that as many as 20% of individuals who experience a stroke due to AF are undiagnosed at the time of the stroke. So extremely prevalent and important condition for us to try to work on. We have 3 large scale studies underway, screen AF, which is looking at the incidence of newly diagnosed at 6 months in a population of about 600 patients and stops, which I'm sure many of you have heard about. This is a prospective, randomized study. 6,600 patients put into a control arm and a monitored arm. Those results are shown on the right-hand side of the chart, where we found a threefold increase in atrial fibrillation. And we also reported at 1 year, a lower incidence on the utilization of health care services. So fewer emergency room visits, fewer hospitalizations and fewer specialty department visits in the population of patients that were monitored versus the control arm. And about a month ago -- 2 months ago, we announced another study called GUARD-AF. This is a 52,000 patient study. And this is looking at only the incidence of stroke in patients in primary care. And so all of those patients will be monitored with ZIO and we hope to be able to report that out overall. Very, very optimistic about this marketplace. And it is about twice as large as our current core market, which as I said earlier, it's about 5.5 million patients. This is potentially upwards of 10 million patients for us to be able to monitor proactively for those individuals who have risk factors, congestive heart failure, hypertension, age over 55, diabetes, sleep apnea, but are largely asymptomatic. Moving on to a little bit of our financial and operational results here. We're on track to deliver 45% revenue growth and 1 to 2 points of gross margin expansion for 2019. We guided in the fourth quarter to $213 million to $214 million of revenue. We'll report out on that at the end of February or towards the end of February as well as reporting out on gross margins. Through the first 9 months of this year, we saw a 6-point improvement in our OpEx to revenue expense profile compared to 2018. We often get a lot of questions about, is the business starting to show operating leverage. And clearly, we are spending less on OpEx as a percent of revenue in 2019 than we did in 2018. And I think as many of you know and you can see down on the bottom here, our gross margins have improved steadily from 50% in 2014 to about 75% to 76% over the last few years. In terms of markets and technologies, things that we achieved last year. We fully launched ZIO AT, which I've discussed. We announced a development collaboration with Verily. So Verily is our development partner for silent AF. Together, we are working on new solutions for that marketplace in addition to what we have with ZIO XT today. And we initiated the transition to a Cat I reimbursement code, which I'm sure none of you know anything about and have never asked us about. That meeting is one of those -- one of the 2 remaining milestones that will take place this week, Wednesday or Thursday, with the AMA RUC Committee. And then by July of this coming year, CMS will weigh in on the pricing of our code or non-permanent code. We remain as confident and as steadfast in the outlook for this as we have for the last 2 or 3 years and have had a very, very good, long-standing relationship with the medical societies and quite optimistic about it. In terms of sales force expansion and fueling growth. We ended the year with 140 sales reps, which was up 30 from prior year, which was up 30 from the prior year and so forth, and we continue to add to our sales channel. We'll be reporting out on that as well in the February time frame. But suffice it to say, for now, we are expanding our sales force here in 2020. And you can see on the right-hand side, how our rep productivity continues to increase with tenure. Some of our most highly tenured reps are in the $2 million to $2.5 million plus revenue per year for the company. And quite honestly, we don't know where the top of this is, we've never been to the top, and it continues to grow. So we're optimistic that we'll continue to see sales force leverage as we go forward. So in summary, our investment highlights are: we are redefining the way cardiac arrhythmias are diagnosed; our ZIO service has proven to provide clinical, operational and financial value for our customers; the single scalable technology stack that I described to you, the 5 layers is highly differentiable and recently refreshed; and TAM expansion strategies for silent AFIB are underway. And last and not the least, we look forward to a strong track record that we've had in the past of revenue growth and margin expansion. With that, I'll say thanks very much. I believe our breakout is next door across the hall. So we'll see you over there. Thank you.