Morning, everyone. Thanks for joining us at the William Blair Growth Stock Conference. My name is Margaret Kaczor Andrew. I am the research analyst at William Blair & Company that covers iRhythm. I am required to inform you that I personally own shares of iRhythm. For everything else, you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now, normally, I don't do this, but I'm gonna do it anyways. I don't do an introduction, but these guys are one of the top one-on-ones of this conference. But, you know, just at a high level, to us, they represent one of the most meaningful mid-cap opportunities over the next three to five years plus in med tech. Now, most people know the story here.
You're taking share with a better version of a ambulatory cardiac monitor, that's kind of well in development and should continue going forward. However, the bigger thing for us is that these guys are kind of in the heart of what we would call the population health movement. Their sensor-based technology is already making differences going earlier in the channel towards the primary care network, going away from very expensive specialist care, but also diagnosing these patients earlier at a lower cost to the system, and also diagnosing them earlier in their care, meaning that you don't have these really expensive back-end costs that may require hospitalizations, maybe an ischemic stroke, and so on. So, for me, that's the vision of the company.
Obviously, you guys have a lot that you've got to figure out to get there, but you are making a lot of progress. So, with that, very pleased to introduce Quentin Blackford, CEO of iRhythm, and Dan Wilson, EVP of Corp Dev and IR.
Terrific. Well, thank you, Margaret. We appreciate the opportunity to be here and share with you guys today and share a little bit about what excites us around iRhythm. So, just real quickly, as I get started, a quick reminder, I will be using forward-looking statements during the course of the presentation. I'd refer you to our company website or quarterly annual filings for any further information that you might be looking for there. To Margaret's point, so iRhythm is a digital healthcare company leveraging the power of artificial intelligence to better identify cardiac arrhythmias or irregular heartbeats. Heartbeats have the ability to tell us a very powerful story about ourselves and each other if we really understand what's taking place within them. Irregular heartbeats are incredibly dangerous. They damage our heart, our brain, other organs of the body.
They lead to a meaningful increase in risk of stroke, even death. The challenge is finding them, though. We like to think about it as trying to find a needle in a haystack, or if you've ever been through a walk in a forest, we see fallen trees all over the forest. We know at some point in time they fell, but we never see them, we never hear them, and those are very much like cardiac arrhythmias. And so therein lies the problem: How do we find them? And that's where iRhythm provides that solution. So when you think about iRhythm, we are a platform technology. We have a wearable device that you wear on your chest for 14 days.
We'll capture about 2 million heartbeats over that period of time, and then we leverage that with our deep neural networks, an AI platform now in the second generation of an FDA-approved algorithm capability that we continue to enhance and differentiate and ultimately is beginning to open up new adjacent opportunities to sense other capabilities off of the chest, that as we get further up the care pathway, and we'll talk about how we're doing that, affords us the ability to look for adjacent disease states. And then we bring all those findings back in an actionable report that we load right into our digital platform. Most of the time, this is integrated directly into the EHR systems of our client accounts and make it very easy for them to review, identify any arrhythmias within the report, but also diagnose off of it.
We will make a recommendation to diagnose. We don't formally diagnose, but physicians will agree with our recommendations 99% of the time. So the AI is quite advanced and quite capable and certainly market-leading. When you think about the company today, we've guided revenues $578 million-$588 million for the full year. That's an increase coming off of our Q1 performance of our full-year guidance. So again, we pushed through that beat on the full year. And excitingly, we're just transitioning into profitability. This has been a real focus for the company historically. Just a few, you know, short months ago or years ago, I guess, about 24 months ago, we were, you know, losing 10%-15% from an adjusted EBITDA perspective.
We're now coming into a profitable state from an EBITDA perspective, with goals to get to 15% as we approach $1 billion in revenue and longer-term goals to get into the mid-20% range. We'll talk later about how we do that, but see a pretty clear path on what opens up the opportunity there. In terms of the momentum in the business, you can see to date, we've served just north of 8 million patients in the history of the company over the last 10 years. However, 2 million of those patients were served in the last 12 months of 2023. So the momentum is really beginning to pick up, the traction's taking hold, and we're having some great progress from that perspective.
Yet we only have 25%-30% of the overall market using our technology, and I think over time, 75%-80% of this cardiac arrhythmia market will ultimately use a patch-based technology, obsoleting the traditional Holter monitor, which is sort of a 12-lead, clunky experience that's been in the market for many, many decades, probably 50, 60 years. And then we're just about to enter into many new incremental international markets that excite us. We're in the U.K. today, but we'll launch into Spain, Switzerland, Netherlands, and Austria in the back half of this year, and we'll launch into the second-largest market in the world, which is Japan, as we turn into 2025.
What excites us about that opportunity is we spent a lot of time with the regulatory authorities over there getting a High Medical Needs designation specific to the Zio product. It's not specific to cardiac monitoring, patches. It's very specific to Zio in particular, which put us in an advantageous position as we move into that second-largest market. And then finally, we're highly unique and differentiated in that we've got a tremendous amount of clinical data that stands behind our product today.
100, north of 100 research papers, manuscripts that are out there, north of 40 independent peer-reviewed publications that stand behind the value of Zio, and more than 2 billion hours are now in our datasets, probably the largest EKG dataset in the world, that are powering our algorithms and allow us to learn so much more, with that capability than what many of our competitors are able to do. When we think about the market today, today we serve a market that's about 6.4 million ACM, Ambulatory Cardiac Monitoring tests being performed each and every year. Most of those are coming by way of Holter monitor, although right about 50% of those are beginning to be patch-based technology, so the standard of care is shifting. But we see the market very, very differently.
Given how easy it is to apply this product, the simple wearable, we can send it directly to a patient's home. They can apply it, they stick it, they forget it, they take it off, send it back to us, we download the data. We think we can move further up the care pathway, and so we have made a very concerted effort to move into the primary care channel. I'll talk about how we're doing that and the traction that we're having. But today, 15 million folks show up in their primary care physician's office with cardiac-specific palpitations identified in their medical records already. 32 million will show up with heart palpitations, but when you strip out the impacts of things like anxiety or caffeine, pregnancy is another one.
You strip those sort of things out, there's 15 million folks left that are still in need of monitoring in some way. We believe the market will eventually move towards putting patches on the majority of those 15 million folks. The question is: how fast does it get there? In addition to that, though, there's 12 million patients, by our estimates, in the U.S. alone, that are completely unaware of the arrhythmias that they may be walking around with. And so how do we find those on a proactive basis? And we're seeing a lot of good momentum here recently, I would say in the last 6 months, with some key partners who are beginning to proactively place patches on patients who meet a certain set of criteria looking for these arrhythmias.
In one of the pilots we just launched, we found arrhythmias in 200 out of the first 300 patients that we were targeting that previously were completely unaware as to whether an arrhythmia was present or not. So making some good progress here, I think that market opportunity will open up, giving us a total opportunity of somewhere around 27 million patients that need to be served in the US, specific to cardiac rhythm opportunities. And then beyond that, we think about channel expansion. We think about getting into sleep channels, we think about adjacent markets, things like hypertension, heart failure, and then, of course, international is very interesting to us as well. We think that the similar opportunity in the international markets exist to what we see right here in the US.
With respect to primary care, so again, we made a very concerted effort to push into the primary care channel about 18 months ago, 24 months ago. We now see north of 20% of our prescriptions in 2023 actually were written by primary care physicians, which validates to us that we will see a primary care physician ultimately write scripts for this and get this onto patients further up the care pathway, which is very important as we think about reducing the cost of care downstream. So much of what we hear from our cardiologists and our EPs today is that we're seeing the wrong patient. Our systems are clogged up. We can't see a patient for 3, 4, 5 months at a time. Many times, those patients get frustrated, they'll leave our network. How do we keep them in the network?
What is exciting is today, we see cardiologists. When we sit down with our customers, cardiologists are proactively inviting primary care physicians to that table to educate them on the value of cardiac monitoring and the value of Zio. And ultimately, our cardiologist champions, our EP champions, are pushing the prescription of the device up into primary care. Sometimes primary care physicians will say: "Look, I'm not comfortable diagnosing arrhythmias off of your report." In that case, we publish the report right in our Zio Suite tool. The cardiologist, the EP, will go into the tool, they'll take a look at the report, and they'll determine, do I really need to see this patient or not? Yes, go ahead and refer them on to me. If not, don't. So we're seeing this open up in a pretty meaningful way.
You can see when this happens within accounts, when cardiologists begin to move the prescribing of the behavior of our patch itself up into primary care, we actually see the entire practice begin to grow. Not only does primary care grow, but cardiology begins to grow again as well, and that's because they're seeing a much better profile of a patient. And in that case, they're now applying the patch to pre-procedure monitor, post-procedure monitor, and as that patient comes back to see them into the future years, there's opportunities to again, monitor. So we're very encouraged by what we're seeing as we move further up the care pathway. This is early stages with, you know, just a few select customers. This is an N of one, but we see this representative many times over as we go deeper into these accounts.
The other way that we're approaching primary care, though, is going right at it from a national level. So we spent a lot of time going at these large, what we call innovative primary care channels, the likes of Signify, One Medical, now working with Oak Street, MDVIP is about to launch, but pushing the product right into these large national, primary care physicians from a top-down approach. So we don't have to have reps out on the street knocking on the door of every one of these brick-and-mortar systems or these at-home nurses. We have it coming from the top down. And between this approach and the prior approach I just shared with you, we think we get at about 65% of the total primary care physicians in the U.S., and that's gonna keep us plenty busy for the next several years.
But the other thing that's really fascinating about this group is sort of leading the effort into this proactive monitoring opportunity. So in several of these folks, Physician Care Centers in particular, they were the first pilot that we launched with an asymptomatic program where we said: "We're gonna use the same targeting criteria that the mSToPS study had went through a couple of years ago. If you're 75 or older, you come into the population. If you're a man that's over the age of... Or sorry, a woman over the age of 65, men over 55, and you have a comorbid condition, like you're diabetic, you're hypertensive, you see a list there, we're gonna bring you into that population." Out of the first 300 tested, 200, north of 200 of them had arrhythmias identified.
So we're proving this to be very effective in terms of the proactive approach. Our data would tell us we need to find roughly 30%-35% yield to truly deliver a value to the overall system. The initial yields in this case, you know, were much north of 60%. So excited about what we're seeing here, I think this ultimately leads us down a pathway where USPSTF will get behind the idea of recommending proactive screening, and that, I think, opens up the floodgates in terms of how we think about the CMS population. But excited about what we're seeing here. Another opportunity from a market perspective is how we think about our mobile cardiac telemetry product offering. Today, that's our Zio AT product. If you look on the left, that's the market share that we have with our extended Holter.
That's our monitor that goes from 3 to 14 days. You, you wear it, it's blinded, you take it off, you send the data back. We own the majority of that market today. But on the MCT side, we have a very small share, and there's a couple of reasons for that. One, we brought a product into that market space much later. The difference with MCT is while you're wearing the product, if we're sensing any arrhythmias, we will more proactively identify and notify the patient, the physician, on a more frequent basis. So, that's the difference between the two. But we introduced that product much later, and we introduced it with a 14-day wear period, and the majority of products in this space are out to 30 days.
Our market data would tell us we need to at least get north of 20 days to truly get after this market opportunity aggressively. But you can see every 10 points of share is roughly $80 million-$100 million of incremental opportunity. What's really fascinating is the very same physicians that are prescribing our product on the left are the same exact physicians that are prescribing competitive products on the right because our product is not what I would call competitive enough to really garner share there. We will have on file in the back part of this year a revised MCT product that'll begin to close these gaps, and I, I've got a slide on that in a second.
But again, if we can get our share in this part of the market up to, call it 25%-30%, $200 million of opportunity to our top line, that is incremental to where we're at today. So, I'm certainly excited by closing out the portfolio and doing more in that area. And then on the international side, just from a market opportunity perspective, we're in the U.K. today, and we're working through reimbursement to get a code and reimbursement established, particular to extended patching. I'm hopeful that we'll see something come there in the next 12+ months, but this has been a long journey, so we've been working on this one for some time. We're also focused on the private sector, and we see that business up meaningfully in the first quarter, gaining a lot of traction there.
I mentioned earlier, we'll be in four additional countries in the EU in the back part of this year. Again, Spain, Switzerland, Netherlands, Austria, and then getting into Japan as we roll into the early part of next year. Second-largest market in the world should be a needle mover for us into the future, particularly with having that high medical needs designation specific to our product. Innovation is a big part of how we lead in the market, and we're continually innovating and looking for ways to out-innovate ourselves and our competitors. Importantly, innovation for us needs to be physician-led, and it needs to be clinically relevant. We spend a lot of time in the market with our customers, understanding what really adds value for you and your practice. We just launched the largest product in the history of our company, which was our Zio Monitor.
By the end of the second quarter, we'll be nearly through 100% conversion of the in-clinic utilization of monitor versus our old product, XT. It brings with it some significant margin enhancements, but also a much better patient experience. You can see it's nearly 70% smaller than the existing product out there, so that excites us. We also introduced a new app experience. We know that when a patient engages with us through the app, their likelihood to wear that patch all the way through to completion and return it to us is much higher than if they don't. And we've seen the increasing utilization there with the app experience and engagement be significant. And we're seeing that in our return device rates, which ultimately results in incremental revenue for every patch worn. So good benefits, good tailwinds to come.
On the MCT side, so as we think about enhancing that product and opening up $200 million of opportunity there, you can see, as we think about the innovation in that product, what it needs to look like. Our Zio AT product is what's in the market today. MCT is what's to come, but introducing a true Bluetooth capability, ultimately enabling connectivity into a smart device over time, will be a feature that begins to be enabled there. Extending the wear period. We need to get closer to 30 days, and so the initial wear period here will be out over 20 days. 21 days will be the initial indication for use, and then also introducing a downloadable capability. So most of the products in this space, insurance still requires prior auth for a majority of them.
Nearly 70% of all policies require prior auth. If you're wearing a Zio AT today and you're not qualified, you have to take that product off. There's no way to get that product paid for. If you have a competitive product, most of our competitors can downgrade into an event recorder through the use of software, never having to interrupt the patient experience with the patch itself. So building those capabilities into the portfolio is important as we think about our next generation of MCT. One of the things I wanted to hit on, though, just because it's been a topic of a lot of focus in and around our story, is our Zio AT product. And we received a warning letter from the FDA back in May of 2023.
We've been in the process, frankly, of rebuilding our entire quality control systems, design history files, to address some of these concerns. I feel very good about where we're at, but this has created a lot of noise in and around our story. So I just wanted to step through a little bit the timeline. So again, in May 2023, we received the warning letter. Importantly, part of what was in that warning letter was a question on, is the AT product a mobile cardiac telemetry product or not? And that got a lot of attention from investors. I think importantly, in November 2023, the FDA, together working together, created a brand-new category code with the label directly in it, ambulatory cardiac telemetry, of which we were put into that code as the first product in that code.
So there is no question around, is the Zio AT product a cardiac telemetry product or not? It absolutely is, and it's coded that way with the FDA now. So that question should be resolved. Now, we're in the process of working through a couple of the questions that they had on the 510(k) submission. So we submitted two 510(k)s with them in January of this year. At their recommendation, we were ready to submit in December. They asked us to wait until after the new year in January, so we did, and we submitted both of those about a week apart. One is to address a letter to file, all the history of the letter to file, to catch that up in one submission. The other is to address the light feature that we put onto the device.
So it's a flashing light if you're approaching a max trigger limit, which is where the FDA was concerned. It'll begin to, to notify the patient with a flashing light. As we were going through that process in March, the FDA asked us to consider running some incremental EMC testing. So when we, when we first submitted these back in January, we had discussions with the FDA originally around, could we use the original EMC testing that was done with the original product that was approved years ago? And when you think about it, we have a sensor that you wear on your chest. We have a gateway, which is sort of a cellular transmission. The original EMC testing tested both of those products, but independently, one at a time. We were comfortable using that. The FDA was comfortable using that as we submitted.
However, in March, they came back and asked: "Would you consider putting those two together, pair them, and then run the EMI/EMC testing against it?" We weren't expecting that at the time. That's part of the reason for the delay that we recently communicated from midyear to somewhere in the middle part of the back half of the year. The other one is a human factors test with the light itself. So if a patient is starting to approach a max trigger limit, we're making a phone call to the physician, we're making a phone call to the patient, we're sending emails, we're also sending a secondary device if required. In addition to that, we put a flashing light feature right on the device.
The FDA has asked us to run the human factor testing, all inclusive with the flashing light and the typical protocol, which we're in the midst of doing right now. Feel very comfortable with where things sit. We'll get back to the FDA in early August with all of this information and follow-up, and then they have about a 30-day window, where the clock starts ticking, which puts us in that September-October timeframe in terms of our estimate of when we would expect to get an approval. So just wanted to walk through that. There's been a lot of questions around our story with respect to that and to help you understand that a little bit better. Back to innovation, AI is another big part of our platform.
We think that we're far advanced from an AI perspective, leveraging the power of neural networks, but also the 2 billion hours in our data set, getting to the point where we see prediction very viable in our future. You might wear the patch today. We don't see AFib or arrhythmias, but we can predict from the biomarkers that there's likely to be AFib or arrhythmias showing up in the next 6-12 months. Same with heart failure, same with sleep disease. We're very comfortable that we can ultimately identify, diagnose sleep disease right off of the EKG signal. The problem is, even if you can diagnose it, then how do you get paid for it?
So that's a multi-year journey that we're down the path of, but feel very good about being able to identify and diagnose multiple efforts off of this platform. That's important as we move further up the care pathway, because to a primary care physician or to these large networks that own the primary care physician or the specialist office, the hospitals, the hospital at home, the sooner they can learn with their patient what's going on, the sooner they know where to send them in their network and avoid unnecessary costs by putting them down the wrong pathway. Making good progress there. The first effort for us is really stepping into sleep. We announced that we are launching our first sleep pilot as we start to branch out of cardiac arrhythmia.
What's interesting is, a vast number of sleep tests or referrals onto sleep specialists actually originate with a cardiologist or an EP, or ultimately, what I think will happen with primary care. 80% of all folks who have AFib have sleep apnea. The prevalence of arrhythmias and sleep apnea is incredibly high. Our view is that we have a call point, and we have a digital platform that can completely streamline the way diagnosing sleep disease takes place today. If you think about it today, a patient gets referred on to a sleep specialist, they get referred on to a sleep lab. They're waiting multiple months, if they ever follow through on that. Most will fall out of it and end up back in the cardiologist office without any results, complaining of the same issues.
We believe with our digital front end, we can make it as easy as going right into Zio Suite. With the click of a button, you prescribe the product. We send the product to home sleep test. You wear it, we get the data back with our IDTF capabilities. We interpret, diagnose, and put the report right back into Zio Suite, and it's a seamless experience for the existing physician today that addresses much of the concern that they're feeling. So this pilot just got launched. We're encouraged by the early results, but a lot to learn here, but I think we're in a really interesting position to take advantage of that. Real quickly as I wrap up, just Q1, $132 million in revenue, roughly 18% growth.
Gross margins, you can see here for three quarters, they've been under a bit of pressure from where we once had them up in the 69.5% range down to the low 66%. We've been working through a transition, right? We're coming off of our old XT product onto our new monitor product. We're introducing automation lines. The first manufacturing automation line went live a week and a half ago, so we're excited to see that get put in place. The second part of that line will get put in place in Q3. You should see the gross margins start to step up in Q2. You're gonna see them get all the way back to that 69%-70% range in the back half of the year. So, feel good about, about where that's going.
On the EBITDA perspective, we see a clear path to get to that 3%-4% on a full year basis. You're gonna see some really nice margin, performance in the back half of this year, which I think will validate for our folks that getting that 15% as we approach $1 billion in revenue is absolutely attainable, and, and that this business model can be quite profitable as we look further to get to the mid-20s% over time and when we move beyond $1 billion in revenue. From a guidance perspective, I noted this, but you can see prior guidance to updated guidance. Big change there was just increasing revenue coming off the first quarter, performance holding in there with our, our gross margin expectations and EBITDA as a percent of revenue, but obviously, absolute dollars continue to increase.
And then I'll just leave you with this. I think there's a lot of catalysts that get us excited about the business today. We think about our U.S. core commercial business, the primary care channel. I showed you some data, 20% north of that, prescribing the product today is gonna open up for us. We see it in the data all the time. We see the interest with the large national primary care players in the volumes continuing to grow there. I can tell you one of those players now routinely shows up as a top five, top ten daily prescriber of our product, which is encouraging because I think it just validates where we see this going. Obviously, all the buzz around pulsed field ablation, those have to be monitored both pre and post.
We expect there's going to be a benefit that will come from that. And I didn't talk about this so much, but we announced a pretty significant collaboration with Epic to integrate into their Aura platform, which is their cloud-based solution that will begin to push down into all the Epic user interfaces. And what that does, we're the first med device company to partner with Epic in this journey. It puts Zio right into the order entry set of any physician who's using Aura that wants to order a monitor. It's going to put that, you know, squarely in front of them.
What I love about this is, it's not only us coming through the front door, where we're knocking on the door, having discussions with physicians, but now we're coming through the back door, through software, through EHR integrations, where we could have a competitor who wants to, you know-- or an account that uses a competitive product that wants to continue to prescribe those competitive products, but they're going to have to do that in a very manual effort outside of a very streamlined workflow. So we're excited by what we see coming from the Epic opportunity. We know a few other companies who have gone down this pathway and have seen pretty meaningful increases in volumes out of the gate, and we're going to wait to see that play out.
But we should be live with Epic in the back part of this year, fully rolling it out across our user base in 2025. MCT gets us excited. International, I talked about it. Japan's second-largest market, I think, will really move the needle. And then getting into these adjacent market opportunities. Sleep, a big opportunity. Hypertension, Know Your Rhythm. These are all things that we're excited about. And then beyond that, I do see a path to resolving finally the warning letter, putting that behind us and getting the noise out of there in terms of the overhang it's created with our story. Getting MCT on file by the end of the year is clearly in our sights.
I mentioned the manufacturing automation that's going to leverage gross margins in a pretty significant way and lead us into some very, very nice improvements on the profitability profile. Then finally, CAMELOT II. We launched a CAMELOT study about a year ago that went into the CMS data set and really went head-to-head with our Zio product versus competitive products monitoring the same thing, and it was clear, the superior product in terms of diagnostic yield, speed the diagnosis, lower likelihood of retest rate, lower cost of the healthcare resources to use and apply our product. The CAMELOT II data set is going into a large commercial payers data set. We're very encouraged by the same data that we're seeing there. Again, far and away, demonstrating that Zio is a superior product in this space.
So, back to Margaret's point earlier, very excited. We're just now starting to step into it. But even within that space alone, as we get into primary care and open up the market, we think there's tremendous opportunity to expand the core market we're in, but also step into adjacent markets, all while driving a nice improvement in profitability. So with that, I think you wanted to leave it for just a couple of questions here?
Sure. Yeah, I was going to go into a series of questions, but we've got two minutes, so we're on the clock.
Sure.
The key question, I guess, and we'll leave it to one. You guys have been doing really well, 20% growth, your 70%+ market share in your core product, you know, obviously continuing to transition, but, you know, I assume your aspiration is well above 20% growth-
Yeah
... especially over time. So maybe transition us from here to there, and then, you know, what are the incremental drivers of that?
Yeah, I think, look, the momentum in the business, particularly around the core monitor business, is incredibly strong, right? Cardiology, EPs, now moving into primary care, that's all very encouraging. And we're delivering right around that 20% growth. But to your point, there's an opportunity to accelerate that. Frankly, you know, our original plans had us bringing an MCT product to the market sooner than what we are, right? It's about a year delayed. I think if you had that product in the market now, we're blowing through that 20%. But it is what it is. MCT will get here in about a year, or in the back half of 2025, and I think that'll be a nice contributor for us. But when you think about the Signifys, like, Signify is a terrific opportunity in primary care.
3 million covered lives, very, you know, encouraged by what we're seeing in the early pilot. I think those things start to come on. You start to open up other primary care, contributors as well, channels. That's going to be a nice contributor. And then in addition to that, we're just getting into the international markets beyond the U.K., right? So Japan, I think Japan, as the second-largest market in the world, could add, you know, a meaningful contribution to us that we're not contemplating. So whether it's primary care, whether it's MCT, whether it's international expansion, whether it's getting into sleep and validating that the sleep pilot, in fact, can create incremental revenue for us, I think those are all opportunities that are going to see acceleration in the growth profile. That, that's what I think will fuel it.
Perfect. Well, I'm down to 20 seconds, so I'm actually going to call it there. We'll do more questions in the breakout in the Adler Room.
Perfect.
Really appreciate it, guys.