iRhythm Technologies, Inc. (0A7L.L) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us for the post-lunch first meeting. I'm still Joanne Wuensch, the medical technology analyst here at Citibank and thrilled to have the management of iRhythm with us, including Dan Wilson. And we -- I was just trying to figure out when you became the CFO?

About 14 months ago. September 24. Yes.

It is so fresh. Am I allowed to ask you about that? Or that's a...

Yes. Absolutely.

What are you finding now that you've moved from IR to the CFO role?

Yes, it's been a fantastic transition. Obviously, been with iRhythm for 6 years now, have always been incredibly bullish on the company and the opportunities we have in front of us. It's been really a lot of fun to be in the CFO role and kind of drive where we're allocating our capital and the initiatives that we're going after and really driving profitable growth, which iRhythm has been a growth company since its beginning. We're now, I like to say, a profitable growth company, which I think is important place to be and have a great team supporting me and the rest of the company, including Lisa here. It's been great.

Wonderful. Well, I'm going to get to the real questions now. And what I really would like to do is sort of get a state of the union on the ambulatory cardiac monitoring market. I've thought about it as growing maybe mid-teens possibly 20% on a good day, but iRhythm is putting a much faster growth. And so I'd love to get your opinion on what is driving the market and what is driving your accelerated growth?

Yes. So the overall market, ambulatory cardiac monitoring, call it, 6.7 million tests in the U.S. that as a whole market growing, call it, healthy mid-single digits. The 2 segments of the market that we operate in, long-term continuous monitoring, which we pioneered. That is by far the fastest-growing segment of the market. As you noted, growing, call it, high teens percent year-over-year. That's consistent with kind of where we're growing. We have been taking share a point or 2 over the last couple of years, so outpacing that overall market growth slightly. I think there's a lot of tailwinds in our market that we're excited about and remain excited about. If you think about pulsed field ablation that has been certainly a tailwind to our market. As therapies improve, it is right to assume that upstream diagnostics will benefit from that as well. So that's been great to see that's a tailwind. Certainly, just general consumer awareness around cardiac arrhythmias, certainly benefiting the market. As you know, we've been pushing aggressively up into primary care and shifting the market in that direction. Combined with that improving consumer individual awareness. We're able to capture patients earlier in the care pathway where they should be -- should be being monitored, that's been a nice tailwind for the market. And when you think about risk factors for arrhythmias. Certainly, there's comorbidities that influence arrhythmia risk, but age is one of the biggest risk factors. Obviously, you have an aging population. The Silver Tsunami, if you've heard that term before, is upon us, we're seeing more and more individuals aging into Medicare and increasing risk of cardiac arrhythmias warranting monitoring. So a lot of tailwinds in the market. We believe we're well positioned to capitalize on those opportunities and continue to drive the market forward.

So let's take each one a little bit. I want to talk about the upstream going into the primary care market. I think it was January of 2023 or 2024, you would talk about 20% of the XT patches were being used by PCPs. And I think an updated number from our CEO call was closer to 30%. How do I think about how much of the accelerated growth is coming from that shift? And how much it may be from something else?

Yes. I think primary care has definitely been a big part of it. I wouldn't say cardiologist is not growing, right? I've talked about pulsed field ablation and that's generally within electrophysiology. So there's post-ablation monitoring, taking place there. There's a desire to find those patients that are candidates for PFA procedures and other ablation procedures. But we're seeing a lot of healthy partnership between cardiologists, electrophysiologists and primary care working together. And we're supporting that through designing workflows where primary care prescribe Zio. But if they're uncomfortable or prefer to have a cardiologist read the report, we can route the report to a cardiologist in their network or a virtual cardiologist through a partnership and have the report read that way. So there's a lot of workflow optimization that we support that allows kind of this upstream move to primary care and don't believe it's slowing down. You mentioned 20% now 30%, that's the right way to think about it, and we believe that will continue to expand.

So you think it goes 30, 40-plus or over time?

I think so. You think about -- I think there's 300,000 primary care physicians out there between cardiologists and EP is probably closer to 50,000. So multiple times higher, and it's just -- it's better for the system, better for patients, better for payers, controlling more care within primary care, making sure it's truly qualified patients that ultimately make their way to the specialists. It's better for all parties.

So let's talk a little bit about the PFA wave because when we talk to doctors, they sort of say exactly what you're saying, which is we want to diagnose the patients so we can do the PFA procedure, and then we want to monitor the patient to make sure it worked. So are you capturing both sides of that coin?

Absolutely. So yes, to your point, they want to fuel the funnel or find patients to bring into the funnel for these procedures. So they're partnering with primary care oftentimes to find candidates. And then there is post-ablation monitoring, and that was true for more traditional ablation procedures as well. There's always been post-ablation monitoring, but as PFA becomes a safer and more efficient procedure that's increasing volumes and therefore, the greater number of post-ablation monitoring being done as well.

You did have this kind of dynamic with the TAVR evolution?

To a degree, but much smaller numbers. So I don't have the specific market sizes with me, but ablation PFA, I think, is a greater number of procedures versus TAVR and certainly higher growth currently.

And when you talk about taking market share, I think you said 1 to 2 points of market share, where is that coming from? And is that across XT and AT or is that just -- and I still think of XT and AT not monitor MCT?

Yes. Yes. So the 1 to 2 points of share was specifically for Zio monitor, which is what replaced our legacy product, Zio XT, that's in long-term continuous monitoring. Again, that's the segment we pioneered call it, 70% -- low 70% share of that market. I'd say it's the shift in the primary care certainly. I think we have a unique advantage there. I think the brand recognition that we've built since we pioneered this segment over the last 15 years or so. All of the clinical and economic evidence that we continue to generate that has been critically important to distinguish Zio relative to other long-term continuous monitoring technologies on the market. Historically, a lot of the evidence that we were generating was long-term continuous monitoring with Zio over short-term Holters showing the benefits there, where we've really started to show with clinical evidence like CAMELOT and AVALON is differentiating Zio relative to other long-term continuous monitoring brand. So that's certainly been a driver. The XT, the monitor transition from a form factor standpoint, that's been a great driver. It's a beautiful product. 55% smaller, 72% lighter, truly miniaturizing that form factor for a better patient experience. And then I would argue all of the kind of support around the service as well. From an operational standpoint, I mentioned some of the workflows that we can design. EHR integration has been a big investment for us and driver for us. We're now over 50% of volume through EHR integration, that makes it that much simpler for a prescriber to prescribe Zio. It opens up all prescribers within a network. They don't have to kind of come out of their clinical workflows to prescribe Zio, they can stay right there in the EHR. So there's a lot of kind of reasons why we continue to be well positioned competitively, and we're going to continue to invest in those.

So when you use the phrase innovative channel partners, what does that mean?

Yes. The right way to think about that is essentially proactive monitoring. So these patients are...

Hold on. Proactive monitoring meaning I walk in and they go, "Hey, you are sort of BMI, family history of heart disease, let's put a Zio on you."

Exactly right. And these -- and the innovative channel partners they own the risk for the patient in some way, whether they have their own Medicare Advantage plan, they're capitated in some way, some type of risk-based arrangement where they can make the determination, they can proactively say, "I want to monitor this patient. " They have risk factors, maybe they're not presenting with symptoms. And what we're seeing is, oftentimes, these patients are having symptoms. They're just -- they're believed to be part of a different condition. And more and more evidence as we're getting into this is showing you monitor these patients, you're going to find a high number of undiagnosed arrhythmia. So innovative channel the way we think about it is proactive monitoring, different from our core business, which is generally symptomatic patients coming in with symptoms, getting prescribed Zio. Innovative channel is groups that own the risk for a patient population and can make the decision to proactively monitor.

And how does that change? I mean I think there's one that you talked about a partnership with Lucem?

Lucem.

Lucem. Okay. Help me understand how that partnership or another partnership comes about and how you monetize it?

Yes. Yes. So we're -- I'd like to tell investors, this has been a 10-year strategy in the works. We have been working on opening up this market for quite some time. There was a number of clinical trials that you probably remember, [ mSToPS ] [indiscernible] a number of others kind of generating the evidence. Where we have found a good product market fit in the last 12, 18 months is in this innovative channel group. And the benefit there is they own the risk of the patient so they can make the decision to proactively monitor, but they also have the touch point with the patient, right? So oftentimes, they're patients -- they're either going into the patient's home or patients are coming into their office. They can explain the program to them. They can show them the device. They can explain the benefits of it. Initially, we were thinking we can sell these programs into payers. That was a little more challenging. And again, where we've seen the nice product market fit is this innovative channel partnership. You mentioned the partnership with Lucem Health, there we're developing AI that will essentially target -- look at a patient population for an innovative channel partner and identify which patients within that population are at risk for undiagnosed monitoring and then make the decision to proactively monitor that. What's great about this AI tool is you can tune it to where if you want to say, I want to monitor patients and get a 50% diagnostic yield, you can tune the algorithm that way and identify patients and expect to get a 50% diagnostic yield. If you want to dial it back and say, actually, I want to be more selective and see an 80% yield, you can dial it that way and vice versa. The other benefit is this algorithm is kind of constantly updating. It's regularly reviewing health records and as risk factors change within your population that's going to be dynamic and identify the patients that are most at risk of undiagnosed arrhythmias. As we've gone into market in innovative channel, this isn't a tool we have yet -- had to utilize, but as we get deeper into it, we think this can be a real benefit and a meaningful enabler to open up the market opportunity.

So on the third quarter call, you also talked about 18 active channel partners with a healthy pipeline. How do you leverage the 18 active channel partners? And how do you build the pipeline?

Yes. So the 12 -- it was 12 going into Q3, and we updated that to 18. So we're seeing nice progress there. One thing that's most encouraging about this segment of our business. And it's early, and it's emerging. But one of the most encouraging things is that for every time we've got a partner to a pilot program, they've continued on to a full commercial program, which tells me that the value proposition is playing through. We lead with data. So we present evidence as to why they should consider a pilot and then we run the pilot and bring data back to them to show, okay, you monitor 1,000 patients. Here's all the different arrhythmia types that you found in your population, the diagnostic yield et cetera. So that's been a really powerful tool. By the way, we use that in our core business as well, our Zio Service report. We always like to lead with data, and that's a meaningful part of our business. So leading with that evidence, we have a nice healthy pipeline, call it, 40 partners that we're in discussions with and selling into a bigger list that's been identified call it, 100 partners or so. I think where we -- where our work is, we know top down, there's, call it, 27 million patients that are at risk of undiagnosed arrhythmias but not being monitored today. So we believe in that opportunity as we've started running these programs with partners, we've gotten even more confident that, that's a real number and a real opportunity. Ultimately finding where -- who owns the risk for those patients and who can make those decisions to proactively monitor those patients. That's the work that we're actively doing to be a little more sophisticated in terms of how we target and go to market and find those 27 million patients. We're confident it's in that pipeline of 40 partners were having active discussions with and then the bigger pipeline of 100. But in terms of how we position, how we go to market, how we target those partners, that's some research that we're doing now.

One of the things sometimes investors ask me is how penetrated as a company? And asymptomatic AF, and I find it an interesting question because I don't know who's asymptomatic, because if you don't have asymptomatic, which 1 of the 3 of us would be it. But I'm going to ask you the same question because your opinion matters far more than mine on this topic.

Fair. We actually just presented some data at AHA to show symptom rhythm correlation is not what I think has historically been believed. So a patient feels like they're having a symptom, but how that correlates to an underlying event is actually very, very low, which tells you that there's patients out there that may or may not be having symptoms but are at risk of having underlying arrhythmia. So again, I think as we're getting into these programs, we're running pilots, running full programs, coming back and showing the data that you have a significant number of patients with undiagnosed arrhythmias. They may or may not have been having symptoms, again, oftentimes confusing it with something else that they're dealing with, but it's very clear. You proactively monitor these patients that meet certain risk factors and you are going to be surprised with how many come back with diagnose arrhythmias.

In September, you submitted Zio MCT to the FDA. And I think it was on the third quarter call, you talked about it being held up. Those aren't your words. So is your mind, given at that time, the government was on a shutdown. That's been relieved. Is there any way to give us an update or comment on where that process is?

Yes. Yes. So we did submit early September. Generally, 510(k)s, you expect to receive comments back from the FDA within 60 days. We did receive comments back from the FDA recently. So encouraging that those timelines are still maintaining despite the government shutdown, whether or not that ultimately impacts timelines from here forward remains to be seen, but encouraging that, that process is moving forward. Comments were kind of consistent with what our expectations were there. Certainly, the FDA has a lot of focus on cybersecurity right now, industry-wide, those are comments we receive that we'll work through. Still too early to put timelines around potential clearance. What we have guided investors to is don't expect Zio MCT that contribute to '26 revenue. That's a good way to set up the year as we get through -- get deeper into the review process, our timelines get a little more clear, we'll update folks there if there is any change to that, but that's the right way to think about it.

Okay. Were there any surprises in the questions or anything that you're like on?

No, I don't think so, consistent with kind of expectations and being early in the review process, certainly, comments to work through. But yes, no real surprises.

Excellent. In your SEC filing for the third quarter, you noticed or noted that 3 of the MACs had proposed an LCD covering ambulatory cardiac monitoring. Can you level set us on what this is? We read a note on it and it created a bit of commentary. Words I might use too, but we're going to call it commentary.

Yes, that's fair. That's fair. Yes, in this -- so we do have a national coverage decision for the category, and that's I think, 20 years old or so. You do see LCDs come in to supplement in NCDs, particularly when there's been changes within the industry in terms of the technologies and how the service is delivered. We saw this with 2 other MACs a couple of years ago, and that was a process we had to work through as well, where there's proposed language that needs kind of refining and through comment periods, industry participation, physician society support, ultimately landing final coverage decisions in the right spot. So we're working through that process. We did participate in the comment period with all 3 of the MACs. We believe our competitors did as well as well as other industry participants, advocacy groups and physician societies as well. So we got to work through it. We do believe there was some kind of inadvertent language in there in terms of MCT level requirements for all modalities, and we commented around that, and we got to work through the process. Unfortunately, there's no timeline around this. There isn't a set schedule. But working through the process, that's the reason there's open forum for industry comment and believe that lands in the right way.

What happened with the 2 LCDs that or the 2 MACs that presented this a few years ago?

Yes, it was a favorable outcome.

Okay. So a similar process. You went to bat the HRS and everybody went at it and it was favorable? And how you define favorable that they rewarded it?

Correct. Yes. I think aligning with FDA guidelines around what is expected by modality, who the appropriate patients are for each modality. And this is where we lean on our clinical and economic evidence. We think it's very clear, long-term continuous monitoring with Zio is the most appropriate modality for the vast majority of patients out there. It has the highest diagnostic yield, lowest retest rate, best health care resource utilization, and that's all proven through the CAMELOT data, in particular, which, by the way, was 300,000 Medicare lives. So that's important data. Obviously, we presented that and again, believe work through the process and it will land in the right way.

I want to talk a little bit about the international business, which is pretty young in its development. Can you give us an update on where you are with that and what the next steps are to grow it?

Yes. So we've been making some good progress there. Historically, the U.K. was really our only international market over the last, call it, 12, 14 months, we have launched into 5 new markets, 4 Western European countries and then Japan more recently in the last few months. So maybe starting with Japan. Japan is second-largest ACM market out there, 1.6 million tests prescribed annually. Generally traditional short-term Holter monitoring in that 1.6 million. So a real opportunity to shift that market to long-term continuous monitoring. I believe we're well positioned to grow our position in that market. We had a high medical needs designation and good physician society support their. Ultimately, the reimbursement rate that was initially assigned as the Holter rate and market Holter rate, which we don't believe recognizes the full value that we're delivering. So we are -- but the feedback was clear. They want to see head-to-head evidence, Zio versus in-market Japanese Holter Technologies. We're running that study now. We'll get that data collected and back in front of MHLW, which is an annual cycle. Think of that probably as a '27 event, not a '26 event by the time we run the study, get the data collected and back in front of MHLW and optimistic that lands in a good spot as well. Similar story in other countries, it's generally a market access and reimbursement effort. We are a new category as we were in the U.S. several years ago. So it's generally showing the evidence giving physician society support there within country and working the reimbursement channels. We're in Switzerland, Netherlands, Austria and Spain and showing good progress there. International has not really been a contributor to our business. Historically, it's starting to contribute. We're seeing good, healthy volume this year. I would expect that to continue in '26. But importantly, kind of seeding these markets for more meaningful contribution, think about it in '27 and beyond.

The Analyst Day that presented the LRP was 3 years ago, if my memory is correct?

Right in 2022.

It was a 5-year LRP or a 3-year LRP?

Five years. So '27 targets.

It's '27 targets. At what stage do you refreshed us? Because it feels to me like the business is very different than it was 3 years ago?

Yes. I would say it is. Some good, some bad, some headwinds, some tailwinds. Certainly, '25 has been a phenomenal year and seeing tremendous amount of growth in the business. No, we're not in a rush to update those targets. We'll get through next year, certainly or into next year. If there is a point in time where we need to update those targets, we'll take that opportunity, but continue to feel good about those.

I think you're a little bit ahead on profitability?

I think the pace that we've been driving from a profitability standpoint would put us slightly ahead of that. It's always a balance, though. We have a lot of innovation that we want to invest in. We do want to drive more and more profitability expansion and just trying to balance those 2 year-to-year. We are -- as I mentioned before, profitable growth is the driving kind of force. We want to continue to expand profitability that 400 basis points of adjusted EBITDA expansion year-to-year is how we think about it. That allows us to reinvest back into the business and continue to invest in innovation that will grow the business over the long term.

You gave preliminary 2026 revenue guidance on your third quarter, if I remember correctly, it was high teens. And we talked afterwards, and I said, why is high teens the right number? And so I'm going to ask you that same question?

Yes. Yes. We didn't give guidance, but coming off a quarter where we reported over 30% growth, we thought it was important to give a little bit of color around 2026. We pointed to kind of where Street numbers were at the time, which was in that 16% to 18% range and essentially said, we felt comfortable there. It's a good way to set up the year. We'll give formal guidance as we get into 2026, but didn't want any kind of surprises there. Obviously, a lot of momentum in the business and believe it's sustainable and durable. There's a lot to be excited about. Certainly, with the performance of 2025, we're going to have difficult comps all of next year, but certainly feel good about what's in front of us and the business continuing to grow. And we want -- I'd say, no different than this year. We want to be thoughtful in terms of how we set guidance. We want to put something out there. We have high confidence in. We're going to bake things in that we have good visibility to and then leave things out of guidance that maybe are a little less predictable or there are some factors that need to play through that before those ultimately contribute to the business. Innovative channel is a good example. That's an early -- an emerging part of our business, right? We don't have a lot of history there. It's kind of concentrated with across 18 partners today, and there can be some lumpiness in that business. So we want to be thoughtful there, not get ahead of ourselves, bake in what we have high confidence in and then leave the rest to play through as upside.

So can we use the word conservative?

We like -- we prefer the words.

This is like no, no, don't use that word.

We prefer the word thoughtful -- thoughtful and balanced approach. And I mean, I will say there's a reason we're leaving things out of guidance, and that's because they don't -- we don't have as high confidence in them as we do what we're putting in guidance. So I definitely want to remind folks of that, and we do try to be thoughtful. Some of these things may not play through and may not come in as upside, but we want to put guidance out there that we have high confidence in.

Is there an update or anything you can share on the FDA warning letter and the review process?

Yes. We made really good progress this year. If you remember, we put in a 12-month remediation plan with the FDA, I want to say, August, September last year. We had every timeline, every commitment in that 12-month plan. So we're through that. We've communicated that back to the FDA. That is an area where during the shutdown, they kind of put it to the side and said they would pick that back up when they came back. We're not stopping there. As we've talked about, we've engaged a third-party firm to come in and essentially do a full audit of our entire quality management system. We communicated that to the FDA. We committed to the FDA, we would share those findings. That will run through, call it, the early, early part of next year, and we'll communicate that back to the FDA. But have made great progress, proud of the progress we've made, certainly not done yet, but like where it's headed.

I believe there were some changes to reimbursement of the patch of the -- we're calling it monitor. Can you comment on that, please?

Yes. So every year, CMS updates the physician fee schedule. There's a proposed rule and a final rule. The final rule published, I want to say, early November. It comes out in pieces. So there's an initial final rule that comes out as a PDF and then data tables, essentially Excel tables that have the different values within that. What ultimately landed is long-term continuous monitoring, which is the primary reimbursement codes for Zio monitor, Medicare rates going up, call it, 8% next year and then for MCT slightly down for next year for Medicare. Medicare is 25% of our revenue, about 25% of our revenue. Commercial, call it, 50% of our revenue. Commercial is not -- generally not indexed directly to Medicare. We've worked hard to kind of divorce those 2 and set commercial rates independent of Medicare rates. And we'll give more guidance on this when we give formal 2026 guidance in terms of price versus volume for next year, but certainly a positive outcome.

Over time, you -- not you, but the company has spoken about other programs, sleep apnea, for example, I believe there are others too, there's a laundry list of them. Is one program further along than another? And what is the timeline for hearing an update on that?

Yes, great question. So that is absolutely -- when I talk about reinvesting back into the business, that is an area that we are really excited about. I would put sleep probably ahead of the others. If you think about from a product standpoint, we have Zio MCT that's with the FDA now. That's kind of the next product platform. And then beyond that, we've been working on a multivitals platform. We licensed some technology last year to start to bring in more sensing capabilities onto the device. So think about SpO2, respiratory rate, heart rate variability, other vitals. And as we're sensing more from the patient, it's right to assume we can deliver more insights for that patient and particularly around sleep. That's one that we think we can do something very similar to what we've done in cardiac monitoring. There's a significant overlap between cardiac arrhythmia and sleep patients. We've built the channel. If you think about our move into primary care as well as cardiologists and electrophysiologists, there's a desire to manage sleep for their patients as well. So we believe we're really well positioned there. We're actively making those investments into that opportunity to open it up. That's a mid- to longer-term opportunity for us, certainly not a 2026 driver. But again, I believe that could be a meaningful opportunity for the company.

You're busy.

We are, and we're having fun.

Good to hear. So when we're all here together at this time next year, what are we going to be talking about?

I think I'd probably stick on the innovation theme. So obviously, we have Zio MCT actively with the FDA now. Certainly, we'll have updates kind of where we're at with MCT this time next year. And I think some of these other opportunities kind of deeper in the pipeline, we'll start to really get some visibility. And we're excited about prioritizing those kind of innovation efforts as we go into 2026 and start making some meaningful progress there. So I'd point to that.

Excellent. Thank you so much, both of you for joining us here today.

Appreciate it. It's great to be here.