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

[Technical Difficulty] iRhythm. I'm thrilled to have Dan Wilson here. Can I call you a new CFO still or...

I think, yes. That's okay.

That's okay. I'll call you an old CFO. How is that? So anyway, somewhat newly minted CFO of iRhythm Technologies. Dan, thank you for joining us today.

Thank you for having us.

Excellent. So a lot has happened for iRhythm over the last 12 months, and even if you think about it, for the patch technology market. So if we could just sort of kick off broadly and just give us maybe a state of the union of patch technology and how you're thinking about adoption.

So from a market standpoint, we quantify our market being ambulatory cardiac monitoring in the U.S. at 6.5 million tests. There's a lot of kind of mix shift happening underneath that 6.5 million tests, but have continued to see the overall market growing, call it, mid-single digits. We do think there's an opportunity to really expand the market as we're making inroads into primary care, which I'm sure we will talk about it as well as asymptomatic screening. But a lot of our growth and the market growth has been driven by this mix shift from legacy short-term and event monitoring technologies to patch-based technologies like Zio. And that has been true for the last several years and will continue to be true for the foreseeable future. There's -- despite all our progress, there's still over 1/3 of the market is using these legacy technologies in terms of short-term Holter and event monitoring. So still a lot of opportunity for us to continue to shift those -- that modality to patch-based technology, which we know is better both clinically and economically. And then a lot of opportunities to expand the market from a primary care standpoint, moving upstream, and we're seeing really good progress there and then ultimately to asymptomatic screening, which we're seeing early signs of as well.

And how do you think today about the competitive landscape? I mean if 1/3 of the market is still -- this is a two-part question. The 1/3 of the market is still traditional Holter monitors, 2/3 is using some form of a patch technology. Both -- what is it -- what do you think about the competitive side of that 2/3 and what moves the 1/3 over?

Yes. Maybe starting with the second part of that question first. Ultimately, I think it's an education, a matter of education, just getting out to primary care physicians and other clinicians that are still leveraging those older modalities and showing them the clinical and economic evidence. I mean it is very clear that Zio and other patch-based technologies are better than legacy modalities. So it's a matter of education. I think how we've gone about it in terms of starting in cardiology and electrophysiology as the clinical champion. What we're seeing now is those clinicians helping educate primary care physicians upstream. It's ultimately better for them as well in terms of getting patients on Zio earlier in their care journey and ultimately, the patients coming through to cardiology and electrophysiology have been kind of prequalified. Those are truly the patients that should be seen by cardiologists and electrophysiologists. So that's been encouraging that they've been a champion of this movement and expect that to continue. Within the competitive landscape of patch-based technologies, I'd say, really, we feel incredibly good about our competitive positioning. We've actually grown our share in long-term continuous monitoring in the segment, long-term continuous monitoring by a point or 2 in the last couple of years and starting at 70%. So a pretty high base that we're growing from there. And really, that's driven by Zio Monitor, our new form factor that is getting really good remarks in the field and certainly a better patient experience. That form factor is 72% smaller than Zio XT, 55% lighter, better adhesive in terms of breathability and waterproofing. And our tagline when we launched Zio Monitor was the best just got better because Zio XT was already best-in-class from a form factor standpoint, but Zio Monitor is a step change to that. So that's been a great driver in terms of our competitive positioning and ultimately winning share in the market. And then I would say, just a steady drumbeat of clinical and economic data as well. We had CAMELOT data last year that was nearly 300,000 Medicare patients retrospective, showing Zio XT being best-in-class in terms of diagnostic yield, retest rate. And that has been a great kind of tool for our commercial team to drive account wins.

So I think this is a great place to start talking about primary care physician. And if I remember correctly, earlier this year, there was a statistic that maybe 20% of your patches were already going into the PCP. First, correct me if that's the right number. But also walk through the mechanics of how you're approaching that segment.

Yes. Yes, good question. So yes, 20%, a little bit over 20% was the metric we gave, I think, earlier this year, which was volume for 2023. That is -- we haven't updated that metric, but we will at some point here, and it does continue to grow as an overall percent of our business, and we expect that to fully continue. How we're approaching primary care, I think, is really kind of 2 approaches. One, our business has always had this land-and-expand model, where we open up an account, again, with that clinical champion, cardiology or electrophysiology and then follow that into other departments in that account, whether it's emergency room, neurology, nephrology and primary care. That is kind of really been happening for several years and our best-performing reps were kind of doing that organically, opening an account and then looking for those expansion opportunities. More recently, in the last, call it, 2, 3 years, we've structured our commercial team to really standardize that approach. We have our territory managers certainly, but then another group called key account managers that are really responsible for driving that expansion into those accounts. So that's been one way we're going after it. The other effort is with the strategic accounts group that's really focused on these innovative PCP groups that we've been talking about more and more, Signify, One Medical, et cetera. that's a small dedicated team going after those accounts. It's a very attractive model in terms of kind of a top-down selling model, a one-to-many selling model. And a lot of those institutions like to kind of standardize care across their network. So once they buy into Zio, they're generally adopting that across their network.

So can we dig into this a little bit? Because I think some of the accounts that you've mentioned, the Signify and the One Medical, if I remember correctly, have almost trial periods to see how the Zio patch might integrate into their practices. So how do you approach getting either groups or -- and accounts just to sort of say, okay, let me fold this in?

Yes. Yes, certainly. So probably good to distinguish between symptomatic monitoring and asymptomatic monitoring. Symptomatic patients are generally getting served in one way or another. So if they're buying into Zio, they're generally adopting Zio for all of their symptomatic patients. Generally, they're adopting Zio for all of their symptomatic patients, and that can be a pretty clean cutover. On the asymptomatic side, generally, they will start with a pilot. They're trying to understand which patients they should be targeting with proactive monitoring. What are those patients that are coming back with arrhythmias and what to learn from there and then ultimately expand from there. Encouragingly, both Signify and PCC that we've talked about, adopting these asymptomatic monitoring programs, they've both -- and there are others like them, have started with a pilot, have seen the value proposition play through. The ROI is meaningful to them and they've moved on to full commercial programs. So I think that's really encouraging. There's early signs here that, that is going to be a meaningful opportunity for us. We did believe it would show up at some point. It was more a matter of when, not if. But we're starting to see some really encouraging signs there.

And is that kind of pilot program expected to be expanded across the U.S.? Are there more that we'll hear about?

Yes. Again, Signify and PCC are just 2 that we've talked about publicly. There are others like them, both active programs as well as kind of in the pipeline, and we'll certainly try to share more around those as we're ramping those. It does kind of cross over into our core business as well. There are institutions that have adopted Zio for their symptomatic patients, have gotten experience with Zio, the clinicians love it, patients love it and then have expanded into asymptomatic monitoring as well. So it isn't fully distinguishable from our core business, which is why we don't break it out separately, but certainly, we'll give the qualitative color. And again, we're seeing really encouraging signs there.

Excellent. I'm glad I didn't start with this, but I do need to talk about some of the regulatory pathways. And if you could just sort of give us a state of the union on what's happening with the FDA warning letter. And congratulations on getting the two 510(k) approvals. Specifically on that second one, what does that really mean?

Yes. So yes, very encouraging progress there. We received the second of the two 510(k)s while we are live on our earnings call.

It was very dramatic.

Very dramatic, yes, but obviously, very, very encouraging that we received that. So I believe we're making very good progress to clearing the warning letter. The 2 510(k)s were a very important milestone in doing that. There's other remediation activities that are ongoing. And ultimately, the FDA will come back at some point for a closing inspection and confirm that we've done everything they were looking for us to do in terms of remediation efforts specific to the warning letter and then ultimately close that out at some point. There are now also the 483 observations that we received in July. We have -- we put a response plan to the FDA in August, and we've been executing against that plan now for the last several months. We talked about hiring a new Head of Quality, and that individual has joined and has made a very big impact in a short amount of time. And we've talked about bringing in other consulting firms as well to support our efforts here. So I believe we're doing everything that we should be doing, and we're going to continue to make progress. And ultimately, we'll hear from the FDA at some point if they're satisfied with our progress or not, but focused on what we control, and we're very confident in the plans that we have to address there.

Did you need to resolve the 483 observations to get the FDA warning letter lifted?

It's a good question. Ultimately, that is the FDA's discretion. So hard to speculate there. It is -- those observations are distinct and different from what they called out in the warning letter. So I think there is a scenario where we've addressed everything from a warning letter standpoint, while still working through the 483 observations. And then ultimately, it's the FDA's call. Do they leave the warning letter outstanding while we're addressing the other 483 observations, or do they go ahead and clear it?

Do you have a line of sight of all clear?

I think the time line we've put out there, both commitments to the FDA as well as activities that we're doing that go -- goes above and beyond what the FDA is asking us to do is through the end of next year. So assuming we learn nothing between now and then or get confirmation from the FDA that these are -- that they're satisfied with the approach that we're taking. I would say, end of next year is when we would really feel good about having the remediation activities completed.

And what is -- how do I [indiscernible] this? What is the impact of the end of next year all clear remediation? Is it financial? Is it product? Is it approval? Outside of popping champagne and saying, okay, we've done this bridge, what happens?

Yes. It's certainly something we'll celebrate. And I think if we were to fast forward to that time, I think we'll feel really good about the foundation that we built from a quality function standpoint, a quality management system standpoint to be really that foundation and infrastructure needed to execute on all of our growth plans over the next decade. So is it having a material impact on our business today. I wouldn't say it is, though it is our #1 corporate priority, right? We've been very clear about that, and we've put other things to the side for the time being while we're focused on remediating the FDA's concerns here. So once we get that fully resolved and have that foundation built, I think we can reprioritize other innovation efforts that have kind of taken a little bit of a back burner at the time -- for the time being.

Okay. This sort of leads me into -- on the third quarter call. You delayed the next-generation Zio MCT. Can you walk through, a, what made you decide to do that; and b, how did you come about to quantifying it as a $10 million impact?

Yes, yes. So importantly there, that was voluntary. I mean this was something we chose to do. It was not asked for by the FDA. But as we were reflecting on kind of what we've learned as we've been going through this process, reflecting on the observations we received in July, engaging with our new quality leader, the new consulting firm that we've engaged. It was really through that dialogue, we decided we need to take some time, make that submission for Zio MCT more robust. And it's really around some testing that just needs to be done really now that the qualified technician, the cardiac technician is considered part of the device, both from a quality management standpoint as well as a device clearance standpoint. So there's just testing work that needs to be done there. And unfortunately, that stuff that you just can't speed up, just takes time to complete that testing. So we're committed to doing that. That is the work that will take place over the next 6 months. We pointed to a Q3 submission time line for Zio MCT and continue to feel good about that. In terms of the $10 million impact, it's interesting. AT is a good product, and it is performing well. It is contributing to growth. We are very hard on that product. We know Zio MCT is ultimately the better product and does close some competitive gaps that exist with AT. But at the same time, AT does have competitive advantages of its own certainly relative to competitors, which is why it continues to grow and take share in the market. But again, we know Zio MCT is the better product. Our teams are incredibly excited about ultimately getting that to market and what we can do with that product. So that is really what is behind that $10 million impact.

So what is -- what makes MCT a better product? And I'm really thinking about this, to me, you're very underleveraged in the [indiscernible] market. So what makes this a better product and what makes it a product that allows you to take market share?

Yes. The biggest thing to point to is 21 days of wear versus 14 days today with AT. We know that there's a view that MCT needs to be a 30-day, if not a 21-day kind of monitoring duration. Whereas AT today only goes out to 14 days. We do have small amount of our patients that were back-to-back AT, extend out to 28 days. But it's not a seamless process. So with Zio MCT, getting out to 21 days is a meaningful change. It's also on the new form factor, and we've seen what that means for Zio Monitor that I was referencing earlier. That is a very, very attractive form factor, certainly relative to existing form factor, but also other competitive devices out there. So that's a big driver. There will be algorithm improvements within the device as well in terms of its detection capabilities, that trigger limit that we've talked about as it related to the warning letter. The number of patients that reach that trigger limit will be drastically reduced because of the better detection algorithm within Zio MCT as well. So a number of benefits with Zio MCT. But Really that 21 days of wear is the big one to point to.

And how does it compare to the competitive dynamics right now?

Yes. So this is where the advantage with [indiscernible] and then certainly MCT is. So a patient can put it on and literally has to do nothing through the entire wear period, 14 days and 21 days in terms of charging the device, swapping out an adhesive, swapping out electrode. That's different than our competitors. To get out to 21 days or 30 days, it requires the patient to recharge the device, swap out the adhesive, et cetera. And we know anytime you introduce what we call patient manipulations in that time period, your patient compliance is going to be -- that introduces friction and patient compliance suffers from that. So you -- and the consequences, you're not monitoring a patient and potentially missing out on arrhythmia when it happens. So the advantage of AT and MCT is patients could put it on, they don't have to touch it, and you get a full continuous 14 days than 21 days of monitoring and capturing every single heartbeat in that time period. That's one thing. The other -- this is kind of a synergy from XT and Monitor, is that end-of-wear report. And that really is the product for XT and Monitor from a physician's perspective, right? That's what they receive at the end of the wear period. If you do channel checks, physicians will tell you they have extreme confidence in that report. They know and love it, have confidence that they can review that in a matter of minutes and know exactly what's happening with that patient and can then move on to determining what's next for that patient. Physicians are receiving that same end-of-wear report for AT and MCT. So if they're an adopter or a user of XT, Monitor, they're going to get that same report for AT. And that is a that is a nice driver for AT and MCT.

Okay. And I think one of the things you've mentioned, and I'm going to start moving into the financials here, is the benefits of having them both on the same platform. And if you could just sort of start to think about -- or start to help us think about where does the gross in operating leverage come from, from that similarity?

Yes. So yes, Zio MCT will be on the same form factor that Zio Monitor is on currently. XT and AT look the legacy form factors for us look the same, but the internal componentry is different. So they're manufactured on separate lines. With MCT and monitor, they will be the same exact product and manufactured on a single line. And we have been -- we've launched Phase 1 of manufacturing automation. We have subsequent phases that will go live next year and the year after. And really as we scale from a volume standpoint from here forward, we're going to start to see that leverage from a manufacturing standpoint, which will ultimately benefit gross margin. That's on the device side. Also within gross margin for us is the clinical operation expense in terms of the human component, labor component to deliver the service. I think there are more opportunities there to continue to be more and more efficient with how we deliver that service, and there's an opportunity for improvement there. And as the detection algorithms improve as our AI continues to improve, that will ultimately benefit gross margin as well. So we expect to exit this year close to 70%. We believe from a full year standpoint, we'll see a step up next year relative to full year '24. And then we have a long-term target out there of 72% to 73% in 2027, and we're driving towards that.

And remind us of your long-term targets for '27 for operating margins or adjusted EBITDA.

Yes. So for adjusted EBITDA, we called out 15% in 2027. Importantly, that is a moment in time. That isn't the ultimate goal. And there's plenty of opportunities to continue to drive above and beyond that, and we're focused on that. The cadence we're on right now is really 400 to 500 basis points of adjusted EBITDA improvement year-to-year. We've executed on that in the last couple of years. That's the expectation for next year as well. And that ultimately is putting us on a pace to exceed that 15%. So we're on the right trajectory there. Back to the FDA remediation efforts, there is -- and we called out $15 million of run rate expenses which will continue into 2025. That is purely incremental in addressing the -- or the remediation efforts that are ongoing. So ultimately, those will go away and that would drop to the bottom line, which would be a nice lever for us.

And of everything -- you said all of these LRP programs, if memory serves me, in 2022. And a lot has happened since 2022. So do the things you've done slowed down the -- your ultimate LRP goal or maybe even accelerate it because you've taken a lot of steps at how to be done.

From a profitability standpoint, yes, we're -- again, we feel really good about the trajectory we're on and achieving that 15% and in the gross margin line. On the top line, Zio MCT is now 2 years delayed from when we initially set that target in 2022. We've been able to overcome that to this point with the success we're seeing in primary care expansion, asymptomatic screening. And so some puts and takes there. Ultimately, we do need to get Zio MCT on the market to achieve that $1 billion target. So we haven't backed away from that. It may be a bit delayed beyond 2027. If it's not '27, it will be '28 in terms of when we eclipse that $1 billion target.

Got it. That's really helpful. What happens with other areas and other geographies? I sat at the analyst meeting in 2022, and it seemed 5 years from now, this might be happening. And now I'm sitting here on the cusp for 2025. And I'm like, where are we or where are you in OUS?

Yes. So I would say maybe back to the question earlier in terms of the puts and takes. International, I wouldn't say has gone faster than we were expecting when we set that target in 2022, but still feel good about the trajectory that we're on. We set up -- launched into 4 new Western European countries over the last few months. And then we've been talking about Japan. We received PMDA approval there earlier this year. We're now in the reimbursement process. Japan alone is 1.5 million tests per year, all being done with short-term Holter. So there's a real opportunity there in Japan for us to kind of change the standard of care like we've done in the U.S. and shift to Zio and patch-based technologies. Similarly, in the 4 European countries, collectively, that represents another, call it, 1.5 million tests. And similarly, all generally being done today, short-term Holter. There are some smaller players from a patch-based technology standpoint. And importantly, in those 4 countries we were chosen because of really for reimbursement purposes, there is good reimbursement in place in each of those 4 countries and feel good about being able to kind of ramp our business within those countries. We're really just getting started, but do feel like international will be a growth driver for us in '25 and then '26 and beyond.

If -- did you put a goal, an RRP goal on the percentage of total revenue expected to come from OUS?

We did. We called out 8% of that $1 billion target.

And where are you tracking towards that now?

So today, before we launched it in the 4 European countries, we're really just in U.K., and that's low single digit, call it, less than 2% of revenue. U.K. remains an opportunity for us. Now we're stacking 4 additional European countries and then ultimately Japan as we go into next year. So continue to feel good about that, growing certainly from that less than 2% to more in line with that 8% target.

Okay. And what do you have to do to start selling these products? Is it a direct sales force? Is it a distributor? Is it a partnership? .

Yes. It will be a mix. For Spain and Japan, we'll be leveraging a distributor. For the other countries, we'll be going direct. Our business is a little bit different from kind of just a traditional med device company where you're selling a device and can hand that over to a distributor really to drive selling. We're device-enabled service. So there is a bit of infrastructure and clinical operations buildout that needs to be done as well that we're doing for the 4 countries that I mentioned. We have that in the U.K. today. And then we'll have our clinical operations team supporting the Japan launch as well. So a little bit more than just handing a device over to a distributor, but feel good about the infrastructure we're building and continuing to drive international expansion.

So but a part of the device is specialty is that you do have a human that looks at the data and downloads it and it creates a report. Are you able to do that regionally? Or is it self-funneled back maybe to somebody here in the United States?

Yes. Each country will be different, and this comes back to kind of the data privacy rules that each country has. And each country is a little bit different. So where we can leverage existing clinical operations, infrastructure, either the U.K. or U.S. or other geographies, we'll look to do that or build it out within the country. If we fast forward on our road map beyond the 4 countries, Germany or France, that's likely going to require staff in country. But those are later in our road map.

Okay. Is there anything that would slow the uptake of these products in the region once reimbursement -- it sounds like reimbursement is in place, culturally or professionally or any -- I'm trying to figure out why you wouldn't have a similar success on the transition to patch technology that you've had in the United States.

Yes. I think it's a fair question. And I would argue we have more clinical and economic evidence than we ever have, right, versus where we started with in the U.S. many years ago. So from that standpoint and a brand recognition standpoint, so Zio is despite only being really in the U.S. today, it does have some global brand recognition given all of the clinical trial work that we've done and clinical evidence that we've generated. So from that standpoint, I think we're starting in a really strong position. At the same time, changing behavior, changing standard of care takes time. And nothing ever moves fast enough in health care from my standpoint. So I think it's right to not get ahead of ourselves here. Ultimately, I think the opportunity is the same as what we've seen in the U.S. in terms of fully shifting the standard of care to Zio.

Okay. Outside of these regions, do you have targets? And if so, how do you approach them?

We do. We have enough kind of to go after at the moment, right, with the 4 Western European countries as well as Japan. We'd like to kind of get some experience there, make sure we're not spreading ourselves too thin. So we'll be focused on those countries for the near term. There are others on the road map. I mentioned Germany and France, but those are a bit further out.

And you've also been looking at other applications of the technology. I know we spoke briefly in the primary care arena. But maybe using it for post-field ablation patients either in identification or post-surgery, structural heart, for example, and I'll even throw sleep apnea into that group. I mean, how do you think about just pushing out the potential applications of the Zio technology?

Yes, it's something we're really excited about and focused on. So if you think about Zio today, we're really just taking the ECG signal from the patient and then providing insights. The insights we're providing today are really around arrhythmias, diagnosing and characterizing the arrhythmias. There's more we can do with just the ECG signal, and we've had some initial data around sleep in terms of classifying sleep and activity and then ultimately overlaying where -- when arrhythmias are showing up, right? Is it in a state of sleep or in a state of activity, which is important clinical insights for a clinician. So there's more and more insights we know we can deliver through ECG alone. Where it gets really exciting is when we start to bring other vital sign monitoring onto the platform, and this goes back to the licensing transaction we did with BioIntelliSense last quarter, where we will now start to build pulse ox, blood pressure, respiratory rate, other vital signs onto the platform. And as you're capturing more and more patient data, it really opens the aperture in terms of insights that you can deliver. And certainly, from a sleep standpoint, we believe we can deliver a home sleep test with those vital signs. And so that will be kind of the next platform build and really excited about what that can mean for us.

And is that something you do on your own? Or is that something you've done in partnership with others?

So we did license that technology from BioIntelliSense. Now it's kind of in the build phase, and some of that will be internal, some of that I think will be external. I think we're open to bringing the outside in, in terms of supporting those efforts. We have high confidence in our R&D capabilities, but we know we can't do everything that we want to do. So I think there is an opportunity to leverage the outside to complement what we can do internally and really drive some pretty exciting innovation.

And what about on structural heart and then post-field ablation. Where do you see the Zio patch fitting?

Yes. I think both opportunities, we do get questions a lot on PFA today. I mean, that is a very exciting opportunity in the market. And I would say there's a buzz and excitement in electrophysiology that hasn't been there for some time. And ultimately, when downstream therapies are improving, like we're seeing with pulse field ablation, it's logical to think about the upstream diagnostics improving with it. So we're seeing that. It is a nice tailwind for the business. Ultimately, those patients need to be diagnosed into the funnel for PFA procedures and then ultimately subsequently monitored post procedure as well. So as that market grows, we expect to see benefits, and we are seeing benefits there as well.

Excellent. So when you and I are talking this time next year, what do you think we're going to be talking about? Or maybe the better question is what do you think we're not going to be talking about?

Yes. I won't surprise anyone with this answer. Well, I hope we are talking about successfully remediating the quality management system that we're really transforming, and back to that comment earlier about building the foundation and infrastructure to support that next major phase of growth for us. I hope that's what we're talking about, that, that foundation is built and all of the exciting growth opportunities are more and more real for us and have great plans to get after them.

Wonderful. Dan, thank you so much for joining us today.

Thank you very much. Appreciate it. .

Okay.