Good morning. Welcome. My name is Mike Polark, Medical Device Analyst at Wolfe Research. Welcome to the 6th Annual Wolfe Healthcare Conference. I'm pleased to be joined in this session by iRhythm, Chief Financial Officer Dan Wilson, and Leader of Investor Relations Stephanie Zhadkevich in the audience. Dan, Stephanie, thanks for being here.
Thanks for having us.
We are short on time. The biggest overhang on the stock over the last few months has been the FDA matters, and so I just want to jump in there. Obviously, some positive news with the 510(k)s clearing, both of them. My first question to you: now that they're cleared, was there any surprises in the language and the kind of FDA information on the approvals?
Yeah, no surprises from a labeling and warning standpoint. I was surprised to get it on the earnings call as we were live. That was fun to share with you all kind of in real time. But pleased with the progress we're making. The two 510(k)s were an important milestone for us. Still work to be done in terms of ultimately clearing the warning letter and working through the more recent 483 observations. But the two 510(k)s were an important step, and I believe we're moving in the right direction.
So what is left to do? I mean, walk us through kind of the project list. I think that's the question I get often: what are you really changing? Training, process, people, IT, all of the above. What does the task list look like over the next few months or quarters to achieve that? And in a base case scenario, when do you think you're through this?
I think it's important to note we are going above and beyond what the FDA is ultimately asking us to do, and the way we're approaching it is really kind of a full transformation of our quality management system and our quality function, which is kind of normal maturation of a growth company, but these are things that we want to get after and, again, go above and beyond what the FDA is ultimately asking us to do. In the more recent 483 observations with the FDA, when we put forward our responses to the FDA, we laid out a 12-month plan in terms of how we would address those observations, and we've been executing against that plan, providing monthly updates to the FDA as we go, and so that will take us out to August next year. Again, we're going above and beyond that.
So really think about our remediation efforts extending through the entirety of 2025. And there are aspects of just how we do things a little bit differently than we've done previously, but nothing kind of major to point out there other than the big change being the qualified technicians, what we've referred to previously as certified cardiac technicians. They will be brought under the quality management system and really part of the device from a clearance and from a quality management system standpoint. So that requires work to update the documentation, update our processes to include the qualified technicians, test those processes, and document that. And that's really the big effort in that 12-month period that I referred to.
This is a tough question, but I'll ask it anyways. It sounds like in saying you plan to go above and beyond that you will meet or exceed their expectations. But as the months have passed and you've provided these progress reports, is there any ability for you all as an organization to feel out how they think you're doing thus far?
It's a good question, and we would like to get that kind of positive acknowledgment along the way from the FDA. From our standpoint, we're going to provide the updates, and if the FDA does not like the progress we're making, we would expect to hear from them, so in some ways, no news is good news, but it would certainly be nice to look them in the eyes and confirm that we're moving in the right direction. Again, the way we're approaching this is really accepting the observations they had in their most recent inspection in July. We didn't push back on any of that. We're accepting of it and we're updating our quality management systems to account for that.
We've also taken steps where we brought in a new leader of quality, new head of quality who has great experience in this space in terms of helping companies work through warning letter situations, very highly respected leader there, and then have brought in an outside firm, another outside firm that we've engaged that is, again, highly reputable, will go above and beyond in terms of what the FDA looks at as they kind of serve as a kind of an internal audit function for us as it relates to our quality management system, so from our standpoint, we're doing everything we possibly can. We hope to get acknowledgment from the FDA as we go, but otherwise, we feel good about our plans.
Maybe two more on this, and then we'll move on. On the timing, you said 12 months, so that's a nice precise disclosure. Is it also fair to say the submission of the next-gen MCT device kind of in your mind comes immediately after resolving the warning letter or this 12-month process? Are those kind of linked?
Not really. Coincidental in terms of how that timing is. As you know, we were originally planning on submitting Zio MCT before the end of the year. What ultimately drove us to the decision to push that out as we brought in the new head of quality that I mentioned as we engaged with this new consulting firm, we realized we can go a little more in terms of making that submission more robust from a testing and documentation standpoint. Again, that was voluntary. That was not at the FDA's request, but as we look to make sure we're putting ourselves in the best position possible as we present things to the FDA, we determined, let's take the time, let's make that submission more robust, and that's the reason for the delay.
Last on this, there was breaking news on the third quarter call with the second 510(k). And you had prepared this message and plan for next-gen MCT. And obviously, that was delivered that night. But in the Q&A, it's like, oh, we have this other box checked now. Does that in any way change what you expect here on timing?
Timing of the Zio MCT submission?
Yeah.
No. No, again, pretty independent from that. I would, again, make the comment that second submission was obviously important and, again, proof that we're on the right track. But did that change our thinking on Zio MCT submission timing? It did not.
Okay. Let's shift gears, but stay with AT. I thought, and then we'll go to XT and hit on the core business. I was surprised to hear AT performing in the market very well. Record new account openings in the third quarter. On track to do another record in the fourth quarter. Record volume. It's just a little thematically surprising, right? The street sees these kind of quality challenges with this product primarily. And yet performance in the real world is going quite well. So to what do you attribute that? Why is AT holding its own in the market? And then some.
Yeah. We're pretty critical of AT. But actually, AT is a good product. And we believe it does have competitive advantages relative to traditional MCT technologies out there. And I think our commercial team has done a tremendous job navigating this entire situation and being confident in the products that we have. AT, the advantages are patient puts it on, can wear it for 14 days without doing anything after they put the device on. Whereas competitive MCT devices require recharging batteries, swapping out adhesives, swapping out electrodes. And any time you introduce those patient manipulations, it lowers patient compliance. And ultimately, your diagnostic is only as good as how often or continuous it's monitoring a patient's heart. So we do believe AT has advantages from that standpoint. where Zio MCT will be an upgrade over AT is taking that time, the wear duration out to 21 days versus 14 days.
And that is a bit of a barrier in the market today. But again, our commercial team has done an incredible job navigating the situation. I think there's also a halo effect of Zio XT and Zio Monitor, right? I mean, that is the gold standard in the market from a long-term continuous monitoring standpoint. If a physician knows that device is comfortable with the brand of Zio and knows the service that they're getting there, they get that same end-of-wear report with Zio AT, which is an important selling feature for Zio AT as well.
I perceived MCT, it's a large market. It's a growing market, but it's fairly mature, at least relative to XT. So would you attribute this AT momentum as direct share capture, kind of converting cardiology and EP accounts that have been using one or two of your competitors to you? Is that what this is? Or is there some kind of, if you just do the market model of market growth and share, is this kind of pure share in your view?
I think it's more share gains than market expansion. Though that MCT market is growing, not to the same degree as long-term continuous monitoring. But I would say, yeah, that growth, the strength in the market that we're seeing is competitive share gains.
Let's go to XT, all that to get to 90% of the business now, so I want to start hyper-focused on this year. And then I'm going to ask some questions on primary care because I think that's interesting for you. One of the other things over the, in September, you were at investor conferences, and the message was, don't expect a beat in the quarter and summer seasonality. Obviously, we know about this. The folks get sweaty. The patches fall off a little quicker. The return rates maybe decline or the wear times on things that are returned are a little lower. It's just a reality of your revenue model, so the street was a little concerned, and then we get to the quarter. There was 1% revenue upside, and you said October was good.
Is everything in gear except that every year the summer is going to be just a little tricky for you because of the sweatiness?
Yeah. We very much are encouraged by the momentum in the business and what we're seeing in the business. Q3 is always a tricky quarter for us. Not only the warmer summer months, but just general summer seasonality as patients and physicians go on vacation. So in early September, that's right when we really start to see volume ramp back up coming off of the summer seasonality. But in terms of our business, patients going on Zio in late August, early September, kind of on the cusp of whether or not that is a Q3 revenue or a Q4 revenue event for us. So it's really difficult to kind of call the quarter in early September, which is why we provided that commentary. Ultimately, the quarter came together nicely for us.
The teams did an incredible job in terms of bringing devices in and getting reports posted there at the end of the quarter. Really pleased with that. The momentum in the business is very strong. We talked about October trends. We talked about new account door openings, all really positive indicators of the direction of the business.
Implicit in the end of the quarter, strong finish in the October commentary, the hurricanes like a consideration, but nothing untoward to call out from Southeast hurricanes.
Yeah, that's correct. We saw the impact, but also saw kind of a bounce back. And yeah, nothing to call out there.
All right. I want to talk about primary care. This metric might be a touch stale, but last year, I think it was described as 20% of scripts and growing faster than overall, so probably a bigger number this year, and as I watch press releases over the course of the year, more of these national account announcements, some of these value-based care groups are kind of doing their own testing and push into asymptomatic on their view of monitoring that population, and knowing the competitive landscape, y'all have led the charge into PCP. This is a highly differentiated concept for iRhythm. The question to you is, how would you frame where we are in terms of penetration? This opportunity in your mind, you've captured what of it and it's going where?
Not to put words in your mouth, but you think primary care volume will be what portion of volume one day over the next three to five years versus, say, 20% last year? Or in terms of calling on doctors, you think the serviceable doctor base to call on would be X and you've captured what portion of that to this point? I'm just curious on the runway here.
Yep. Let me try to come to that a couple different angles. So from a kind of coverage standpoint, we believe that with our current sales team, current commercial team, really focused on the large integrated networks and our expansion plays into those networks. Generally start with cardiology. But then we have kind of support teams that come in and look to expand out into primary care as well as other prescriber bases in that account. That's one approach. And that's really our core sales team. We also have a more kind of strategic accounts type group that focuses on these large primary care networks. And we're seeing really good success in that model. So kind of a two-prong approach. With those two efforts, we believe we can get to, call it 60%-70% of primary care physicians out there.
Plenty of opportunity to continue to grow with the current sales team that we have. And so feel really good about continuing to expand into primary care. You talked about 20% or a little bit over 20% of volume last year. We'll look to update that metric at some point. But it's safe to say primary care continues to step up quarter to quarter. And we believe we're really just getting started. We've talked about data that shows, claims data that shows patients showing up in primary care, 15 million patients showing up in primary care every year that have a cardiac palpitation documented in their medical record. Yet only 6.5 million ambulatory cardiac monitoring tests are being done per year. So that tells you the market expansion opportunity just for symptomatic patients alone.
Another encouraging thing that we're seeing as we're launching into these innovative PCP groups, they're often sometimes starting with asymptomatic screening, but other times starting with symptomatic and then getting comfortable with Zio and then looking to expand from an indication standpoint and into that proactive monitoring space. A lot to be really excited about. It's been a good growth driver for our business. We believe we're just getting started.
I'll ask one follow-up on asymptomatic and then hit on margin, and then we'll probably have to wrap, so asymptomatic, the concept on paper is a really big number. The guidelines probably will take many years to unlock, if ever, but if payers see value, some of these folks in the U.S. can just head into it on their own dime, and it seems to be that that's starting. My question is, and maybe it's more, hey, here's how to watch this or monitor this over the next year or two. In terms of identifying the risk profile of the population for which asymptomatic screening might be relevant, where does that consensus lie, and what are the papers or payers or docs who are dialing that in, and where's the algorithm really tight, and it's like, this is definitely going to happen, but it's not happening yet.
What's the nice to have down the road?
Yeah. So I think one comment is the clinical evidence here will continue to build. We had some evidence, clinical data at AHA this past weekend, which I think is informative of what are the patients that we should be targeting with asymptomatic screening. The data there was on COPD and type 2 diabetic patients and showing how monitoring for arrhythmias and early detection of arrhythmias can have a significant improvement in terms of healthcare resource utilization costs, so let alone patient outcomes. So I think the clinical data will continue to build here as we're getting experience with these innovative PCP groups. We'll likely be generating data through those more real-world evidence there as well. I would say mSTOPS is kind of the criteria that's being applied today and iterations of the mSTOPS type criteria.
Again, I think it'll be refined as we get experience and more clinical data is generated.
Business model efficiency is always kind of an overhang for me personally. I'm seeing the light, the gross margin starting to pick back up, the operating leverage. I'm seeing it. On Zio Monitor, remind me, the unit economics of that versus XT, how much better are they, especially as you get to kind of scale on manufacturing? And on the whole, there was a year-long period of obsolescence charges and kind of duplicative redundancies. Are we through that? What's the dream on unit margin for Monitor?
Yep. Good question, so we're nearly through that. The home enrollment part of our business is still being served with Zio XT, which is about 23% of our volume in Q3, so early next year, we will make that cut over from Zio XT to Zio Monitor, so all of long-term continuous monitoring in the U.S. will then be utilized, or Zio Monitor will be utilized there, and I think as we scale, we're going to see benefits there, and Zio Monitor does have better unit economics than Zio XT, particularly as we scale. We've launched phase one of our manufacturing automation earlier this year. There's subsequent phases that will come in the coming years, and we'll really start to see those scale benefits, and that's on the hardware side.
And I would also say we continue to see opportunities for efficiencies on the operations side, which is also in gross margin and just being more efficient there. And our teams have done a really good job the last couple of quarters here in terms of being really thoughtful, resourceful, and efficiently driving the business. So see a nice trajectory ahead of us. And we're excited about it.
Philippines for kind of shared services. I mean, I think we get the labor arbitrage. Would you say business continuity and performance is really good as you've done that? What's been the major success to this point or successes, and what's the agenda on certain roles over the next year or two?
Yeah. I think it is an important part of operating leverage for us. That isn't the only component. We did stand up some functions in the Philippines. And in terms of kind of wholesale moves of functions, I think that's behind us. But really, as we look to grow from this point forward, it should really be a default of what can start in the Philippines versus what needs to be in the US. We have a great team there. They're performing really well. And again, I think there's a lot of opportunity to continue to build that out.
Last one, 30 seconds. Just open-ended. The DOJ inquiry, is there any update that you can share for investors?
No updates. Since our last update, there was some activity over the summer in terms of back and forth on attorney-client privilege matters related to a few documents. We had turned over 400,000 documents to the DOJ previously. They were asking us to waive attorney-client privilege on three documents. We've maintained that privilege. There is a court date in early December where ultimately that'll be ruled on, but otherwise, no updates.
Excellent. Dan, thank you so much.
Appreciate it.
Awesome.
Thank you very much.