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

Good afternoon, and thank you for joining us for the first day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the health care research team here at Morgan Stanley. It's my pleasure to have iRhythm with us today. Doug Devine, Interim CEO and CFO; and Dan Wilson, EVP Strategy and Corporate Development. Before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any question, please reach out to your Morgan Stanley sales representative. And with that, Doug, Dan, thank you for joining us today.

Hi, Cecilia.

And I wanted to start off, coming out of 2Q, you reinstated full year guidance. Underlying your sequential assumptions is a revenue benefit to 3Q from a push out of 2Q volumes due to extended processing times, followed by approximately flat sequential revenue in 4Q, unsequential volume growth. A few areas I was hoping you could focus on. And can you just touch on the strength in registrations in March, April and May that drove the processing delays and where you've seen increased traction or volumes?

Cecilia, we saw very strong registration volumes in the months of March, April and May. We do attribute a lot of this to patient behavior and the lull we were seeing in COVID as a lot of patients got vaccinated and the case counts were lower in that time period. So the number of registrations we saw almost 3 months exceeded anything we had modeled, which did result in our processing times lengthening, as we disclosed, by about a week. We have been using a combination of overtime, expediting and hiring to bring that down, and we expect to be back to normal processing times from the patient and provider standpoint by the end of Q3. We will still have some higher cost measures in place in our operations probably through the end of Q4. We did -- with the combination of the summer vacation season, a lot of people, a lot of pent-up demands for vacation. And we did see registrations, as is the typical seasonal pattern in this business, taper off a bit over the summer and move down off of that peak that we saw in that March through May time period. Typically -- typical seasonality, we would usually see -- start to see a good pickup coming off the Labor Day weekend. And so we're watching that closely. Too soon to say anything on how the fall is looking. But that is the usual pattern in this business. We see a slowdown starting June, more pronounced July and August. And then post Labor Day, we see a pickup in volume.

Doug, you highlighted new account openings in 2Q declined sequentially. As you focus on addressing the clinical backlog, what are you contemplating from reacceleration in new account openings? And really, how are you thinking about same-store new store sales contributions to growth as you think about second half and then kind of transitioning into 2022?

Historically, we've been closer to 50-50 between our growth coming between new store and same store. And by that, we define a new store as a site that has been open and prescribing our product for less than 12 months. Now right now, we are seeing much -- growth is much more weighted toward that same store. The stores that have been open for longer than 12 months. But that is heavily because you go back 12 months to Q2 and Q3 of 2020 and volumes were very depressed in that period due to COVID. So naturally, you see a very strong rebound in volumes over that time period. We did consciously delay some of our new account openings later in the second half of Q2 because we were working through the clinical backlog. And I would expect that new account openings would be down a little bit, continue to be down through Q3, and in the Q4, Q1 time frame, we're looking to reaccelerate on getting back to the pace that we had been on previously on new account openings per quarter.

As you think about seasonality, too, you spoke to it a bit, but I'm just curious, as you thought about second half, kind of how much of your typical normal seasonality were you factoring in versus COVID impacts versus kind of a ability for home enrollment to step in? Just curious kind of all of those dynamics, potentially more vacation time away, really how you brought all of this together in your outlook for the rest of the year.

So first of all, pre-COVID this business was very predictable on a month on month. If you look at the 12 months of the year, we got a fairly predictable seasonality. So of course, we're looking at that. When you look at COVID, I don't think -- on the provider side, I don't feel like COVID is having as large an impact. And one of the measures we look at is that home enrollment percentage that you referred to. So we -- as we disclosed previously, in 2020, there were periods where the home enrollment peaked as high as over 50% and that was well under the 30s for some periods. Throughout all of 2021, we've been in the mid- to low 20% range for home enrollment, which is our telemedicine flow. With the Delta peak, we saw this -- we saw it pop up a couple of points, but just a couple of points. Kind of talking like 21 to 23 points type of pop up. So what we're seeing is, I think the health -- the providers have their protocols well defined now on how they're operating in this COVID environment. And so it's a swinger around the margins, but -- and we certainly have taken into account Delta, which was already well underway when we provided our guidance for the second half of the year. But like I said, it's a swinger around the margins. It's not the game changer it was Q2, Q3 of 2020.

As you look forward to home enrollment, do you see this the potential for this to become a bigger portion of your business? Or does this trend back down to kind of what you saw when COVID pulled back? I'm just curious kind of how you think about other drivers that might shift more toward home enrollment potentially over the long term.

I mean I think that I'd put that back to the bigger question of telemedicine and the support that the payers provide for telemedicine. There were a number of exceptions made to encourage telemedicine in the peak of COVID, many of those are, for the most part, expired. Many of our prescribers or providers, the facility fees remain a significant fraction. So for home enrollment, which was approximately 5%. I mean our telemedicine flow pre-COVID was approximately 5%. It has moved up to that kind of mid -- low to mid-20s. I do expect it to stay well elevated above that 5% level. But at the same time, unless the payers come up with a method where the providers are going to be paid equivalently for in-clinic versus telemedicine, that will put a limit on just how high the telemedicine flow can go.

Okay. And I wanted to switch to your U.K. business. It's shown recent strength from new grant sakes. How -- as you think about the sites that you have today, how fast can penetration ramp? And I guess beyond that, just how you're thinking about the cadence of continuing to support those sites versus kind of transitioning to pushing a greater commercial presence in driving new site openings?

So I think that there's 2 aspects to the U.K. market. One is the private payer market, which we continue to -- have been growing steadily for years and continue to grow steadily. And then there's the NHS. So we've won this artificial intelligence grant, which we -- where we were allowed to recently disclose the sizing at $6.8 million. It is a 3-year study. It's going to allow us to get into 10 to 12 sites approximately based on that funding level and the volumes. It's the NHS, which is going to be doing the work to evaluate the effectiveness of the pilot. Our hope is at the end of the 3-year pilot that this is going to enable us to get more into a triple-digit number of NHS medical trusts and give us significantly greater access to the U.K. But I don't see a real shortcut to the pilot. So I'd be guiding that it's kind of 2024 is the time frame when we'll be able to start meaningfully increasing those U.K. volumes. Although it will be subtly incremental growth from now and then.

Can you talk to about your planned operational infrastructure build-out in the region? And what's encompassed in that? And again, how that really contributes to your outlook for potential growth out of the U.K. broadly?

Yes. And I think we're certainly looking at the rest of Europe and we discussed that we will, at some point, could be late Q4, it could be sometime in Q1. And we do plan to announce the next couple of countries. Right now, we're working on building out the right infrastructure. And the biggest thing is we provide a service and there's a lot of privacy concerns and issues around providing service. In no way you're not going to see many countries that are going to allow patient financial -- patient health information to be transferred to the U.S. for processing. So what this means is that we need to build out it's clinical, it's customer support, it's quality-based fulfillment. We need to build out that infrastructure. But the priority aspect is building out the privacy side. And this is -- with the -- initially with the U.K. low volume, we had gone with a more manual flow. We had not fully replicated the flow that we have in the United States, where we're doing over 1 million patients a year in the United States. And so over the next -- currently and over the next couple of quarters, we're working on much more replicating the same quality of infrastructure in the U.K., which will then allow us to then replicate and use that infrastructure to move into the continent of Europe as well.

As you think longer term, too, just as a percentage of volume, what can OUS really trend to over the next, call it, 5 to 10 years, as you think about just everything you have going on in the U.S. and your target market's OUS. I'm just curious kind of how much of a contribution to overall business can OUS really have over the next kind of half to full decade?

Yes. I would point you more towards the second half of the decade. I mean obviously, when you start looking at -- just looking at Europe, that's getting you access to a larger patient portfolio. But health care is quite fragmented in Europe. And so penetration would definitely be slower. I mean, ultimately, we do believe that we'll be able to achieve similar penetration ratios in rates in Europe that we do in the United States. But I would certainly still expect it to be smaller than the U.S. given how far ahead we are in the U.S. and how fragmented Europe is. But I see the potential for it to be -- I mean, a very meaningful double-digit, mid-double-digit number -- percentage of our revenue within the next decade. Within the next 5 years, I would be thinking still more single digits as a percentage of the revenue kind of potentially.

Okay. No, very clear. And just another kind of growth factor for you, but Zio AT represented about 10% of your revenue in the most recent quarter. But can you talk to AT's performance, really where you've seen the greatest increase in utilization? And also just the synergistic interplay at an account level with XT that you've seen since you launched AT?

So we're very happy with the progress we've made with Zio AT. AT now having crossed 10% of our revenue, and we do expect it to continue to grow as a percentage of our revenue from there. When you compare Zio AT to Zio XT, we are significantly less penetrated. We're approaching 20% penetration with Zio XT. We're roughly 1/3 as much penetrated with Zio AT as we are with Zio XT. We are -- I mean, our primary focus is selling Zio AT into prescribers who are already prescribing Zio XT. And that is where we're seeing the growth in Zio AT. When we open new accounts now, we are certainly targeting to open them for both Zio AT and Zio XT at the same time. But I would say more of our focus is getting people who are already very familiar with Zio XT to start prescribing Zio AT. And that's a place where we do -- one of the strongest features of our product is the end report that we give at the end of the Zio XT. And we produced a nearly identical report with Zio AT. And so once prescribers have become very familiar and comfortable with that Zio XT report, then it gives us a great sales path to look at converting them into adding Zio AT into their prescriptions.

As you think about AT, XT mix, where can AT just as a -- from a volume standpoint? As you look at your total volumes, what can AT represent going forward over the next several years?

What you look at is -- when you look at medical necessity and if you ask different cardiologists look at some different ranges, maybe you're not going to get one answer. That's one thing. But it's approximately 1 to -- on a basic kind of medical necessity, you'd expect to see Zio AT prescribed about a 1 to 10 ratio Zio XT. And so -- and then if you factor that currently, we're seeing the ASP of a Zio AT is roughly 3x of Zio XT. Now if we were to get some reimbursement, good news on Zio XT, that could move up to a little less than that to move into more of that 2.75 to 2.5. But today, it's hovering around approximately 3. So as I said, with more penetration, there certainly -- we're only about 1/3 as penetrated with Zio ATs we are on Zio XTs. So that tells you there's quite a bit of room to grow from 10% of revenue right now. I mean I would probably put -- If you take that 1/3 as much penetrated, that would imply that you could get it up as high as 30%. I think there is more competition in the MCT market than there is in the XT market. So I would guide that it's -- you're probably not going to reach that theoretical maximum penetration. But I think we can get a lot closer than where we are right now on that penetration.

Okay. And I did want to turn to reimbursement. It's been the focus. But can you provide any updates around your approach during the open comment period or messaging and approach you're seeing from other constituents, societies, stakeholders in this space?

So certainly, the comment period ends next week. We are working with our consultants on the appropriate comments to bring in. We're definitely going to be emphasizing that the mechanisms are there to set pricing -- national pricing for 2022 and giving them our thoughts and recommendations. And we do know that -- well, I mean the societies are certainly going to be putting their inputs in and our competitors will be putting their inputs in as well.

And if there isn't ultimately a change at the national level come 2022, how do you continue to push your messaging ahead of the next proposal or next summary?

Well, I think the first thing I'd emphasize is the -- we are continuing to meet with and work with the MACs. And we are we're looking at alternative cost models, which is really cost disclosure, disclosing more of our costs. We are working with a number of industry players through an industry body and a third-party aggregator. And so we do expect to be providing some additional -- some cost information really for the first time to the MACs, either late September or early October, and we're hopeful that will be influential to them to reconsider pricing again in later in 2021. And then we continue to work with the societies. We continue to work on -- I mean, with our consultants on developing what new information we will be able to provide. For 2023 national pricing, the initial input period ends by the end of February. So we are certainly working with them on what additional information we would be able to provide at the end of February as compared to what we'll be able to provide in the comment period. Given the nature of this process, I think we can all understand that we're not going to be very transparent. And given that there's been a lot of other interest involved in this process, we're not going to be -- some of our comments will be submitted and information will be submitted publicly. Some will be submitted confidentially, and we'll be keeping the nature and time line of what our submissions will be confidential at the present time.

And -- completely understand. And I'm just curious, too, in your conversations with CMS, just their receptiveness to looking at valuing technology differently than they've historically done. Is this something as you think about, not just you, but other players in the space, but something that they just need more time and continuing to see different inputs, different kind of conversations from different directions? I'm just curious how their receptivity to being more open-minded looking at this through a different lens has kind of given you confidence as you think forward, maybe it's not 2022, but future potential they really shift this reimbursement landscape.

So certainly the tone with CMS is very constructive. We had a recent meeting with group in CMS. We are aware from our consortia that a number of our competitors, I mean, fellows in our space have also taken the meetings. So CMS is definitely listening, definitely taking meetings. I mean definitely aware -- well aware of the situation. And I think holding to find the right answer to it. I mean, I think your comments are well placed. The question is how much more time do they have, they need to get confident? As I said, we are advocating for them to make a decision for 2022. But at the same time, as we commented in our earnings release in early August, that we do believe that a decision in -- we do believe 2023 is a more likely time frame for their decision on national pricing in 2022, which goes back to your point, they do need to take the right time to make a decision that they feel confident.

Longer term, with your pipeline contributions, the OUS opportunity, what you have from a TAM expansion, asymptomatic opportunity, how do you think about direct exposure to Medicare declining over the next several years?

It's certainly going to decline. And I think going back -- I mean first, our primary growth vector is going to remain Zio XT in the United States. And then follow that, in the order of what they will contribute, say, in the next 3 years, I mean Zio AT is going to be clearly the next biggest growth driver for the company after Zio XT. That one is going through Medicare reimbursement, but there seems to be a lot more stability in the MCT code than in the 2 codes that extended EKG monitoring is going through. Silent AF, we definitely envision that being a different model. And I would view that as the second growth -- the next growth driver after XT and AT would be Silent AF over the next 3 years. We are targeting to get into hatch-based revenue pilots in the 2022 time frame. And like I said, that will be a different model and not -- what we do not envision silent AF going through Medicare reimbursement codes. And then finally, international, which is probably maybe the largest potential of the 3, long-term potential. But I would definitely guide would be the smaller of the 3, given just the very long lead times in international. But of course, that also, as we discussed, is very independent of -- it's not going through Medicare in any way. So with the combination of -- over the next 3 to 5 years with certainly Zio AT and silent AF and potentially international -- OUS as well growing faster than U.S. XT, that does offer us the opportunity to get a degree of diversification away from these cost code -- these Medicare codes that have been so challenging to appropriately price for reimbursement.

And I wanted to ask too just at this point, is there any scenario near term or you'd consider suspending service to Medicare?

We view that these reimbursement challenges, we're certainly hoping it will be sooner, but we're optimistic, cautiously optimistic that we can get to the right answer for 2023 national pricing, if not before. So our view is that we are -- we had laid out an investment program, an investment profile in Q4 of 2020. We are holding to that. We are keeping our growth drivers intact, be they Zio XT in the U.S., Zio AT or investments internationally, but we're watching it closely. Because I think one of the last things I want to see is that we would then get to an acceptable reimbursement, and we have taken steps that would then be limiting our growth because we had not continued to invest. And one of the things that would really definitely limit our growth would be limiting market access to our product. And with the issue being that we are having this issue with Medicare fee-for-service, which in itself is about 25% of our U.S. volumes. But the thing is there is no clean way to segregate that out. It is most prescribers are prescribing doing 25% of their prescriptions to that Medicare fee-for-service segment. And if you try to roll that off and say -- tell prescribers, we only -- we want to service 75% of your prescriptions, but we don't want to service the other 25%, many prescribers are going to say, "I really need is -- I really need the solution for all of my prescriptions, not for 75% of my prescriptions." So we definitely view it as we need to have the right degree of patients and we're prioritizing keeping our unit growth on track versus near-term margin structure because obviously, commercial is reimbursing us at a significantly greater level than Medicare at this point in time. So that is the thinking is that we are -- our approach is we are holding the course on our strategy, holding the course on prioritizing volume growth over the next 15 months and taking a multipronged approach to reimbursement and driving to get to the right answer on reimbursement over those 15 months with our growth drivers intact.

Okay. And the last few minutes, but I really wanted to just touch on barely your pipeline opportunity here, but with 510(k) submission on track for later this calendar year and considering another 6-month clearance timing plus the market evaluation phase, is the commercial launch sometime kind of back half of 2022, a reasonable outlook? And also, I'm just curious if you can provide any details as you're thinking about potential business models, what you may look to explore there?

Let me turn that one over to Dan.

Yes, yes. Thanks, Doug. So on that one, Cecilia, you're right, the next milestone that we're pushing forward towards is the 510(k) submission with the FDA, which we expect to hit before the end of the year. Following clearance, we put in a 6-month time line for the review that seems appropriate. Following the clearance, we will be entering a market -- and we touched on this during our Q2 call, but this is a paradigm shift in ambulatory cardiac monitoring. And so that will take a reasonable amount of time to generate the real-world evidence, the clinical evidence to really get physicians' and patients' confidence in that technology as high as it is with Zio XT, and that took years to do. We have an opportunity to go faster here, but we will be taking a measured approach following clearance, really making term we're doing that clinical evidence generation work and evaluating potential business models. I think it naturally fits in well with our -- within silent AF. And so we'll be looking to integrate the verily technology there as well as potentially other applications.

Okay. No, very clear. And I'm looking forward to seeing that roll out. But I know we're out of time. But Doug, Dan, I wanted to thank you both for the conversation and for attending the conference. So it was great to chat with you tonight.

Thanks, Cecilia.

We really appreciate being here.

Thank you.