McChip Resources Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 16 speakers on the call.

Operator

Welcome to today's Irhythm Technologies Inc. Q2 2023 Earnings Conference Call. My name is Bailey, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Stephanie Zadovich, please go ahead.

Speaker 1

Thank you all for participating in today's call. Earlier today, Iraven released financial results for the Q2 ended June 30, 2023. Before we begin, I'd like to remind you that management will make statements during this Call that includes forward looking statements within the meaning of federal securities laws pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward looking statements. These are based upon our current estimates and various assumptions And reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance.

Speaker 1

These statements include risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section Also during the call, we will discuss certain financial measures that have not been prepared in accordance with U. S. GAAP with respect to our non GAAP and cash based results, Including adjusted EBITDA, adjusted operating expenses and adjusted net loss.

Speaker 1

Unless otherwise noted, all references to financial metrics are presented on a non GAAP basis. The presentation of additional information should not be considered in isolation of, as a substitute for, or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10 Q for a reconciliation of these measures to their most directly comparable GAAP financial measures. This conference call contains time sensitive information And is accurate only as of the live broadcast today, August 3, 2023. IRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise.

Speaker 1

And with that, I'll turn the call over to Quentin Blackford, Ibertham's President and CEO.

Speaker 2

Thank you, Stephanie. Good afternoon, and thank you all for joining us. Bryce Bobzine, our Chief Financial Officer and Dan Wilson, our EVP of Corporate Development Investor Relations, join me on today's call. My prepared remarks today cover business updates during the Q2 of 2023 and progress we've made against our growth and operational initiatives. I'll then turn the call over to Bryce to provide a detailed review of our financial results and updated guidance.

Speaker 2

In the Q2 of 2023, we realized continued growth across multiple channels And built on the solid momentum we saw in the Q1 of 2023, we recognized record quarterly revenue of $124,100,000 in the 2nd quarter, Which was ahead of our expectations and represented 22% growth compared to the prior year. These results were driven by continued strong volume from both Zio XT and Zio AT As we continue to see near record levels of new account openings, opened additional large national accounts, continued to gain traction within the primary care space and increased our market penetration within existing accounts. Fueling this growth was a continued market shift away from the short term halter usage Towards long term continuous monitoring as well as Zio XT outpacing the growth of an expanding ACM market. The second quarter was also the first Full quarter that Camelot data was available for our commercial teams to use in the field. The clinical value of Zio XT versus other modalities and brands is resonating with our customers, Driving account wins and impacting account retention.

Speaker 2

While early, payers are also responding positively to Camelot data, And it is influencing payer policies, including recent successes where previous utilization of halters or prior authorization requirements for long term ECG are now updating their policies and removing these requirements. Full manuscript publication of the Camelot data in a peer reviewed journal is in process. We are also beginning to expand into additional analyses of these real world data to further demonstrate the clinical value of the Zio services to patients, Physicians, payers, and healthcare systems. We are also making meaningful inroads with driving EHR integrations, which are intended to allow for an administratively simpler process and integrate Zio into existing workflows of our customers and their staff. Through incredible cross functional efforts by our internal teams and great collaboration with our customers, We achieved a significant milestone this past April with 1,000,000 all time registrations for the Zio services received through EHR integrated accounts.

Speaker 2

We believe this has translated to an estimated 175,000 hours of time back to our customer staff to support patient care, In which we project may have saved health systems an estimated $4,000,000 in staff time cost. The pace of EHR integration at both new and existing accounts has only accelerated Throughout 2023, with the total volume of registrations through EHR integration up more than 60% year over year, we are very excited to continue this progress And to continue developing innovative solutions for our customers as we strive to serve millions more patients within the coming years. As we move into the back half of twenty twenty three, We also are eagerly awaiting the upcoming Zio monitor launch later this quarter to provide our next generation device for our best in class long term continuous monitoring service. We believe that compared to Zio XT, this thinner, smaller, lighter, more breathable device can improve patient compliance And diagnostic yield as a result of extended wear times, initial real world data from the first 673 patients who wore Zio monitor were presented at ACC this past March. The first market evaluation phase was concluded in May with the Zio monitor being used by 6,000 plus patients over a 12 month period.

Speaker 2

The market evaluation data confirmed the findings from ACC and showed that when compared to Zio XT, Zio Monitor showed an increase in patient compliance and diagnostic yield As well as delivering the same high quality service. As we move into full commercial launch, we are planning a purposeful rollout strategy designed to support our customers and patients With the best in class service they have come to expect from iRhythm. To do this, we are implementing a phased rollout that allows us to bring availability of Zio Monitor to patients as quickly as possible While making sure that we transition away from Zio XT in a measured fashion, we look forward to sharing additional details with you in the months ahead. Turning to additional pillars for iRhythm's long term sustainable growth, we've recently hit several milestones essential to strengthening our international presence. In Japan, we are thrilled to announce that we were granted high medical needs designation by the Japanese Ministry of Health and Welfare, or the MHLW, in early July.

Speaker 2

Worth noting, this designation is specific to Zio, giving us a differentiated position in this large market. As a reminder, Japan is the 2nd largest ACM market in the world with 1,500,000 ACM tests prescribed annually. Japan still utilizes the Halter monitor as a standard of care with very limited adoption of patch technologies, resulting in a very attractive point of entry for Zio as a disruptive, innovative technology and service. By working closely with the Japanese Heart Rhythm Society, Our teams did an exceptional job using Zio's extensive clinical trial evidence and differentiated AI to help the MHLW appreciate Zio's clinical value when compared to the existing Halter standard of care. Following this designation, we submitted our Shodan application for regulatory review in July.

Speaker 2

Importantly, the designation enables priority review for marketing authorization by the Japanese Pharmaceutical and Medical Device Agency, or the PMDA, And it also paves the way for potential premium pricing specifically for Zio in Japan. We will continue to work closely with the PMDA during the review of our shonen submission look forward to updating you on the progress in future quarters. In Europe, we were also pleased to announce that we have opened our first market evaluation engagement in Switzerland With early onboarding of one of the country's 5 university hospitals, this initial engagement will allow targeted healthcare providers to experience the Zio service In preparation for a broader commercial launch in the future, as shared in our strategic plan at our Investor Day last September, this market priming phase represents the initial steps international growth plan to accelerate access to long term cardiac monitoring to more patients worldwide as we gain experience with regional reimbursement dynamics in parallel. While we are hyper focused on execution within our growth pillars, I've also been pleased with the progress made to drive operational excellence throughout the organization, Enhancing our financial profile and preparing to scale the business for future growth. We achieved a significant milestone in our global business services center in Manila during the quarter As we welcome the 1st wave of full time employees, we've been very pleased with the progress made in our ongoing business transformation activities As is being demonstrated by the nice improvements in our financial profile this quarter.

Speaker 2

Lastly, as previously disclosed, we received a warning letter from the FDA on May 25, Which focused on our Zio AT system and the alleged nonconformities related to medical device reporting requirements and quality system requirements. Since we received the warning letter in late May, we have engaged with the FDA and submitted a thorough response. We have been encouraged by the collaborative engagement with them and believe we have now clarified with the labeling modifications that are needed to improve the user's understanding of the Zio AT system and how the device is used for the provision of ambulatory, mobile, cardiac telemetry services. In addition, we have proposed enhanced design features to the product that further address areas

Speaker 3

of focus, while also following

Speaker 2

the FDA's direction to work with the CDRH product review team Regarding changes that occurred under letters to file and the potential need to submit a 510 ks as a catch up for changes to the Zio AT system. While we understand the FDA continues to review our responses, are pleased with the progress, and we'll continue to work collaboratively with them to address their concerns. While always subject to change until the review is completed, We've agreed to make the requested labeling changes that will allow us to continue to market Zio AT as a device for ambulatory MCT services. We remain committed to our customers, patient safety, quality and compliance, and we will continue to work diligently and collaboratively to resolve the warning letter to the FDA satisfaction. Considering the proposed design enhancements and other commitments related to the Zio AT system, we do expect our original timeline for the submission of our next Zio MCT system to be impacted.

Speaker 2

Based on current estimates, we anticipate Zio MCT to be delayed by approximately 12 months As we work through the product modifications for Zio AT and potential regulatory filing requirements, resulting in a 2025 market introduction of our Given the additional time, our strategy regarding the ZiomCT system enhancements has shifted such that we intend to move directly to ZiomCT 2.0 By pulling additional product design features into our initial submission that we had previously planned for a later generation, we will continue to evaluate options to expedite our product timelines and ensure In closing, I could not be prouder of the iRhythm team. The teams have remained Focused and committed to the goals that we laid out at the beginning of the year despite the potential of being easily distracted and have achieved outstanding results to date, We delivered tremendous growth in the first half of twenty twenty three and are making the necessary investments into the business to continue driving growth through multiple levers in an operationally efficient manner. We continue to believe that the global ambulatory cardiac monitoring market will grow significantly in the coming years, and we are well positioned to capture our share of this sizable opportunity ahead.

Speaker 2

We've never been more excited about the future of our company. With that, I'll now turn

Speaker 4

the call over to Bryce to discuss our financial performance. Thanks, Quintin. A reminder, unless otherwise noted, the financial metrics that I discuss today will be presented on a non GAAP basis. Reconciliations to GAAP can be found in today's earnings release And on our IR website. As previously mentioned, our 2nd quarter results demonstrated significant momentum in our core U.

Speaker 4

S. Market As we realized revenues of $124,100,000 or 21.6 percent year over year growth. Looking at new store, same store mix, New store, defined as accounts that have been open for less than 12 months, accounted for over 30% of our year over year volume growth. This was driven by the Q2 being the 2nd highest quarter ever of Zio XT new account openings, while we also continue to increase penetration in existing accounts and reduced account churn. Home enrollment for Zio Services was approximately 20% of volume in the Average selling prices during the Q2 were in line both year over year and quarter over quarter.

Speaker 4

With pricing stable within the commercial portfolio and national rates in place For our Medicare business, as of the beginning of 2023, we have continued to leverage our IDTF footprint in the most efficient manner to serve our patients. After the Q2 close, CMS did release proposed updates to their calendar year 2024 physician fee schedule that included relatively minor reductions to A physician conversion factor used to calculate payments for all CPT codes as well as proposed clinical labor cuts to relative value units for all CPT codes. However, the proposed rule also incorporated an increase in San Francisco's geographic practice cost index modifier. Thus, we believe the net impact The CMS calendar year 'twenty four proposed rule will be immaterial to iRhythm's business as we understand it today. As this is only a proposed rule at this point, we We intend to proactively engage with CMS and industry groups until the rule is finalized in the November time frame.

Speaker 4

Longer term, we intend to continue to work with CMS and other stakeholders to properly understand the value of AI and innovative medical devices such as the Zevo Systems. Moving down the rest the P and L, gross margin for the Q2 was 69.5%, representing 160 basis point improvement compared to the Q1 of 2023 And a seventy basis point improvement versus the Q2 of 2022, both sequentially and year over year improvements were driven by a reduction in unit cost to serve As we ramp volumes significantly and continue to leverage our fixed cost infrastructure, 2nd quarter adjusted operating expenses were 99,700,000 Down 9% sequentially and up 7% year over year. Sequentially, decreased spend was primarily driven by seasonal items in the Q1 that did not reoccur in the second, Such as timing of payroll taxes as well as annual sales and leadership meetings, slightly offset by higher personnel expenses to support growing volumes. Also as expected, some of the duplicative costs incurred during the Q1 of 2023 started to slow down as we operationalize the global businesses services center in the Philippines and begin to leverage 3rd parties. Compared to the Q2 of 2022, the increase in adjusted operating expenses was primarily due to payroll related expenses To support the business' significant volume growth, particularly encouraging is that SG and A as a percentage of revenue was dramatically reduced compared to the prior quarters, lent sequentially by the benefit in G and A leverage.

Speaker 4

We believe that this is a trend that is sustainable over the long term as we begin to realize value from our focus on operational efficiency. Adjusted net loss in the Q2 was $13,100,000 or a loss of $0.43 per share compared to adjusted net loss of $33,400,000 Or a loss of $1.10 per share in the Q1 of 2023. Year over year, we saw a $0.36 improvement in adjusted net loss per share As we continue to drive operating leverage in our core business, 2nd quarter 2023 business transformation costs were 5,400,000 Generally in line with expectations as we continue to stand up our Global Business Services Center. Importantly, adjusted EBITDA in the Q2 2023 was positive $4,400,000 reflecting an increase of $16,400,000 sequentially and an increase of $9,300,000 year over year. You can clearly see the momentum building in the organization as we put greater focus around operational efficiency.

Speaker 4

Turning to guidance, we are updating our 2023 outlook To reflect the anticipated full year revenue growth of approximately 18% to 19% compared to 2022, representing a range of approximately $485,000,000 to 490,000,000 This takes into consideration our performance in the first half of twenty twenty three and seasonality typically seen in the Q3, while also remaining thoughtful as we We anticipate approximately 25% of full year revenues to be realized in the Q3, in line with non COVID years. We continue to believe that gross margin will range between approximately 69% 70% for the full year. As previously detailed, our full year guidance contemplates pressure to gross margin in the back half of twenty twenty three as we ramp to launch our Xeal monitor services into the U. S. Commercial marketplace.

Speaker 4

This will include an evaluation of our current XT inventory levels and may reflect underutilized cost for our Zio monitor system as we scale the new product. We continue to anticipate that adjusted operating expenses in 2023 will range between approximately $417,000,000 $427,000,000 Notably, our adjusted operating expense guidance now contemplates costs associated with the FDA engagement and the Department of Justice inquiry. However, we've been able to drive efficiencies in the business that will offset these incremental increases for the remainder of the year. With the update to revenue guidance the efficiencies created within operating expenses, we now believe that adjusted EBITDA margin in 2023 will range between approximately 0.5% of revenue. As a reminder, adjusted EBITDA will continue to exclude restructuring costs, transformation costs and stock based compensation expenses.

Speaker 4

In 2023, we continue to anticipate incurring approximately $15,000,000 to $20,000,000 of onetime non GAAP business transformation and restructuring costs Related to the ongoing globalization efforts to drive efficiency, improve scalability and provide continued high quality customer and patient experience. We believe that the expenses incurred related to these activities in 2023 will further enable operating leverage into the future, Especially as we grow to serve more patients in our core markets and internationally. Finally, we ended the 2nd quarter in a strong financial position with 164 point With that, Quentin, Dan and I would like to now open the call for questions. Operator?

Operator

Thank you. And please do ensure that you are unmuted locally. We request that each person limits themselves to one question and one follow-up. Thank you. Our first question today comes from the line of Margaret Kuzoor from William Blair.

Operator

Please go ahead Margaret. Your line is now open.

Speaker 5

Hi, good afternoon, guys. Thanks for taking the question. Maybe just to start, I wanted to see if you guys can give any breakdown in terms of growth of XT versus AT this quarter. And I referenced that in part because of guidance, right? So we saw guidance on the low end, up $5,000,000 You obviously had a really nice beat this quarter, at least relative to our numbers.

Speaker 5

You're talking about near record new account adds, national accounts. We're seeing accelerating growth. So long story short, I'm trying to understand Why not raise the high end of the guidance range? I know AT was part of that in the past.

Speaker 3

Sure. Thanks for the question, Margaret. Look, I think overall, we continue to be really encouraged with momentum in the business on both the XT and the AT business for that matter. With AT continuing to step up off of where it was at in Q1, I'll let Bryce get into some of the specifics around exactly how the two figures grew within the quarter itself. But in terms of the full year, I think more than anything else, we just we're not going to get ahead of ourselves at this point in time on the high end of the guide.

Speaker 3

Certainly, we're heading Q2. We're very bullish with respect to the momentum that we're seeing. But going into the back half of the year, we want to be So there's nothing to read into there, but I'll let Bryce speak to the results of the quarter.

Speaker 6

Yes. Margaret, good question. And we've talked about this in the past. I think From a registration perspective, we're seeing pretty significant growth across both lines of business. When you think about the AT component, it's in that high 30s range We've talked about in the past, and you can think about then where that meets from an XP perspective, it's north of the 20% range.

Speaker 6

So We feel great about the progress being made and where we're at operationally, to Quintin's point. We just need to be thoughtful as we navigate the back half And make sure we're not getting that out of ourselves.

Speaker 5

Okay. That's helpful. And then the second thing I wanted to touch on a little bit is The warning letter, your comments on the label changes the FDA is requiring to kind of leave the product on some market. So, one, did I understand that correctly, you will be able to leave kind of AT On the market. And then 2, what's the impact of that label change that they're asking for?

Speaker 5

Does that limit your ability to sell it all or Add new accounts or anything of that sort? Thank you.

Speaker 3

Yes, Margaret. That is the right way to think about it. We've worked through with the FDA Our suggested labeling changes, they've had some suggested labeling changes as well to which we're in full alignment with and we're in the process of working those into The label as we speak and most of that is just around clarifying more clearly for the patient and the physician, matters around trigger limits, duration of The life of the product, those sort of things. So it's nothing that's going to impede our ability to sell the product or market the product. And to your point, yes, we've reached alignment there that we can continue to monitor or sorry, market as an MCT monitor into the future.

Speaker 7

Perfect. Thanks guys.

Operator

Thank you. The next question today comes from the line of Alan Gong from JPMorgan. Please go ahead, Alan. Your line is now open.

Speaker 8

Hi. This is actually Lily on for Alan. Thanks so much for taking the question. Maybe just following up on that, could you talk a bit about the trends you've been seeing in VOAT in light of the warning letter? Have you seen that result in any sort Softness in demand since that was announced?

Speaker 2

Yes. I think for

Speaker 3

the most part over the course Keep in mind that the warning letter came in the latter part of it, but we were very proactive to get out with our customers to address the fact that there was a warning letter To speak to exactly where the focus was at and make sure that we were proactively engaging with our customers. And I'll tell you, we've been really Encouraged by the results that we've seen in that AT business even post the warning letter. So momentum continues to be strong. I think we're as excited as ever About that product line, to Bryce's point earlier, we're going to be thoughtful about it in the back half of the year. The comps do get a bit easier with AT in the back half considering No, we had the challenges with it in the Q4 of last year.

Speaker 3

So the setup is nice, but we're just not going to get ahead of ourselves at this point with respect to The high end of our guidance. But with AT, incredibly bullish on it. We think there's a tremendous amount of market share to be gained in that MCT space. We think the AT product It's differentiated. Certainly, we're excited to get the next generation of our MCT device out there, but there's a lot of runway in that space and the momentum continues to be very strong in our business there.

Speaker 8

Great. That's helpful. And then maybe just on the DOJ inquiry, is there anything new that you'd be willing to share in terms of what they're actually looking into, any timelines we should be keeping in mind and how you're thinking about this impacting the business? Thanks so

Speaker 2

much. Yes. With respect to the DOJ, not

Speaker 3

a whole lot to update on at this point in time. I mean, we are producing documentation for them. It's hard to get any real clarity on exactly what the area of focus is. I would point back to we believe we're not the only one in the Industry that received the document request or the subpoena knowing that one of our competitors in the NGT space also received that. So We're complying with them.

Speaker 3

We continue to cooperate with them. The interactions have been very cordial. We're going to continue to Work directly with them. But in terms of giving you a time line around what to expect, it's hard to say. I really don't know what to share with you there.

Speaker 3

As we have updates, we'll be committed to updating the investor community as we have those. But at this point in time, there's just not any new information to share.

Speaker 8

Got it. Thank you.

Operator

Thank you. The next question today comes from the line of Callum Tidjmarsh from Morgan Stanley. Please go ahead, Calum. Your line is now open.

Speaker 9

Thanks, guys. Just one on international for me, if possible. So obviously, good development here in Japan. Can you maybe talk a bit more about this and how we should think about modeling the ramp out here over time once approved, I guess, relative to what we in the U. S.

Speaker 9

Relative to the launch there? Thanks.

Speaker 3

Yes. We're super excited by what we're seeing in Japan. I think Capturing that high medical needs designation is a meaningful milestone for us. And I think most importantly, the fact that it's specific to Zio And not long term monitoring in general is even more encouraging to us because it creates some real differentiation for us in a Market that frankly hasn't valued PAS based technologies just yet and then to have Zio differentiated within that group is significant. We're on file now as we identified with respect to the Shonen application.

Speaker 3

I think that probably runs 9 to 12 months is our best estimate. And then we'll immediately go into discussions around reimbursement, which is probably another 6 months. And certainly, having the high medical needs designation, I think, puts us in a position To really push for premium pricing in that segment, I think it will be very attractive pricing for us in that market, which again is the 2nd largest market in the world, more than 1,500,000 ACM test being prescribed each and every year. But when you think about timing of contribution, I think you probably see a product Coming into the market late in 2024 as we turn into 2025. So we'll speak more around what to think about in the way of contribution we get more clarity on when it will be available to come into the market, but probably not a revenue driver for us in the year of 2024, but a product that begins to come into the market early 2025.

Speaker 9

Got it. And then maybe just one follow-up, please. So just on penetration of Zio in the U. S. ACM market, Quite a few numbers out there at the moment.

Speaker 9

Maybe it would be helpful if you could break down and quantify where you think penetration sits right now, I guess, relative to the traditional Holter devices. And then any impact you've seen from the emergence of competing products that might have changed the rate of penetration? Cheers.

Speaker 3

Yes, I think that penetration rate sits somewhere right around 30% of the overall market utilizing patch based So I think there's a meaningful runway that continues to sit in front of this entire industry. I think we have the fair share of that 30%. I think we have the best in class product There certainly Camelot, the data that we released earlier in the year would validate that. And back to the point, you got a long runway in here as Patch based technologies become the standard of care in this industry, and I think that's going to fuel significant growth, not only for ourselves, but for our competitors as well. I think the rising tide is going to lift I'll vote in this scenario and that's going to be the case for several years.

Speaker 3

I think where it gets really exciting is the progress that we see around the primary care physicians Utilizing this device to a meaningful degree and the interest level that continues to grow there, the bigger question is does the overall market grow significantly With this technology, considering how easy it is to use, and I think that becomes the real opportunity where you can more than double the overall size of this market over the next several years. So You've got 2 things working in your favor. You've got early adoption of the technology as it moves from store to standard of care, and then you've got the opportunity to really Meaningfully increased double, if not triple the overall size of the market.

Speaker 9

Got it. Thanks a lot, guys.

Operator

Thank you. Thank you. The next question today comes from the line of Marie Thibault from BTIG. Please go ahead, Marie. Your line is now open.

Speaker 10

Hi, thanks. Hi, thanks so much for taking the questions and congrats on a great quarter. Wanted to ask here a clarification on the FDA warning letter process. I think I heard you say that in your discussions with the FDA, you've also proposed Enhanced design features and are still determining the potential need to submit a 510. Any clarity on the sorts of Time lines you're thinking about with the agency, anything that they've communicated on that front and just wanted to understand those proposed enhanced Design features.

Speaker 10

Certainly understand MCT is a separate thing, but just wanted to learn a little bit more about that.

Speaker 3

Yes. Hey, Marie, thanks for the question. With respect to the letter to file or would they like to see a catch up 510 that is something that's still in the review with The CDRH and therefore the FDA. And I'll tell you that the collaboration there has been terrific. A lot of great dialogue And back and forth there, and they certainly are looking at our letters to file and getting comfortable with whether that was an approach they're okay with or if they would like to see us move Do a catch up 510 ks.

Speaker 3

In terms of the time frame around that, I can't give you any specific timing around it other than It's the active part of their review right now, and we're in the midst of it. So it could be quick. It could take a bit longer. The way we've thought about the ONCT in those time frames, frankly, is that it's going to take a bit of time to work through this with them and that There may be a catch up 510 that's required, of which we're highly confident that we would be able to continue to market the product and leave that AGT product in the marketplace while we work through a catch up 510, but we would need to get that through the FDA and then we could submit NCT. So When we talk about the delay in the MCC product, a lot of that is sort of contemplating navigating through this with the AT product in the So that's what's impacting those timeframes a bit.

Speaker 3

With respect to the design features, they're relatively straightforward. It's identifying the capability to put on the patch So a way to notify the patient when they might be approaching that max trigger limit. So think about that as a light that begins to flash on the device itself. It's working into, say, Zio Suite, a trigger limit counter, so that as you're approaching it, you start to see that. So These are relatively easy design enhancements that we've identified and are working with the FDA on.

Speaker 3

Nothing that changes the features, functions of the product in any way or how we would Sell it. It's more informative to the patient and the physician. So that's how we think about it. And of course, as I said, When the FDA sort of clarifies if they're okay with our learn to file approach or if they'd like to see us file a catch up 510, We can provide more information at that point in time, but we feel good about the interactions, the date, the tone and the interactions and exactly how we can continue to navigate Forward with this and the product staying in the market throughout that process.

Speaker 10

Okay. That's well understood. Thanks for all that detail, Quentin. My follow-up here is on Zio Monitor. Good to hear all the really positive feedback coming out of that product.

Speaker 10

How are you thinking about Phase 1, should we be in a broad launch by the end of the year? And how should we be thinking about changes in return rates or any Uptick in prescribing, any ways to think about that new enhanced product? Thank you.

Speaker 6

Yes. Marie, we're super excited about these ModernaV Marketplace. And that launch will start here in the back half of Q3, and we're really excited to get it into our patients and our customers' hands. And It will continue throughout the remainder of the year. As you know, these things take a bit of time as you're pushing them out into multiple channels Multiple different customers, but we're really excited.

Speaker 6

As far as contemplation of any improvement in their churn device rate, we haven't necessarily thought about it thus Barb, it's going to take some time for it to be out there and start to be utilized and frankly for it to come all the way back through the system. So Nothing contemplated from a guidance perspective, so any benefit that we would get, and we do believe there's a benefit over time, is not contemplated in the guidance that stands now. We also have not contemplated any incremental volume associated with the Zeo monitor launch. Penetration levels, Ramping volumes, those sorts of things have been performing incredibly well with XT. Do we think there's an opportunity for that to be enhanced with monitor?

Speaker 6

Absolutely, there is, But that has not been contemplated in the guidance it stands now.

Speaker 10

Okay, very good. Good luck with it. Thank you.

Speaker 11

Thank you. Thank you.

Operator

Thank you. The next question today comes from the line of Richard Newitter from Truist Securities. Please go ahead, Richard. Your line is now open.

Speaker 7

Hi, this is Sam on for Rich. Thanks for taking the question. Just First one to put a finer point on AT as it's contemplated in the guide. Is it reasonable to expect and does guidance expect an acceleration in Year over year growth for AT in the second half given that those comps get easier?

Speaker 6

Yes. So the comp definitely gets easier. The way we're thinking about it is we're keeping it in line with what our original expectations were. And 100%, There could be it is on some easier comps, so we could see accelerated growth there. But we want to see it play through the numbers before We get out ahead of ourselves.

Speaker 6

So that's the way we thought about it, really no adjustment to what we had originally assumed from the original guidance.

Speaker 7

Got it. That's helpful. And then second one just on cost and impressive margin results here in the quarter. And as we think about some of those costs How sustainable could they be? And as we think about 2024 with some of these hopefully one time costs coming out with the DOJ and warning How should we think about leveraging the business into next year?

Speaker 6

Yes. So gross margin in the quarter, we're really happy with the So 69.5 percent coming off a quarter of 67.9% in Q1. So nice improvements from a sequential quarter standpoint. And honestly, To your point, there's some duplicative costs that were in Q1, and some of those came out in Q2, but there are still others that are there. And A lot of that is just creating efficiency in these areas of focus that we've had, and that's being leveraging some third party resources for our customer care and our clinical ops side, As well as standing up the Global Business Center in Manila.

Speaker 6

So there is some duplicative costs still in the system, but we did see it start to tail down. For me, as I think about gross margin, we talked about the XeoMonitor launch being a bit of a headwind In the short run, because we have to evaluate the XT inventory levels, and it'll take a while to get the scale. So you're thinking about the model, I Gross margin probably pulls back a little bit in Q3, but spend, I think spend is $100,000,000 or so. It's going to be relatively consistent. Now, there will always be some volatility, and that's why we put out the range of 4.17 to 4.27, and you'll work that into your model.

Speaker 6

But I do think over time, This is absolutely sustainable. It's just going to take a few quarters for us to fully have those new operations up and running Until we really see it play through. We'll talk more about 2024 as we move throughout the year, but we feel great about the trajectory we're heading.

Operator

Thank you. The next question today comes from the line of Nathan Trebek from Wells Fargo. Please go ahead, Nathan. Your line is now open.

Speaker 12

Hi, thanks for taking the question. Just to clarify on the warning letter, is there any change to your marketing claims at the moment for Zio AT

Speaker 3

No. There's further clarification in the label itself, as I indicated earlier, Just to help enhance the understanding for the patient, but there's no difference in how we're marketing the device and we'll continue to market it as an MCT device.

Speaker 12

Okay, great. Thanks. And in terms of so what can you comment on the next gen COMCT that you will

Speaker 11

Kind of bring it to

Speaker 12

the market due to the submission delay. Will this be a 30 day device? Anything you can give on a next gen device? Thanks.

Speaker 3

Yes. So, great question. The 1st generation of the NCC device was certainly looking to extend the wear period out Beyond the 14 days that's in our AT product today, getting north of 20. By going to the 2.0 version, it does start to introduce capabilities like utilizing a smart device versus our gateway that we use today. When you introduce that, it now starts to open up opportunities to go even beyond 21 days, get out closer to that 30 days, if not 30 days.

Speaker 3

So yes, it opens up that feature set, opens up things like making information more available through the smart device on a more timely To inform a patient, to inform a physician, there's a lot of things you can do through a smart device. Now there are some other things that we'll bring into the product that we're not going to disclose at this point in time more for competitive reasons, but I think there are some real differentiators that we had planned originally in the 2nd generation of MCT to be Delivered after the launch of the 1st generation, we'll now pull that forward. So as we get closer to submitting that and ultimately getting that through clearance, We'll start to talk about some of those enhanced features, but we're excited about MCT. I think it's a tremendous opportunity for us in the future.

Speaker 12

Great. Thanks.

Operator

Thank you. The next question today comes from the line of David Rescott Baird, please go ahead, David. Your line is now open.

Speaker 13

Hey, guys. Thanks for taking the question. Congrats on A strong quarter here. Just first on the Zio MCT extended time line here. I just a 2 part question.

Speaker 13

1, wanted to clarify that what you're Talking about with the Zio kind of MCT 2.0 is essentially more of just an enhancement that's coming in 2025 and there's not a new device Coming between the products you have now and ZioMCT. And then the second part of that question, I'm just wondering if the extended time lines here Impact the kind of 5 year 20 percent growth outlook that you have or the way in which you've kind of described that I think you previously talked more about linear growth and just wondering if the timeline here impacts that at all.

Speaker 3

David, thanks for the question. I don't see it impacting our path to where we're trying to get over the 5 years to $1,000,000,000 in revenue. I don't see it impacting that at all. I think we continue to be encouraged by the momentum in the AT business. It's growing very nicely for us.

Speaker 3

I do think There are some things we can even do on that AT product, before we get to the next generation of the MCC device that we will bring to market that can continue to enhance it. So I don't see any change to the long term trajectory of what we're taking the business and getting to the $1,000,000,000 in revenue and the time frames that we talked about. There will not be another device that will get introduced between, say, AT and ultimately getting to that MCT, what I'm now calling 2.0, but it will really be our version of our Zio MCT product into the market. It's just we're bringing features that were originally in the 2nd generation forward into that 1st generation. I think it's important to note, we were within a matter of weeks, a month or so of being able to submit our Zio MCT product with the FDA For approval of sort of that first generation device, the reality is as we navigate through the warning letter with the And we want to make sure we address all of their concerns appropriately.

Speaker 3

Our focus is on IT with them. And we're not going to focus on anything other than AT With the agency until we get them comfortable and we feel like there's a clear path there, but we want to navigate through that before we introduce MCT as a filing. So We're really happy with the progress on MCT. We're excited by it. A lot of that first generation is designed.

Speaker 3

Now we move on to designing in some of those 2nd generation features we continue to work with the agency on AT and at the end of the day, it speeds up our ability to get an even better product into the market.

Speaker 13

Okay. Makes sense. I guess, just on the warning letter then, I think you said you talked about kind Clarification around the label changes. I'm just wondering, based on what you submitted, if the FDA essentially has These clarifications and maybe the risk that we've all kind of thought about, for the device to maybe get come off the market, Has been removed or if that kind of risk is more or less off the table at this point, just based on where you are in the discussions with the FDA on the morning order. Thank you.

Speaker 3

Yes. And I think, look, out of respect to the agency, we realized that The review is still open, right? And anytime the review is still open, the agency could go any direction that they want to. To your Initial question, have we aligned with the agency? We absolutely have with respect to the labeling requirements that both, One, we have suggested some updates and they suggested some updates.

Speaker 3

We've absolutely aligned with them on what those labeling changes need to look like, and we're putting those into The label as we speak and there's alignment there that with those labeling updates, we can continue to market the product as an MCT device. So There is alignment there with the agency. The part of the review that we're not through yet is they're digging into the letter to file. They're looking into that. And Ultimately, they're going to have to get comfortable that either the letter to file approach that we took is one that they're comfortable with.

Speaker 3

We continue to believe that it was the right approach. We've had external Experts and consultants look at this as well that align with our point of view around letter to file, but we respect the fact that the agency could have a different point of view. And If that's the case, then likely would run down the path of a catch up 510 to where you would put those letter to file Changes into a catch up 510 to get it on file. In that scenario, we continue to believe that the product would stay in the market and that we would continue To market the product, there would not be any disruption with it. And my view is, we've had multiple months of interaction now with the agency.

Speaker 3

If they were interested in halting the product or delaying marketing of the product, seizing shipment of the product, they would have made that clear in the warning letter or they would have begun to make that Clear in the interactions that we've had with them to date, and there's nothing in those interactions that give us any indication that, that is Where they would go with this? As a matter of fact, the fact that we're raising the midpoint of our guidance, I think, should infer the confidence that we have in the interactions to date and sort of The fact that we're pleased with where this has gone thus far. So we continue to be excited about the future, continue to believe we can navigate through this In a very successful way and that the product will remain in the market throughout it.

Speaker 6

Great. Thank you.

Operator

Thank you. The next question today comes from the line of David Saxon from Needham. Please go ahead, David. Your line is now open.

Speaker 12

Yes. Good afternoon, guys. And thanks for taking my questions. I wanted to start with reimbursement, maybe a 2 parter here. Maybe first just give an update on where you are with transferring volumes to your SFIDTF?

Speaker 12

And then secondly, maybe can you just remind us what you've seen historically in terms of changes at commercial payers? We obviously see what CMS is proposing, but I think it'd be helpful if you could frame what commercial rates have done as contracts right now.

Speaker 6

Sure. So as far as the progression to the San Francisco IDPF, I would say we're operating in line with our expectations. We still Believe that roughly 50% of our total volume in 2023 will run through that San Francisco IDPF. So I think we're progressing well. And again, we'll continue to bring the investor community up to speed should anything change from there, but we're operating in line with what the plan was.

Speaker 6

As far as the reimbursement side, you probably saw the announcement on the CMS side for calendar year 2024. And there were Some small reductions contemplated in the proposed rule. And with some small changes to the physician conversion factor, Clinical labor reductions for relative value units across all CPT codes. In our mind, that's probably about a 4% to 5% reduction in the reimbursement for CMS with those two impacts. As importantly, I think You probably saw the San Francisco geographic modifier being increased by about 2%.

Speaker 6

So as we think about it, that's 2% to 3% net net On 25% of our business, immaterial from our perspective. So, it is a proposed rule. We'll certainly We continue to work with CMS and provide as much information as we can as to why we should continue to look at these and maybe a reduction isn't necessarily necessary, but That's a relatively small reduction. As far as the commercial pricing goes, we've said low single digits from the beginning on that, guided to it, and We're landing right in that sweet spot and right in that range. There are a few commercial payers that do follow CMS pricing.

Speaker 6

Those would be incorporated based on this 2024 proposed rule. Again, it still falls into that low single digit range. So No deviation from what our expectations would have been originally.

Speaker 12

Okay. That's super helpful. Thanks for that, Bryce. And then, I guess, as a follow-up, I haven't heard anything on the Zio watch. So maybe just give an update Dave, on how you're thinking about pilot timing and kind of monetizing that product?

Speaker 12

Thanks for taking my questions.

Speaker 2

Yes, great. So with respect to

Speaker 3

the watch, again, development teams continue to make progress in and around that. Our focus has here in the near term turned entirely to the AT product and just navigating through the questions that were We're posed there. I would expect we'll be in pilots probably more of the turn of the New Year and into the very beginning of next year, but progress is being made there and I'm excited about what the watch can bring over time.

Speaker 12

Great. Thank you.

Operator

Thank you. The next question today comes from the line of Bill Klavaneck from Canaccord. Please go ahead, Bill. Your line is now open.

Speaker 11

Hey, everyone. It's John on for Bill tonight. Thanks for taking our questions and congrats on the quarter. Maybe I could go to the PCP side. I know you commented that, it continues to be strong.

Speaker 11

You're seeing a lot of success there. But could you provide any metrics around that? Maybe, talk about The high number of new accounts you opened in Q2, how many of those were from TCPs? And just talk about how the commercial field force may be dividing its time between the two

Speaker 2

Yes, I

Speaker 3

don't think we've given any specific color around exactly what percent of the new accounts are coming from PCPs, and that may be something that we'll look to disclose further into the future. I can tell you we're having a lot of good success in that segment Of the market, we've spoken about some of the new national accounts that we've brought on board. Many of those are primary care focused national accounts, if you will. And so Really excited about the success that we're having there and maybe more importantly the interest that continues to build around that model. I think There's no question in my mind that primary care is where the majority of the application of this patch is going to happen in the It's just it's so easy to use and the benefits are so significant.

Speaker 3

Benefits beyond even sort of Diagnostic capability with the patient, but workflow benefits that these networks, these IDNs are beginning to see. I think it kind of hits on your question of how are the reps devoting their time. Well, a lot of the success we're having in the primary care channel frankly comes From the accounts that we already have a relationship with where we were dealing with the cardiologist or the EP, the specialist, They see the value of having this device placed much earlier in the care pathway by the primary care physician, which then helps them identify who do they really need Spend time with, do they need to schedule an office visit with a patient or not? And they will make that determination based upon what they're seeing in the report coming off of the VEOPATH. So You see a lot of these existing accounts now having the primary care specialists within their network prescribe the device and then they'll look at the report in Zio Suite and make a determination.

Speaker 3

So in terms of refocusing a sales rep's time or call point, not a whole lot of that at this point in time. They're focused on the specialists, These networks where we can go deeper into the channel and then we've got a large national sort of national accounts team that's really focusing More at that national level to go broad across these big strategic players like the One Medical that we've announced in the past That allow us to come from a top down approach. So a lot of great progress. I'm incredibly excited about where this is going to go in the future.

Speaker 11

I appreciate all that color Quentin. And then maybe just as my follow-up. Any update on the Know Your Rhythm program? I know you spent a lot of the Investor Day talking about Just the at risk model and the asymptomatic opportunity, especially with the Camelot data that you have now, just any updates around that program would be great. Thanks.

Speaker 3

Yes. Continue to have a lot of discussions in and around it. I would expect we'll be in formal pilots here in the Q3 With some of these parties, but I think we're also seeing that the Know Your Rhythm, as we defined it historically around that asymptomatic population, Quite honestly, it's starting to branch beyond that. It's more about an undiagnosed population. And we're seeing this in the interest of payers where they're starting to see connections, Say in disease states that go beyond just arrhythmias, but how does an arrhythmia connect to, say, a diabetic population or A COPD population or hypertensive population or sleep disease, they see these connections.

Speaker 3

And the idea is where we see those connections in Medical records, can we identify populations that have been undiagnosed with arrhythmias that can increase the opportunity to find those things and then better treat those patients And therefore reduce costs downstream. That's getting a lot of discussion and a lot of traction at this point in time in terms of identifying ways to validate that, Put pilots in place and ultimately open up those markets. So I would tell you, we're very excited about Know Your Rhythm, although I think it is Broadening a bit in terms of how it's being defined today or how we see it growing versus maybe how we defined it earlier around just the asymptomatic population. So It's growing a

Speaker 11

bit. Great. Thanks so much.

Operator

Thank you. The next question today comes from the line of Suraj Kalia from Oppenheimer. Please go ahead, Suraj. Your line is now open.

Speaker 14

Good afternoon, Quintin, Bryce. Can you hear me all right?

Speaker 3

Yes, we can hear you, Suraj.

Speaker 14

Perfect. Hey, Quintin, congrats on the quarter. Quentin, many calls going on, so please forgive me if this is redundant. I must have missed it. Specifically, going back on Zio AT Quentin, I just want to make sure I heard your comments about labeling changes.

Speaker 14

But if you recall, the warning letter was also talking about misbranding. So I just want to make sure Yolar, there is a clear understanding you all can bill Medicare as MCOT. With the event Trigger thresholds or throttles, that is status quo, there is no change, there's going to be no surprise on the

Speaker 3

That's correct, Suraj. So as we work through this With the agency around the labeling updates that again, some that they've suggested, some that we've recommended, they've aligned to and we've certainly aligned to their recommendations. And we're in the process of making those updated labeling changes, which again are really informing the patient more clearly and the physician more clearly around The device and the features of it, not changing any of the features of the product at all, we can continue to market that device as an MCT device. And now keep in mind, the FDA does not make determination around what you can bill or how you bill, Right. That's an AMA billing code question.

Speaker 3

But I will tell you, we feel very comfortable that we meet the requirements of AMA's definition of NCT as well and also the very clear requirements in the billing code for MCT. So in our mind, nothing changes there At all, we continue to see AT as an MCT product, and we'll continue to market that way.

Speaker 14

Fair enough. Quentin, in terms of pressure points in the field, for your next gen 2.0 MCT, 30 day, 20 fourseven, I go with the assumption this is going to be like real time 20 fourseven. Obviously, the business model by your competitors versus iRhythm is completely and fundamentally different. Should we think about any aspects of shared economics with ZiomCT that you'll envision rolling out in the future? More specifically, just given the centers really don't make any money on MCT with the Zio approach.

Speaker 3

Yes. I don't know why the approach with Zio is any different than any competitive approach. Zio AT It's an MCT product. It works very similar to any of the competitive products. Yes, we have the trigger limit, which It's in our product by design to address battery life issues.

Speaker 3

And frankly, as a patient or a physician would approach the Trigger limit, we would send a second device to replace it. It's no different than a competitive product that has a battery limit issue. When their battery dies, they're no longer recording. They have to take that off and recharge it or put a new patch on. So it's no different than the competitive devices that are in the market today.

Speaker 3

We position ours as 14 days. We believe that the data that you can get off that 14 days It's very valuable and as good as anything you're getting off of a traditional MCT device, but there are opportunities for us to extend the wear period into the future. But In terms of competitive positioning, how we're going to position the new MCT product, I don't see it a whole lot different than AT. This has got some enhanced design features to it that continue to differentiate it within the marketplace, and we're excited about that.

Speaker 14

Forgive me, Quentin, I should have rephrased. What I meant was the professional and the technical fee collection By on the MCOT side is you guys collect the $800 or so in Medicare. On the other side, it's not collected it is collected by the cardiologist, right? And that's the economics I was talking about. If there could be some aspect of shared economics eventually, I mean, 2.0 is rolled out.

Speaker 3

Yes. I think, look, as we get closer to rolling out 2.0, we can talk about how we're going to position it in the Good or if pricing were to change in some fashion, then I suppose we could talk about that. I don't envision that at this point in time, and That's getting into something that we probably would discuss more of that closer to that launch date if we were to think differently on how we would position it in the marketplace.

Speaker 14

Fair enough. Gentlemen, thank you for taking my questions and congrats again.

Speaker 3

Hey, thanks Raj.

Operator

Thank you. The next question today comes from the line of Michael Pollack from Wolfe Research. Please go ahead, Michael. Your line is now open.

Speaker 15

Hey, good afternoon. Thank you for taking the question. I wanted to pick up the Know Your Rhythm thread and broaden it And as for a reminder on something as impactful as like USPSTF, kind of a full unlock of screening, Is there a path there that you can articulate today with the kind of 2, 3, 4 year horizon? Or is that kind of a dream at this point? I know there's obviously been tons of evidence generated over a long period of time, but one of the major trials that was Position to answer the question, USPS TF was wanting to be asked or answered.

Speaker 15

Guard AF kind of Fell short on enrollment and so might be underpowered. And so just where does this all stand today? And then what are the next steps With an organization like that.

Speaker 3

Yes. Look, we certainly will continue to work with the USPSF around getting them to identify the need proactive screening, I think that's an important part of the future opportunity here and certainly opens doors more readily, although I don't think you necessarily have that to open the doors with the commercial payers. And look, the USPSF typically works on cycles, right? It's not every year that they're reviewing these sort of things. But to that point, we expect there's going to be data out later this year, economic data around the mSToPS study.

Speaker 3

I think you're going to see some incremental information coming out around Guard AF. We've already seen some of the economic data that's been presented around Zio, in particular, in terms of the quality Adjusted life year and sort of the economic value of that, which came back very, very attractive. At $17,000 for quality adjusted life year, We know that when you start to get less than 50,000, it becomes very, very attractive to payers. And frankly, it's capturing a lot of attention, as we sit in front of payers with it. So Folks are paying attention here.

Speaker 3

This is not something that we've put on the back burner and not focused on. But to move the USPS team up, it takes time and they work on cycles. So We will continue to work with them, but we're going to continue to pull data together that makes the case for the value that this device delivers.

Speaker 15

Helpful. My other one is on international, and I know it's early days and small numbers And all that, but like, so something like Japan, is that a country where you build a local IDTF or you leverage what you're doing Manila or a little of both and maybe in Europe as an example as well as you start to open up more European markets. Are you building local IDTS support or using Manila or a little bit of both? I'm just curious how this kind of evolves and cross border Or intercountry service support, what the vision is? And one more piece of this, are any of these countries Places where you might want to go in as kind of a product first company as opposed to a product enabled service company.

Speaker 15

Thank you so much.

Speaker 3

It's a good question. Actually, it's a great question because I think those are the very things that we navigate through On a daily basis as we think about the international opportunity, and the reality is every country is a bit unique and different. And early on, those countries that we believe can leverage, say, the U. K. Stack that we've put in place and already built, Those are sort of higher up on our areas of focus just from the aspect of being able to move with speed.

Speaker 3

Over time, we'll continue to build out Capabilities that meet local requirements, particularly around privacy, that's very important to us and very important to our patients. But we want to make sure we can meet those needs before we could go into any one of those markets. So all of that comes into consideration as we think about which markets we go into first. I mentioned we'll get started here in Switzerland here in the very near term. Spain, Netherlands are next on that list in terms of ease to get into the market and really start to evaluate the product there.

Speaker 3

Japan, we're on file from a regulatory perspective. We'll build out capabilities there locally to a degree, but we'll also leverage those across the company that we can In a way that is compliant with Japanese requirements. So those are still things that we're working through with the local administrators In that country. So all of that will define more clearly as we get closer to commercial launch, but I think we've got a clear path here. And your question is The right one, but every country is just a little bit unique and different and a different pathway for each one, maybe required.

Speaker 3

Some of those will leverage infrastructure, other we might have to build A bit ourselves. In terms of a country where we go product first versus services, those are certainly things we're looking at as well. So not going to get ahead of ourselves there, but there are opportunities.

Speaker 11

Thank

Operator

you. Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference back over to the management team for any closing remarks.

Speaker 3

Terrific. Well, again, thank you for your time today. We're incredibly pleased with the progress to date in the business and the strong operational performance that our teams have put together. We've never been more excited or believe stronger in the future that sits ahead of us. We'll see many of you on the road over the course of the next quarter, and I look forward to sharing our next quarterly update in just a few short months.

Speaker 3

With that, take care.

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your

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