Okay, great. Okay, thank you all for coming to the 2023 Baird Global Healthcare conference. I'm David Rescott, Senior MedTech Analyst here at Baird. We're pleased to have iRhythm with us today, a leader in the cardiac monitoring space. We have Dan Wilson, EVP, Corporate Development, Investor Relations. I'm gonna do a couple Q&A questions today. I think you can see on the tables that if you need to or would like to send in a question, you can do that via email, and I can look it up on this iPad. So Dan, thanks for joining us today. I wanna start maybe from a high level. You know, the company came public seven years ago.
The goal was to really drive this shift in the way in which extended wear cardiac monitoring, and the way in which cardiac monitoring is done. Today, you're at 1.5 million ACM tests annually. You're about 25% penetrated in the market. You had an Analyst Day last September, laying out the five-year goal. Just for some of the investors, maybe who are newer, can you remind us what those five-year plans are, and really how you get there from today?
Yeah, great. Thank you, David, and thank you for having us here today, and thank you for all your interest in iRhythm and support of the iRhythm story. So, as you noted, iRhythm is a what we like to say is a pioneer in the cardiac monitoring space. Have been public since 2016, and really changing the standard of care in cardiac monitoring. We had an Investor Day about a year ago, where we set a long-range plan in 2027 financial targets. On the top line, revenue target of $1 billion, representing essentially 20% growth rate from here to 2027, which we expect to be fairly linear.
On the gross margin side, expect 73% gross margin, step up from where we're at today, and, and see really improvements on continued improvements on the AI side of our business, and driving efficiencies there in terms of how we deliver the service. And then, on the bottom line, we set a target of 15% adjusted EBITDA. It's important to note that that is a point in time. We do believe there is still continued leverage in the business that we'll see through, you know, 2027 and beyond. We, we do believe we will continue to be a growth company in 2027, and there's a number of growth drivers that we're excited about, and we'll, we'll continue to invest in.
Okay. You mentioned the 2027 goal, 20% growth, $1 billion. It's a linear growth trajectory. You know, guidance for 2023 is below that. There were a few challenges that arose over the past couple quarters. Is there anything in your mind that makes you think that you're not going to be able to deliver on that linear trajectory, or do you at least still see that there is the ability for you to grow in a linear fashion through 2027?
Yeah. Yeah, as we get into it, I think you'll understand that we have a number of growth drivers kinda stacking on top of one another, you know, 2024 and 2025, and beyond. So feel good about, you know, our continued growth, and our progress towards that 2027 target. We feel very good about that, and I'm sure we'll get into some of the drivers behind that. We're launching Zio monitor this month, which is a very big product launch for the company, one we're really excited about, and believe that can be a catalyst for growth, not only in the U.S. market, but also internationally. International, you know, is a very small percentage of our business today. We just...
We're in the U.K., and have plans to enter into several other countries, and we'll really start to see international contribute to growth, you know, in 2024 and 2025, notably, and onto 2027.
Okay. My guess is you might not go as far as to comment on growth expectations for 2024 yet, but if we were to assume that there is a linear growth trajectory over the next, you know, 12-24 months at least, does that seem like a reasonable point at which growth could come out to next year, or are we still too early in the year?
You are right that we won't comment yet on 2024, but again, we feel good about our path to the 2027 target. Again, as we get into kinda the drivers of the business, you'll see and appreciate some that will, you know, really start to come through in 2024.
Okay. When do you internally typically come together to decide what the next year's growth looks like? Is that something that happens in the last few months of the year, or do you get a month or two under your belt before you set out guidance for the full year end in March or on Q4?
Yeah.
What's kind of the internal look on that?
Internally, we're always looking at it, obviously. But in terms of setting investor expectations and setting guidance, we've typically used our Q4 call in late February to set guidance, and see no reason to change from that precedent.
Okay. So $1 billion, 2027, 15% EBITDA margins. If we think... Or just EBITDA margins. If we think about both of those, you know, separate from each other, do you think there is an area, or where do you think there's an area in which there could potentially be, you know, the biggest variability of maybe upside to those numbers? And if we were to, again, think about those two separately, would you be more or less disappointed if you didn't hit the $1 billion, or if you didn't hit the 15% margin?
Yeah, good question. I would say, first and foremost, we're a growth company. So, you know, hitting that top-line target is most critical for us, but we also wanna do it in an efficient manner, a responsible manner, and be good stewards of the business. So, it is absolutely our intention to deliver on both of those targets. We see a giant opportunity in front of us, and we're investing in that growth appropriately, and excited about where the business is set up.
Okay. We're gonna get into profit a little bit later, too, but I did just wanna ask upfront. I think you said the 15% EBITDA margin is a point in time at which you'll achieve this number. Longer term, perhaps something higher than the 15% margin is the longer-term goal?
That's right. Yep, that's right.
... Okay. Okay, so let's move on to 2023, nine months or so, you know, into the year. Can you talk maybe just a little bit about the first half growth you've seen so far? What have been really the key drivers there, and as far as it relates to delivering growth above that of which you've guided so far for this year?
Yep. Yeah, so we're really pleased with what we're seeing in the business. Obviously, a very strong start to the first half of the year, and one of the most encouraging signs to me is really the consistent growth across the business. We're seeing great contribution from both Zio XT and Zio AT. You know, Zio AT continues to grow really well and a nice bounce back from late last year, and performing really well despite the noise around the warning letter there, which I'm sure we'll talk about. And then, you know, similarly, seeing great growth from, you know, cardiologists, which is where we have historically focused, as well as electrophysiologists and other specialists.
Seeing good contribution to growth there, and then in primary care, seeing really good signs from the primary care channel, and we're really excited about kind of where that can take us. So really excited about how the business performed in the first half of the year, excited about the setup for the second half.
Okay. So I think growth so far in the first half, +20%, guidance is for 18%-19% top line growth. You know, you did mention some of the, you know, things around the warning letter. You know, last year, there was the Customer Advisory Notice that came out in Q3, Q4, so perhaps the comps at least are a little bit easier in the second half of the year, at least in our view. How do you think about maybe some of those moving pieces there? You know, obviously, the warning letter is still out there. Can you maybe help us think about the level of conservatism built into why or why not there should be a slowdown in growth in the second-
Sure
... half of this year?
Yep, good question, and you used the word conservatism there. That isn't a word that we, we like, we push back on. We try to be thoughtful and, and deliberate in terms of how we, how we set guidance. And again, you know, the first half of the year, we've seen really strong momentum in the business and excited about the setup for the second half of the year. As we think about how we set guidance, for the full year, as well as Q3 specifically, there were a couple kind of considerations that I think investors should be aware of and appreciate. The first, as I mentioned earlier, we're fully launching Zio monitor this month.
That is the biggest launch in the company's history and, you know, really transitioning, you know, 95% of our business to the new form factor Zio monitor. So, really excited about that and believe that can be a catalyst for future growth. We will see new account onboarding slow down in Q3 as we're launching Zio monitor, which makes sense. You know, accounts that would have otherwise launched in August or September will wait. You know, with XT, they will wait to get on Zio monitor. That's something we contemplated, and we are seeing that. Once we're through that launch period, you know, again, we'll see that as a catalyst for growth.
As we noted, you know, Q1 and Q2 this year, we opened up a record number of new accounts, which is a great, you know, leading indicator for the business. We will not see a record number of new accounts in Q3, just to put that out there. But the good news is, the pipeline is as full as it's ever been, which bodes incredibly well for how we exit 2023 and enter into 2024. The other aspect I would call out, we've always seen seasonality in our business. The summer months, this year in particular, has had, you know, hotter-than-usual summer months, which does impact our device return rates. We called that out last year. We are seeing that this year.
The good news is, we're seeing strong patient registration numbers offset that a bit, but that is another kind of consideration to call out for Q3 specifically. So we did on the Q2 call, obviously set full year guidance, but we also noted that we expect Q3 revenue to be 25% of full year guidance. We expect Q3 revenue to be 25% of guidance. So, you know, I just wanted to-
Uh
... reiterate that.
You said the new accounts not being at record levels is because you're rolling out the Zio monitor product, and that impacts the ability to open up new accounts? Or-
Not the ability to open up new accounts-
Okay
... ability to launch those new accounts.
Okay.
Right. An account that would have launched in August or September, we would have trained them up on Zio XT, and then have to come back, you know, a month or two later and train them on Zio monitor.
Okay.
It made sense to us to defer that.
Okay. And summer months typically being hotter, can you just-
And-
... elaborate on what that f-
Yep
... you know, what that means?
Yep. So, hot, humid summer months are not conducive to adhering things on the body. So we do see kind of early fall off of the device. People going on vacation may choose to take the device off early or not mail the device back. So that is always something we've seen in the business. You know, we've kind of always grown through that seasonality. But this summer has been hotter than usual, and it is something we are seeing. But again, we're very pleased with kind of where the registration numbers are, and that has offset that impact.
Okay, and anything from a vacation schedule that is unseasonal, meaning that, are there more vacations perhaps happening than you originally thought would be happening this year?
No, I wouldn't call that out.
Okay.
Vacations have seemed to elongate post-COVID.
Right.
But I wouldn't call that one out.
Okay, and then, you know, something we are asking all companies too, you know, maybe rising COVID cases in the U.S. a little bit, any impact that you've seen early on just from that at all?
No, we haven't. We have not seen that. In fact, yeah, we have seen the momentum building kind of in the back half of August and into September. So, seeing very good signs in the business and not seeing any impact from COVID.
Okay. And then, okay, nope, that makes sense. And then just around, you know, the warning letter, we'll get into that in a little bit. I think earlier in the year, maybe we thought that, you know, we've seen a few news articles about this, perhaps that could impact the ability for new accounts to... or the interest in new accounts opening up, you know, or adopting Zio AT. I think in Q2, you really didn't maybe see that. Any sense for whether or not, at least either in the first part of this year or what you're thinking about in guidance, whether or not that has an impact?
Yeah
... on growth or Zio AT adoption?
Yep. No, as you noted, we saw really strong contribution from Zio AT in Q2, including June, which was post the receipt of the warning letter. So AT has hung in there really well, and as we set up guidance for the year back in February, we did note that, you know, getting to the high end of the range, one way to get there would be Zio AT returning to kind of historical growth levels that we saw in the first half of that year. AT is, you know, progressing incredibly well, so we're very excited about that. Obviously, we wanna work through the remaining issues with the warning letter and get that fully resolved and behind us, but AT is performing very well.
Has Zio AT reached back to those pre-levels, those pre-levels?
We noted in Q2 that it was not yet there, but kind of marching up from Q4 and Q1.
Would you define those levels as 45?
That's correct.
-plus % is
Yep
... kind of that, right? Okay.
That's right.
Okay, okay, let's move on to... So primary care is something you mentioned that's been a pretty significant driver over the past couple of years or so. Can you just talk about why that's been happening and where you are today as it relates to the opportunity out in front from PCPs, relative to the opportunity out in front from kind of the cardio-
Yeah
... EP channel?
Yep. Maybe starting on the last part of that question first. You know, we, we are not taking our eye off the ball as it relates to, to cardiology. That is still a focus for us. We do see the market moving into primary care, and we're fully supportive of that. But we also, we're of the view that we need to continue to own the cardiology space and, and have, you know, those, those specialists be our clinical champions. Which we are seeing, and, and they are actually helping drive our penetration into primary care. You know, as you think about it, it is better for the patient, better for the physician, better for the payer, and better for the system in terms of getting Zio upstream into primary care.
From a patient standpoint, you know, they can get an answer faster. They don't have to go through this diagnostic odyssey that we've talked about previously and have clinical data around. They can get on Zio quickly and know, you know, with high confidence in, you know, two to three weeks, you know, what's going on. Versus having to go, you know, be referred on to a cardiologist who often has two to three-month backlogs, and patients get lost in that referral path.
For cardiologists, it makes a lot of sense in that, you know, rather than seeing a patient that may or may not kind of need to be there, if they get prescribed Zio upstream in primary care, the patients that do make it to them are pre-qualified and kind of pre-vetted and are really the patients that they should be seeing. From a payer standpoint, you know, payers do desire to control as much care as possible within primary care. It's more efficient for the system, and so we're seeing kind of all stakeholders support this move, and we're really excited about it.
This has been happening now for, you know, two, three years, and happened somewhat organically, with our best performing reps, kind of, you know, with this land and expand model, where we open up an account, typically through cardiology or electrophysiology, and then, you know, they follow the referral patterns upstream into primary care. So we saw our best performing reps doing that. We set up essentially a playbook for the rest of our team to kind of follow that playbook, and we've seen really good results from that. We also see these innovative primary care networks popping up that we've talked about previously. We've called out One Medical as a great example there. That is a fantastic model for us, and one we're really excited about.
Okay. Just touching on One Medical, I think you said that there in the past, the company's talked about there being other, you know, primary care, large networks that are out there. Do you think that we'll find out about those as they roll out, or is this more of a they're rolling out and, you know-
Yeah
... we're not calling them out because they're not a One Medical?
We are not calling them out either for competitive reasons or, you know, the customer prefers to keep it, keep it quiet. But there are several others, like One Medical, that are adopting Zio, and these models are great in that it's typically a one-to-many selling model. We're selling kind of into the top of these networks. They are helping drive the education and utilization of Zio down through their physicians in the network, and it's a highly efficient model for us. And then what we often see is, particularly if these primary care networks own the risk for the patient, oftentimes they have a Medicare Advantage plan that they're operating under.
You know, they can then make the determination: "Okay, we started with our symptomatic patients, we're seeing great results there." And we, we lead with data and, and show them, you know, how Zio is being utilized in their population, what the diagnostic yield is. And through those conversations and really demonstrated by the data, they get more comfortable expanding the patient populations. And we are seeing groups like this, you know, move on to kind of, you know, asymptomatic screening a bit. I would call it maybe targeted screening, which starts to blur the lines a little bit with Know Your Rhythm that we've talked about in the, in the past. So, a lot of things to be excited about.
Okay
- in primary care.
Do you, do you typically have exclusivity within these accounts?
Not, not typically. But I would say, you know, our business is very sticky. You know, it is, it's not just picking a device off the shelf. You know, it is very much integrated into the workflows of our physicians. And in particular, when we get integrated into the EHR, it takes a sticky business to a very sticky business.
Okay.
Yeah.
Okay, that makes sense. I think, for the 2027 $1 billion goal, you've talked about penetration maybe going from 25%-50%. Remind me if that's what the view is of the 6 million ACMs in the U.S. Have you laid out the percentage of which would potentially be coming from PCPs, the penetration you expect to have in the primary care channel to drive that $1 billion in revenue?
Yeah. A couple, couple comments. So one, no, we haven't quantified it, both where we're at today and then, you know, what our expectations are in 2027. To give some frame of reference, you know, primary care as a percentage of our business, it's not more than 50%, but it's also, meaningfully above, you know, double digits. So I know that's a big range, but that helps give some context to it. And it has consistently been growing as a percentage of our business, you know, quarter to quarter. And we fully expect that, to continue into 2027. The other... We've talked about this, you know, you referenced 6 million ACM tests being done per year.
Based on claims data, we know that as many as 14 million unique patients are showing up in primary care every year with cardiac palpitations. All of those are candidates for ambulatory cardiac monitoring, yet they're lost in that referral path that I mentioned earlier, or primary care is unaware of, you know, the benefits of patch-based monitoring with Zio. So, it really is... You know, it comes down to education and getting them comfortable with prescribing Zio, and as we do that, we do believe there's opportunities for the market to expand meaningfully beyond the 6 million. That isn't contemplated in the 2027-
It is not contemplated. Okay. Okay, I think we've got less than 10 minutes left, so I do want to get through a couple other topics. Maybe we'll start on the warning letter. I think the tone from management, at least in our view, was a bit... sounded a fairly positive just around where we are in the remediation efforts. Can you just remind us again where we are, what you see kind of coming or at least what the next steps are over the next couple of months or quarters or so?
Yep.
- to remediate that fully?
Yeah. So we did update folks on our Q2 call in early August. We did have one kind of positive clarification from the FDA, and that with proposed labelling changes, both changes we proposed as well as what the FDA proposed, that we can continue to market AT as an MCT service. So pleased with that clarification. We will continue to work with the FDA to resolve kind of the remaining, the remaining concerns. Most notably would be whether, you know, the letter to file or letter to file approach is acceptable, or whether they would prefer us have a catch-up 510(k). We're hoping to get clarification there, you know, in the near term.
There's no kind of set process or timeline associated with this, but we are working collaboratively and looking to get resolution on our path forward, as quickly as we can.
Okay. And if the FDA does take issue with the letter to file, what's the pathway to get beyond that?
It would be submitting a catch-up 510(k), which we are working on in the background, in case that is the route they wanna go. And that would be, you know, within... Once we have resolution there or clarification, you know, we would look to submit that in the coming months.
Okay, and if that's the case, is Zio AT allowed to remain on the market?
That is our view.
Okay.
Important to note, obviously, the FDA can make a decision, you know, their own decision at any time. We don't believe that's their intention. They've had the opportunity to do that, and we don't believe that's their intention.
Okay. Okay, so new product, Zio monitor, you talked about coming this, at some point this month. Wondering, I think you categorized it, categorized it as the, or qualified at least as the biggest launch in the company's history. What does that mean when you think about what it can do for growth, what it can do for market-
Yeah
penetration, what it can do for share?
Yep. Yeah, so we're very excited about it, obviously. If I could show a picture of it, you know, it's 72% smaller than Zio XT. So, Zio XT is already a best-in-class device from our perspective, and we're really raising the bar on ourselves as well as the market. And we believe that will have, you know, positive influence on patient adoption. As you miniaturize devices and make it even more seamless in terms of the patient's... You know, integrating into a patient's life, we believe the adoption will, you know, will improve, or continue to increase. And then in terms of patient compliance, so obviously it starts with a better patient experience.
72% smaller, 55% lighter, better adhesive, and we talked about wear times earlier. So, with that profile, we do expect to, and we're seeing this with early data, get patients out, you know, to longer, longer durations. You know, ideally out to 14 days, which is where you will see the highest diagnostic yield. So seeing really good signs there with the early data, and we're really excited about launching that and seeing what it can do for the business.
Okay. And as it relates to, I guess, the share in the space, so I guess backing up to the five-year plan, what's your assumptions, I guess, first, for where share shakes out in the long-? Does that assume you, you know, there is share loss, there's no share loss, you maintain share, you gain share, and then how does Zio monitor impact that?
Yeah. So I think you noted earlier kind of the expectation for, you know, roughly 50% growth in that 2027 timeframe. Obviously, that's stepping up from where we're at today, just below 30%. So again, that doesn't contemplate any kind of market expansion. That's kind of steady growth from here. And I would say within that, you know, kind of maintaining or maybe giving a bit of share within Zio XT, Zio monitor, while gaining share on the MCT space. We're low single digits market share within the MCT space, and we're seeing really good growth from AT, as we noted before, and we continue to gain share there.
There is a meaningful gap from where we're at from a share perspective, you know, within the MCT space versus the long-term continuous monitoring space with XT and Monitor, and we're looking to close that gap.
How important is Zio MCT, Zio MCT to closing that gap?
Yeah. So again, you know, we're seeing very good growth from AT. It is a good product. Patients or, I'm sorry, physicians that, you know, know Zio and appreciate Zio for what it is, they are fully adopting AT. We do believe there are some competitive gaps that we can close with AT, as we move to—as we transition to Zio MCT. Zio AT to Zio MCT will move on to the new hardware platform, which has all the benefits that I mentioned earlier in terms of, 72% smaller, 55% lighter. And so we'll see the patient experience improve there as well.
But importantly, you know, some competitors in MCT devices have this flexibility aspect to them, where a patient can be prescribed MCT, but then switched, you know, to another modality, whether it be event monitoring, or short-term Holter, if a patient's insurance coverage doesn't cover MCT. So that flexibility is something that we know physicians appreciate. We will build that into Zio MCT. A couple other notable improvements to Zio MCT include moving to a smartphone away from a dedicated gateway, which provides some nice product optionality for us in terms of data transmission. And then extending wear times, and then improving the detection algorithms within the product.
So we do believe that can be, you know, an inflection point for Zio AT and Zio MCT, but again, we're seeing good growth from AT and continuing to gain share there.
Okay, Moving on to profit, you know, you mentioned that the 15% adjusted EBITDA number is not where the company ultimately gets to. What are the biggest drivers to improving profit? And when you think about what you've already identified and that are executing against that, versus potentially what could be identified, you know, when we think about where we are today versus where we can get to, how do you think about how profit improves and what those moving pieces are to get there?
Yeah.
Is there still room for more improvement beyond that of what you've already identified?
Yeah, I would say so. Again, that 15% is a point in time, and we believe we will see continued leverage from that point forward. You know, R&D as a percent of revenue, we feel good about where that's at, you know, call it 12% of revenue. We wanna continue to invest in innovation and the growth that we see ahead of us. Similarly, sales and marketing, we're comfortable with where that is from a percentage of revenue standpoint. There are efficiencies that we are seeing within that line, but we're reinvesting that back into the business for growth. The real opportunity is on the G&A side.
You know, the company has been through a tremendous amount of growth over the last several years, and it was really kind of growth at all costs and throwing headcount at the problem. We can be more efficient, and we're getting after that. You saw that in Q2, in the Q2 results. As we're standing up our Global Business Services center in Manila, there's a lot of opportunity for continued efficiencies there, and it's you know, being disciplined, setting up the right processes, driving automation, and leveraging kind of lower cost of business geographies.
Okay. 30 seconds left here. We're gonna group all these into, to one: international expansion, Zio Watch, asymptomatic, and then OSA, hypertension, and heart failure as being longer term opportunities.
Yeah.
Where should we focus-
Yeah.
-in 30 seconds?
Well, I got 30 seconds—so I'll pick one. I would say international expansion. That's probably the nearest term driver for us. As I mentioned earlier, we're only in the U.K. today. There's a massive opportunity outside the U.S. We received really positive news in Japan, which is the large, second largest ACM market out there, second to the U.S. 1.5 million tests being done there per year, all of which are Holter-based tests. So real opportunity to get into that market and disrupt that and change the standard of care to Zio. We have received high medical needs designation, which puts us on a great path from a regulatory standpoint, as well as premium reimbursement following approval. So really excited about that one.
Expect to be on the market there in 2025.
Okay, we're out of time. Thank you so much.
Thank you very much. Appreciate it. Thank you.