Kestra Medical Technologies, Ltd. ($KMTS)

Good afternoon, everybody. Next up, we have Kestra Medical. We have Brian Webster, President and CEO; and Vaseem Mahboob, Chief Financial Officer. Welcome.

Thanks.

Thank you. Thank you for having us.

So I guess maybe to start out, 2026, since your IPO, you've seen very consistent execution, which has been really nice. You got a good beats and guidance raises on the top line and gross margin. Can you talk about the momentum in the business and some of the progress you've made in '26?

Yes. I think our fiscal year 2026, which we just ended in April, I think, the start of the year was really about getting some of the momentum from the benefit of all of our payer contracts being in place. So we had worked for a couple of years to get all those contracts in place. Once those -- once we got to that sort of 70%-plus payer mix under contract, it really unlock the rest of the business model. So that was sort of the way we started the fiscal year. And then we saw great momentum coming from that. We built out our commercial team substantially. We've added about 60 reps in the last, I guess, 13 months. So that's quite an expansion of the sales team. We now have about 130 reps. And so getting all those reps in place, getting them trained up, out of the field, starting to see productivity is a big driver. So that, plus the insurance coverage has really gotten the engine going, and we're starting to see terrific momentum.

That's helpful. You're going to be giving guidance in the next earnings call. It's kind of Q4, fiscal Q4, given your fiscal year. How should we think about some of the kind of the key drivers in '27? Any kind of puts and takes you'd call out?

Yes. Well, I think we're mid-July is our earnings call. So we're giving official guidance then. I think the drivers for FY '27 will look a lot like '26 in that we've got continuing sales force expansion. What you'll see is as we build out the revenue pathway in FY '27, you'll start to see the benefit of all these hires that we did in FY '26 as they get on the productivity curve. So I think that will be a big part of the story. We'll continue to see revenue cycle management improvements as we get closer to accrual-based accounting on some of the -- with some of the payers, and we'll see a combination of those things will -- are going to deliver, we think, top-tier medtech growth here in the coming year.

We saw your competitor just reported this week actually, and their 12-month growth was like 8% for their LifeVest business over the last 12 months. And so the market is clearly growing. If you're taking share, they're growing high single digits. How should I think about just the underlying market growth rate and kind of the acceleration there?

Yes. It's -- so they just reported on Monday, and they reported 8% growth in their business. We're at about 60% growth in our last quarter. So the math there is the market's growing at 14%. And I think we would all agree that a big existing market growing at 14% is something to behold, and we're pretty happy about that. The real impetus behind that growth is the fact that our competitor figured out that we were going to take a bunch of their market share, and the only way that they were going to be able to grow their business was to grow the market. And that's exactly where we want them. We want them to be out pounding the pavement, using clinical data to push the narrative around WCD use. And so we're seeing the benefit of that. So you have ZOLL doing that and Kestra doing that. And so these physicians are hearing it in stereo now, and we're seeing the market grow. I would not be surprised at all is -- as we get into the next year, if we see that market growth continue to accelerate because we're adding a lot of sales territories.

How sustainable is those market acceleration?

Well, the math on the TAM, if you will, is 850,000 patients are eligible for a WCD. And only this past year, only about 1 in 7 that were eligible actually were prescribed one. So I think that it's very reasonable with continued good clinical data and execution that we can turn that 1 in 7 to 2 in 7, 3 in 7, maybe even 4 in 7. So I think we've got a good runway for extended market growth for the next 5 years, certainly.

On market share, 12%, 13% right now, but only on half of the accounts, can you just kind of help us understand like the market share in some of the key accounts that you're in and what -- how that's indicative of where share is going for you?

Yes, that rep count, so about 130 reps, right, as we ended our fiscal year, that gets us to maybe 60% market coverage in the U.S. market. So I think in the markets that we're actually in, we're certainly more than double that kind of share. So we're definitely seeing where we put a rep and we resource it with clinical resource and things like that, we're definitely seeing -- we're getting 25%, 30% and beyond market share. I would remind you, it's a 1 doc at a time model. So it's not a -- there's no hospital contract. There's no buying committees, clinical committees. You have to go get 1 doc at a time. So what happens is the rep gets in there, they convert that first physician and then they go right next door and they work on the next one and the next one. And so you see gradual penetration in those accounts kind of quarter-over-quarter. And we'll see that some of our more tenured reps, we're seeing 70% plus kind of market share in those accounts. So I think we'll see continued penetration, which will convert into a really good sales productivity metrics.

And obviously, the low-hanging fruit is just taking share, right, share conversion. Can you talk about the process and kind of the strategy of getting into account and opening an account and taking share? And then how can you take the share kind of post being in an account?

Well, yes, I think the first thing we do is when we're putting a new territory in, we're looking at the intersection between previous prescribing history because we have all the data. We know who the high prescribers are. So we're looking at the intersection between that and where we have payer contracts. And when we see those two things, that's where we want to put a rep. And then a rep comes in, first thing they do when they open up their sales force instances, they see all their prescribers Pareto, and they know who exactly to go after. And then once the rep starts to get some productivity, start to see that they can really develop that territory, then we'll drop in a clinical specialist who will help them to manage the accounts as they're bringing them up. So that's how we're seeing really good acceleration even with our top-tier reps who are really, really nailing the numbers, but we're adding clinical people to help them and now they're growing even faster.

On your sales force expanded to 130 from 80 end of last year, how are these territories kind of ramping in productivity at this stage?

I think we have a model that maybe, Vaseem, maybe you want to answer the model on that.

Yes, sure. So I think the financial model that we had put out there, Travis, was based on a rep starting doing about 40 fittings in the first 6 months as they ramp up. And when we define ramp-up, we are talking about like they come in, getting trained, getting the product, activating their 1099 fitters and then kind of building out those initial accounts that Brian talked about. They get to 10 fittings at month 6, means they're scaled up, then they stay there for 10 for that first year. They go to 12 the following year and 15 in year 3. So what we are seeing is the returns are like absolutely fantastic. So we -- all of our reps are averaging better than kind of the model. And our top reps are starting to put points that are north of 50 fittings per month. So plenty of room to go. But in our business, it's not that reps are not performing. They're just scaling from the left-hand side of the curve over to the right.

And when you think about kind of the doubling of reps, how much of this is like putting -- getting reps in the right place ahead of reimbursement wins and potential guideline updates ahead of the expansion there?

I think we're being very thoughtful about where we add reps. We tend to want to go deeper where we have really good account concentration. And we have -- I can think of several different territories where we had a high-producing rep. We went in, we split the territory, added another rep in there, and now we have 2 really high-producing reps. We've got -- we've seen that in at least a handful that I know of recently. I've looked at that data. And that's really exciting because that means we can do that effectively without running off the rep because the reps are -- they go out there and they earn that business, you don't want to take that business away from them, but there's so much business out there that they can go rebuild it. And that's been a great strategy so far.

You've had your ACE data in hand for a couple of quarters now. What's been the receptivity to docs and kind of feedback are you seeing and help with share gains or market expansion in any way?

I think the ACE-PAS, which is our post-approval study data, 21,000 patients, the largest ever WCD study, by the way, I think it's been really well received. Number one, it gives the rep something to go talk to the talk about. Number two, the data is rock solid supporting the product. So it allows the rep to defeat any myth that the competitor has been telling the physicians. And then it's also really focused on something very important, which is identifying that the percentage of risk in these patients is higher than the physicians generally thought it was. And so that's why you're going to see market growth is because the docs are going to start saying, "hey, maybe this patient that yesterday I didn't prescribe the WCD for, maybe tomorrow, I'm going to because I understand that they have more risk than I thought they did." And I think that's probably one of the most powerful things in that data set that we're seeing a benefit of.

On the guidelines, can you remind us kind of what guidelines are today and the time line to change those and how you think they're going to change and the impact on the market as those do change potentially?

Yes. So the guidelines today, a WCD and these are AHA and HRS rhythm guideline basically. The WCD today has a combination of II-A and II-B guidelines recommendations. II-A for the implant -- awaiting implant patients or somebody who's an ICD patient that's getting their lead extracted or their generator change. Those are super high risk, so those are II-A indication. The standard post-MI patient is a II-B indication. We think that with some work and all this data that we're putting on the table, we think we can get the wheels turning to get the guidelines updated. We've got to start with new scientific statements around it from KOLs, and then that hopefully will open the doors to the guidelines committee starting to talk about it. We think there's a lot of data there. We probably will add some outcome data that will help solidify the data set. And then if we can get even from a II-B for that big population moved up to a II-A, then I think the market goes from 1 in 7, it goes to 2, 3 or 4 in 7. So it would be a dramatic impact because it takes the risk assessment out of this sort of solely in the hands of the doc into now they've got more of a protocol program, and that's where we wanted to get to, and we think it should get to. We think the patient should have a vote in whether they are protected by a device like this, and we think that would lead to more of that.

How quickly can we see it in prescribing patterns?

I think it's reasonable, I think, within a couple of years. It's not going to happen next month. You don't get these committees to act very quickly, but as you should, right? It's clinical evidence and they need to be thoughtful about it. But I think it's reasonable within a couple of years.

And then on the competitive side, just curious what the kind of the latest you're seeing from your competitor there, and they've upgraded their WCD as well. Are you seeing any impact on that? Obviously, the market is expanding. So it's one of the impacts, but anything?

Yes. So our competitor, ZOLL, they brought out -- they launched their gen 5, so fifth generation WCD in December. I think they were a little embarrassed about it because it wasn't a really a launch. So we certainly wouldn't have launched a product that way. It -- I think it's an iterative product change for them as they continue to manage their fleet of assets. What they didn't do is bring any innovation in this new platform that was going to change our competitiveness. There's still no feature that they have in their product that is better than any one feature in our product. And so the product came out. It's bigger. It's heavier. We love it. And so we're excited to compete against it.

And the other competitor that's got the larger patch-like product, anything from them?

Yes. There's another company called Element Science that's trying to do a stick on AED basically. And we haven't seen them in the market much. We've seen them in a couple of accounts that were their clinical trial accounts, but we haven't seen much activity out of them yet.

I didn't think so, just making sure. On the algorithm side, you launched the new algorithm, HRS, what's been the receptivity to that? And how does it kind of strengthen your pitch to doctors and physician?

Yes. We're really excited about that. So we -- at HRS, we launched a new upgrade to the algorithm. What I love about it is med tech -- this is exactly the way med tech is supposed to work, right? You go out, you launch a product, you do a post-approval study, you look at your own data, and you improve your product based on what you learn, and you improve the opportunity to take care of these patients. So we did that. We looked at our data, we saw we could further reduce the already low false alarm rate. And we also saw we could further reduce the inappropriate shock rates. So we're going to cut our false alarm rate by 50%. The inappropriate shock rate will be reduced by over 60%. And both of those were already leading the category, but we're just making -- we're extending the lead, if you will. And we're doing that because we saw an opportunity to do a better job of taking care of these patients.

Helpful. And Vaseem, to bring it out a little bit your, I guess, kind of target gross margin. If you look at kind of your peer mid-80% gross margins, 85% gross margins, what's the path for you to get to that and your progress so far on the gross margin side?

Yes. I mean a big shout out to the team. I mean we have now expanded gross margins 9 quarters in a row. So really, really, it's been quite a journey to get there. But I think what's true is what we've been saying about the model and how we get there, right? As you run more volume through the P&L, you're going to get that leverage that you get from the volume. But there's 2 big parts to it. One, we have already completed all of the kind of unit cost reduction projects that we had to do. We're not touching the hardware because we want to preserve the CapEx investment. So you won't see that but most of our cost-out programs have been focused on the disposable itself. And I think that's pretty well understood. I think really for us, the big driver of gross margins going forward is going to be continuing that journey from being out of network to being in-network. And as we move those patients in we're going to get paid for those fittings and as a result, get higher revenue per fit, which will just translate into price and coming down into the P&L. So we feel really, really good about the progress that we have made and where we are on that journey. I think the unit economics, Travis, is really the silver lining here, which is a $10,000 asset acquisition cost over 10 years is going to generate $300,000 revenue and $250,000 of cash margin. So the investment in CapEx if you believe the market exists is we should be doing all day long. And I think that's really where the focus is to make sure that we have the product available for the team so that we can meet that service level and give our sales team the comfort that they have product, then they can never say no. And then at the same time, go out and drive more volume through the P&L, and we got good line of sight to those 70% plus gross margins.

On the macro side, just you are seeing some inflation or resin shipping costs and computer, anything that you can kind of call out where we should think about you have some exposure to?

No, I think the numbers that we see, and I think now we've been in this kind of environment for a little bit is de minimis. Freight cost as it is not a big deal for us, but the chips and everything else, we have done advanced purchases and things like that. So we feel pretty good about. And I think we tell, I mean, the fact that we have made a $75 million investment in our CapEx, we have a supply hedge and we have an inflation hedge because we are our biggest supplier.

Yes. It's an interesting model when you're -- when the hardware, you're depreciating it over so long and you're using the product over and over again. So things like the memory chip set are in the headlines today, we did advance buys of that, seeing some of that price uplift coming. And so we have a bunch of stock. But even at a little bit higher price, the per unit price increases is less than $0.20. So it's just -- it doesn't matter in this model.

Because it's being used so many times.

Right. Right. Right.

And over a long period of time.

The -- on the OpEx side, just maybe help us understand how much OpEx is needed to support kind of the top line at this stage and why not go faster?

Yes. Fiscal '26 has been like a really foundational year for. We talked about that we've been investing in the right places. When you look at the way the dollars have been going really focused on building out their direct to cardiology sales force that Brian talked about, making sure that the team has the resources, I think one of the great advantages that we have is we know where the fittings are at a ZIP code level. So we look for two things, where are the fittings and whether they have insurance coverage, and that's where we are deploying the reps. But then what we are doing now is, as Brian talked about some of those platinum reps going out doing business, now we are supporting those resources with clinical specialists, a very proven model where they're now farming the account, whereas the hunters are going out and doing more -- bringing on accounts online. So I think the dollars are going to be focused mostly on the distribution side. We have a very exciting pipeline, which is really a call option for the business. There's nothing baked into the numbers for some really exciting stuff that we have coming into the pipeline. So we'll continue to invest in R&D. And I think 2027 will be all about confirming what we have said ahead of that investment, which is that there's a lot of exciting revenue growth to come.

What are some of the things in the pipeline that are coming?

New exciting innovation. We developed the system to be platforms, right? So we have a WCD platform, which is the electronics. We have the wearable platform, and then we have the digital platform. And we have new, pretty exciting innovation happening on all three of those platforms. And so you'll see over the next several years, you'll see sort of an annual cadence of new innovation coming on to the market.

So likely some sort of innovation this year?

Yes.

On the Biobeat collaboration, maybe just help us understand like why and kind of what you're thinking about that collaboration investment?

Well, the why comes back to what I was saying earlier about looking at your own data and what we looked at our post-approval data, and 72% of the patients had hypertension. And the physicians who are putting them on the guidelines drugs, one of the most important things that they needed to know was what's going on with their blood pressure while they're going through their drug treatment. They want to know blood pressure and they want to know weight fluctuation. Those are the 2 biggest things. And so we said we met through our Board member, Ray Cohen, we met this Biobeat team, and they had a really innovative first FDA-approved wireless patch-based blood pressure monitoring. And we look at that and spend a bunch of time with them and figured out that, gee, if we integrated that into our system, then we could provide that kind of blood pressure monitoring to the physician, we'll couple that data with our ECG data to present 1 set of data to the physician who can get a better look at what's going on with those patients and allow them to manage the titration of those drugs as effectively as they can. We also -- as part of that structure, we'll have the ability to do Bluetooth weight scale data, we'll be able to collect as well and complete that whole picture. So we're excited about it. We've got an ongoing R&D partnership with Biobeat today and doing some different commercial collaborations with them, but we're super excited about where that's going to go. And I think for the platform, it's a signal that we are going to drive that platform towards a vital signs monitoring capability in the home environment. So we've already got the defibrillation capability, and that's for the most severe patients. But all these heart failure patients that are wearing our system for the long haul, we can put various vital signs monitoring signals in there and put -- give the physicians a really full view on what's going on with those patients while they're getting better. And we're excited about being able to add additional clinical utility to the product but also being able to monetize that.

So it basically adds revenue per patient as well?

Yes. Yes.

When you're thinking about collaboration with Biobeat, what all is involved in kind of getting the products to work together? Where are we in that process? And I don't think they're on the market yet, so kind of timing.

Well, they're -- Biobeat is on the market as a stand-alone with their patch-based device. And there -- they're making good commercial progress, ramping up a sales team and really doing a lot of kind of, I would say, market development activities right now. And so they've got that work going on. They're continuing to do some clinical work. We're focused right now on the R&D project with them, where we're working on integration of the actual hardware into our wearable and also the integration of the data platform so that we can -- as I mentioned, we can present that data uniformly to the physicians. So a lot of work going on between the companies. That's going great. And I don't think this is a long-term project. It's something that I would expect within the next 18 months or something like that, we'd be able to see that come to market.

Are there other opportunities to partner with other people, other companies in a similar way?

Yes. I think there's opportunities to extend the partnership with Biobeat even beyond that first measurement, which is the blood pressure. But then there's also -- because we built it as a platform, there's also the opportunity to bring in other technologies into that. And we're spending a good amount of time kind of vetting some of those opportunities. As you know, there's a lot of companies out there that have a particular area of focus. And so we're evaluating that. But the vision is when these patients go home, we want them to have this ability to have diagnosis of all the vital signs measurements that we can that can help to manage them as they're getting better. And so with that in mind, we're going to continue to add more capability.

And do you think that helps? Is the kind of the, I guess, the incentive for you more giving more value for your products so you get more share? Or is there other things that we're not thinking about?

Well, we want to monetize these for obvious reasons. And we will approach every one of them with that goal in mind. If the worst thing that happens though is we just gained more share in a really big market, then that will be a bad outcome. So that's the nice thing about the strategy is you got the two-prong, you can go get more revenue per fit because you're already spending all the money to get that patient, right? So you can go get more revenue per fit. But if you can -- if that can help you to get 5% more share in the WCD market, then that has dramatic impacts on the business.

When you think about revenue per fit, is it like single-digit uplift or double-digit uplift, 50% -- any way to kind of quantify revenue per fit uplift?

It will depend on the model. But I think it's reasonable to think that it's double-digit uplift percent-wise for sure.

And then if you think about potential for utilization, is it something like -- would it just be the heart failure patients? Or would everybody maybe use it?

I think we will likely segment the way we bring the technology to market. If you have a short-term patient who's maybe that explant patient or something like that, I'm not sure there's a big benefit to putting that kind of technology in there. But if you do have that longer-term heart failure patient, then that's where you really get to see the benefit.

Okay. And then internationally, is that even part of the strategy at this point?

Yes. We're working on our CE Mark. We want to make sure we have that optionality. The reality is we have so much to do here in the U.S. and so much opportunity. We're not going to take our eye off that ball, but we do want to advance the international far enough where we can pull that trigger when we want to. And there are some nice developments. We've heard just last week that some of the market development that's going on over there has led to new and expanded reimbursement in France. So that's great because that's one of the -- probably the second largest country for the category in Europe.

There's been some expansion in Florida Medicaid and the VA as well. Can you just help us understand how important that is as that rolls out?

Well, the VA is important because once you get on the federal supply schedule, now you have a license to hunt within the VA hospitals, and many of the high-producing territories in the U.S. have VA hospitals in them. So our team is putting concentrated effort going into those hospitals. And we've seen some really nice wins, including a few that I've heard of already where the VA has said -- in that particular hospital has said, we're exclusively going to use the customer device in this hospital. Then the Florida Medicaid, it helps us in a couple of ways. It helps us to get more business. So it was still a barrier that we had to overcome ZOLL would be able to say, "well, we cover Florida Medicaid, so you should give your patients to us and that." So it helps us to knock down that barrier, but it also just helps us with some of the patients where we did take a Medicaid patient. We weren't getting paid a nickel for it. And so now we'll get paid at least the Medicaid rate. So that's a revenue per fit increase that will be a benefit to us.

Great. Thanks a lot. I think we're out of time.

Okay. Thank you.

Awesome. Thanks for having us.

Thanks, everybody.