Good afternoon. Thank you for attending today's iRhythm Inc. Q4 2022 Earnings Conference Call. My name is Bethany, and I will be the 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. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Stephanie Zhadkevich, Director of Investor Relations. Please go ahead.
Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the Q4 and full year ended December thirty-first, 2022. Before we begin, I'd like to remind you that management will make statements during this call that include 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. These statements involve 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 those statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, filed with the Securities and Exchange Commission. 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. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this 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-K 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, February 23, 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. With that, I'll turn the call over to Quentin Blackford, iRhythm's President and CEO.
Thank you, Stephanie. Good afternoon, and thank you all for joining us. Brice Bobzien, our Chief Financial Officer, Doug Devine, our Chief Operating Officer, and Dan Wilson, our EVP of Corporate Strategy and Development, join me on today's call. My prepared remarks today cover progress we've made during the Q4 of 2022 and discuss the near-term growth initiatives for our business. I'll then turn the call over to Brice to provide a detailed review of our financial results. We were very pleased with our significant growth exiting 2022, recognizing $112.6 million in revenues for the Q4 and achieving 38% growth year-over-year. This was in line with expectations as registrations grew more than 20% compared to the Q4 of 2021, and we saw improvement in return device rates.
For the second time in the last 3 quarters, we realized another record quarter of new account openings for Zio XT, reflecting strong demand for our Zio services and setting us up for success as we enter 2023. Our Zio AT service continued to grow nicely, albeit growth did slow as expected when compared to the first 9 months of 2022. We continue to drive awareness and adoption with the cardiology and EP physician segments where we believe there is still significant greenfield opportunity. We are also continuing our push into primary care to deliver a complete ambulatory cardiac monitoring service to the right patients earlier in their treatment paradigm. As discussed in the past, we believe this opens up the potential for a vastly larger market opportunity with over 14 million patients showing up in their primary care provider with cardiac-related heart palpitations annually.
Patients can benefit from ambulatory cardiac monitoring early in their diagnostic journey. We believe our Zio services offer the right test the first time. As an example of this strategic expansion, we recently announced a nationwide agreement with One Medical, with whom we share a dedication to delivering technology-powered and patient-focused solutions. We are very pleased with the progress we are making in the primary care segment and see significant opportunities to deliver Zio services to patients earlier in their care journey, ultimately benefiting patient lives and the healthcare system. On the pricing front, in November 2022, CMS published the calendar year 2023 physician fee schedule final rule containing payment rates for the two main CPT code sets related to long-term continuous ECG monitoring and recording that we use to seek reimbursement for the Zio XT service and the Zio monitor service.
We were very pleased with the outstanding work by our teams and other industry groups working with CMS to enable this milestone. Importantly, this positions us to bring our innovative products to more patients. Through our continued focus on improving market access in 2022, approximately 75% of all Medicare and commercial patients eligible for coverage now have a $50 copay or less. Approximately 25% of all Medicare and commercial patients eligible for coverage will not pay anything at all out of pocket for the Zio XT or Zio monitor service. CMS national pricing also opens the opportunity to contract with state Medicaid programs and further expand market access for these patients who represent approximately 10% of the U.S. market.
While the CMS national pricing for long-term continuous ECG monitoring provides stability in our core U.S. business, we continue to believe that CMS undervalues the clinical benefit that our service brings to Medicare beneficiaries. We look forward to continuing to partner with CMS in the coming years as our industry moves towards gaining increased recognition of the clinical value of innovative AI technologies.
On the innovation front, the clinical and economic evidence for our Zio XT service continued to build during the Q4 with the mSToPS economic analysis presented at AHA in November 2022. 1-year follow-up findings from this trial were published in Heart Rhythm O2 in 2020 and demonstrated that active monitoring with our Zio XT service led to AFib being newly diagnosed in 6.6% of patients who were actively monitored versus 2.4% in the observational control group receiving routine care. 3-year follow-up findings of mSToPS published in PLOS ONE in 2021 furthermore demonstrated the active monitoring with Zio XT service led to a statistically significant reduction in the combined primary endpoint of death, stroke, systemic emboli, or myocardial infarction versus standard clinical care.
The mSToPS trial was the first study to observe the benefits of AFib screening at 3 years. The economic outcomes analysis presented this past November demonstrated that targeted AFib screening with our Zio XT service provides excellent value to the healthcare system by enabling early diagnosis. Over 3 years, individuals prescribed the Zio XT service were more likely than unmonitored individuals to have outpatient visits, including to cardiologists, but less likely to require emergency department visits or hospitalization. More specifically, the analysis showed an incremental cost-effectiveness ratio of approximately $17,000 per quality-adjusted life year gained, which is the academic standard for measuring how well medical interventions lengthen and or improve patient lives. For reference, the USPSTF recommended in 2021 to begin proactively screening for lung cancer with an incremental cost-effectiveness ratio of $72,000.
According to ACC and AHA, incremental cost-effectiveness ratios for diagnostics under $100,000 are viewed as attractive, while anything under $50,000 is viewed as highly valuable. We believe that this continues to support our value proposition to payers as we build out our Know Your Rhythm program to proactively monitor properly targeted at-risk populations. Regarding product innovation, we are pleased to announce that we recently received FDA clearance for another set of software modifications to our ZEUS system. This 510K clearance includes the addition of AFib burden estimates to be added to daily reports for our Zio AT service. Since higher AFib burden has been associated with a higher risk of stroke as well as higher prevalence of heart failure, we believe this is a clinically important enhancement to our service offering.
Importantly, this further demonstrates our ability to continue developing innovative solutions and enhancements to our existing services for patients and customers and set the stage for continued innovation around our Zio AT service. Turning to 2023, I'm excited for the year ahead and expect to build on the solid momentum we've seen in the past few months. On a macro level, while healthcare systems did experience staffing challenges in 2022, we're seeing early signs of improvement in early 2023. The operational efficiency associated with our Zio service has been resonating with accounts and driving adoption by allowing clinicians to streamline their workflow and focus their time on patient care. With 99% physician agreement with the Zio report and 98% patient compliance, the value of our Zio services continues to be appreciated by clinicians and continues to underlie our competitive advantage.
We continue to see a steady pace of new account openings thus far in 2023. We are particularly pleased with the early progress in primary care volumes from recent account openings that continue to validate our belief that the primary care market will in fact open up and be a nice contributor to growth for years to come. We also anticipate significant catalyst over the next 18 months to drive our business forward and position us for success in both the near term and long term. Most importantly, we expect there will be significant data upcoming at ACC 2023 in New Orleans, including important information further demonstrating our value proposition with our Zio services compared to other ambulatory cardiac monitoring offerings in the ACM market. We look forward to speaking with you about them after the ACC presentation in the coming weeks.
On the product front, we continue to anticipate full commercial launch of our next-generation biosensor, the Zio monitor, to replace our current Zio XT patch form factor in the back half of 2023. As a reminder, this new patch is 72% smaller, 55% lighter, and 20% thinner than our existing Zio XT form factor, all of which we believe has a positive impact on patient experience and may have an associated improvement in wear times and device return rates. The Zio monitor is currently in limited U.S. commercial launch, and we are very excited to get this into the marketplace in the hands of physicians and their patients. We also anticipate submissions to the FDA for an updated MCT service in the latter part of 2023 for potential commercial launch in 2024.
There is significant runway ahead of us in the MCT market where we own less than 10% market share today. The submission on the hardware side will include an upgrade to our new biosensor platform, which was built for automation and will therefore improve our scalability once volumes are ramped across all modalities. We also expect to submit software improvements to add enhanced detection features, monitoring flexibility within a single device, and longer wear time optionality. We are excited about this next generation of our Zio AT product, which we believe will better position us to compete in this space and drive market share gains into the future. As we've discussed in the past, our Zio Watch is also expected to enter limited market evaluation in 2023.
Using a continuous PPG AI-based algorithm, the Zio Watch not only detects AFib, but also characterizes the amount of AFib over time to calculate an AFib burden estimate with accuracy compared to that of the Zio XT patch as a reference. This contextualization of patient AFib presence or absence collected through the monitoring period is important and clinically meaningful to aid in a potential diagnosis. The Zio Watch is intended to be complementary to Zio patches by adding a modality with longer wear times for patients who require long-term monitoring.
The anticipated market evaluation in 2023 will enable us to gain real-world experience with the product and service to gather patient and physician feedback and to consider the appropriate reimbursement approach for this uniquely positioned prescription-based monitoring service. Finally, we've outlined previously how driving operational efficiency is an important strategic pillar for iRhythm to serve millions more patients across the globe in the future. After nearly 10 years, we served our 5 millionth patient in late 2022. With our current growth assumptions, we expect to serve our next 5 million patients in just a few short years. This requires us to think bigger than we have before. In anticipation of this, we are sharing 2 transformative steps that we are taking to advance our strategic plan and enhance our internal infrastructure to meet the significant demand ahead of us.
These steps include the establishment of a global business services center located in Manila, Philippines, as well as efforts to enhance the experience that our physicians and patients have with iRhythm. These efforts will enable us to scale and develop our clinical, operational, and administrative functions more quickly, thereby enabling us to continue providing excellent support to our patients and customers globally. In addition, we'll leverage third-party service providers where necessary that will allow us to grow and scale more aggressively over time. While we expand our operations internationally and leverage our new service providers to meet our operational goals, these actions will enable our ability to grow globally and add team members where they are needed, both in the U.S. and abroad. These transformative steps mark a defining moment in iRhythm's journey.
We know that patients, especially those seeking access to the care they need, as well as physicians, rely on Zio Services to help unlock opportunities for better care and improved outcomes. Removing friction and barriers to access is a critical part of our mission. We need to ensure our operations allow us to do this. The changes I just outlined will equip us to improve access for patients worldwide. With solid momentum in our core business and significant opportunities on the horizon, I'm truly excited about our future at iRhythm in 2023 and beyond. I'll now turn the call over to Brice to discuss our financial results and 2023 guidance.
Thanks, Quentin. As 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. Q4 results demonstrated solid momentum in our core business as revenue grew to $112.6 million, representing 8% sequential and 38% year-over-year growth. On a full year basis, we recognized $410.9 million in revenues, representing 27% growth compared to 2021, driven by both volume growth as well as ASP improvements. Looking at new store, same store mix, new store, defined as accounts that have been open for less than 12 months, accounted for approximately 40% of our year-over-year growth. Home enrollment for Zio Services was about 20% of volume in the Q4.
Moving down the rest of the P&L, gross margin for the Q4 was 69.9% and through full year 2022 was 68.5% or the midpoint of our guidance range. Both sequential and year-over-year benefits were achieved through ASP improvements as we continue to optimize our pricing strategy. We realized nice improvements to cost per unit as volume scaled throughout the year. Q4 adjusted operating expenses were $97.1 million, up 8% sequentially and up 16% year-over-year. Full year adjusted operating expenses were $363.7 million, up 16% compared to 2021. While higher on an absolute basis, this compares to year-over-year full year revenue growth of 27%, demonstrating our ability to realize leverage in the P&L.
Our investments remain strong in R&D, and we have started to see efficiencies in our SG&A profile. Adjusted net loss in the Q4 was $17.9 million or a loss of $0.59 per share, compared to adjusted net loss of $19.1 million or a loss of $0.63 per share in the Q3 of 2022. This compares to adjusted net loss of $1.10 per share or a $0.51 improvement versus the Q4 of 2021. Adjusted net loss for the full year 2022 was $84.5 million or $2.82 per share, compared to a net loss of $101.4 million or a loss of $3.46 per share during 2021.
We are beginning to realize value from an increased focus on operational discipline, achieving positive adjusted EBITDA of $1.1 million in the Q4. This represents an improvement of $3.7 million sequentially and an improvement of $18.4 million year-over-year. Adjusted EBITDA for the full year 2022 was -$11.3 million, representing an 830 basis point improvement to adjusted EBITDA margin compared to 2021. We are focused on disciplined spending in our operating expenses, but also continuing to invest in strategic initiatives that we believe could enable future growth opportunities. Note that we did incur approximately $2.3 million of expenses related to business transformation activities in the Q4, bringing our full year impairment, restructuring, and business transformation cost to approximately $31.7 million in 2022.
Very importantly, we're extremely pleased to announce that we have cleared the material weakness of our internal control environment. Over the past several years, we took actions designed to improve our internal controls and remediate deficiencies that led to our material weakness. These have included enhancing the depth and experience within our finance organization by hiring additional accounting and finance personnel with relevant expertise, providing additional management oversight over financial reporting, including the establishment of a SOC steering committee within our internal audit functions, and implementing new controls and processes. We remain committed to advancing our culture of operational excellence and will continue to add skilled talent as complexities grow and needs arise.
Turning to guidance for 2023, we anticipate full year revenue growth of approximately 16%-18% compared to 2022, representing a range of approximately $475 million-$485 million. This contemplates national CMS pricing in place beginning January 1, 2023, and we believe that our ASP in 2023 will be generally in line with what we experienced in 2022.
With pricing stabilized, we believe that the volume contributions will be the main driver of revenue growth during the year. We anticipate gross margin will range between approximately 69%-70% for the full year. Continued gross margin improvements will be realized through volume growth contributions to our per unit cost, as well as improvements to our fixed cost structure. Notably, our full year guidance contemplates a bit of pressure to gross margin as we launch our Zio monitor service into the US commercial marketplace, which will include an evaluation of our current Zio XT inventory levels and will reflect underutilized costs for our Zio monitor system. We believe that adjusted operating expenses in 2023 will range between approximately $415 million-$425 million as we scale our business to meet increased volume demand.
We believe that adjusted EBITDA margin in 2023 will range between approximately -0.5% and 0.5% of revenues. As a reminder, adjusted EBITDA will continue to exclude restructuring costs, transformation costs and stock-based compensation expense. In 2023, we do anticipate incurring approximately $15 million-$20 million of one-time 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 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. Please note that we also anticipate $8 million-$10 million of capital expenditures related to standing up new facilities and system solutions.
In closing, we exited 2022 in a strong financial position with $213.1 million of cash on hand to drive continued growth from our core business, invest in innovation, and lay the foundation for future expansion into new markets. We are excited for the strong momentum in our business to continue and look forward to upcoming catalysts that we anticipate can drive growth in 2023 and beyond. With that, Quentin, Doug, Dan, and I would like to now open the call for questions. Operator?
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question, and we ask that you limit yourself to 1 question and 1 follow-up. We will pause here briefly as questions are registered. Our first question comes from the line of Allen Gong with JP Morgan. Please go ahead.
Hi. Thanks for, you know, taking the question. I just had a quick, you know, I had a quick one and then a follow-up. When I think about the 16%-80% guidance range you put out, you know, I think in the past you've talked about how the 20% LRP is still, you know, achievable for the year. You're coming in a step below that. I think in the past you've said you do wanna see more progress made on some of the challenges you were experiencing at the tail end of 2022. Could you just provide an update on how those have really progressed and, you know, your confidence in that 20% number?
Yeah. Hey, Allen, this is Quentin. I'll jump on that. You know, look, I think at this point we feel really good about where things are at in the business. Clearly, you know, we spoke about the return device rate with our Zio XT business, and we knew that we had some of the growth headwinds with AT coming off the operational issues in the Q4. I would say we've navigated through those pretty well. Our Q4 came in right in line with expectations, maybe showing a bit of opportunity to improve upon that. The way we set up expectations for 2023 is that we'll continue with that return device rate more or less the way we exited the year.
That'll be into the low end of the guidance range and that the AT business continues to perform in line with what we saw coming off the Q4 as well. To the degree that we make progress, you know, over the course of the year, then you can start to see that step up beyond the 16% and ultimately get into that 18% range. The assumption is that we've made that progress by sort of the mid part of the year. If we can make that happen faster, then great, there's further upside to where we're at. That's how we thought about the guidance, and I do believe, you know, with progress made on the operational side, we can see our way back to the 20%, but it's early.
You know, we're seven, call it eight weeks into the new year. We're not gonna get ahead of ourselves at this point in time, and we're gonna go execute and ultimately deliver, and we'll see where that takes us.
Got it. You know, just like, kind of like touching on that a little bit more. When we think about how you're starting off the year, you kinda just, you know, qualitatively pointing towards like the 16%, you know. Should we think of that as basically assuming fairly usual seasonality with maybe a little bit of headwinds from laboring impacts from the device return rate, you know, the improvement in AT, and then, you know, then transition into more growth in the balance of the year? Thank you.
I think you're thinking about it the right way, Allen Gong. You know, keep in mind, you know, these efforts that we're putting forward with respect to the return device rate and getting the AT growth rate back to where we've seen it historically, you know, those are efforts that are ongoing right now. Naturally, you know, we would expect to see progression over the course of the year, which means you're gonna start at your low point from a guidance perspective here in the Q1 and then hope to see progress beyond that. That's how we think about it. I think that, you know, starting on the lower end of that here in the Q1 is the right way to think about it. As we make progress, we would expect to see that increase over time.
Thank you. Our next question comes from the line of Marie Thibault with BTIG. Please go ahead.
Hi, Quentin, Bryce. Thanks for taking the questions. Wanted to ask one here, I guess on the new sensor that's in limited launch right now. Would love to hear what you're learning so far in that launch. What will sort of trigger the move to a broader launch? In particular, would love to hear if device return rates or compliance or physician opinions of the sensor are any different than the current generation.
Yeah. Thanks, Marie. I, you know, I will tell you one of the things I get most excited about over the course of 2023 is getting the Zio Monitor into a full commercial launch. The initial feedback that we've received around that device is that it's a transformational sort of technology in this space. Again, it's 72% smaller and 50% lighter. It's 20% thinner. It leads to a much better patient experience. Of course, when the patient experience is better, the physician experience ends up being better as well. We're excited by what we think that can bring, you know, in the back part of the year. We really haven't contemplated any sort of change in our guidance expectations with respect to having that new product out there.
It's one of those things where we think about it as let's get it in the market and then see how it performs, and we can adjust our expectations from that. But I'm very encouraged by what we're seeing and the feedback that we're seeing. There's actually gonna be data at ACC that's gonna be presented around Zio monitor as well that demonstrates some of the improved patient experience and wearability factors associated with it, including the return device rate, which is a bit better than what we're seeing with the XT product. It's in a limited launch phase, if you will, or limited evaluation at this point, so the number of patients are not significant, but the early indicators are all very, very positive around this. We're bullish on this.
Our expectation is, you know, we'll roll it out in the back part of the year into a full commercial launch, and we'll step into it as quickly as we can, which will really be, you know, driven by how fast we can produce the product off of our line. We're ramping up that capacity as we speak right now, to be able to meet the demand once we go with the launch. We're very excited by what we're gonna see with Zio monitor.
Okay, that's great to hear. If I could ask a follow-up here on the national rate with Medicare. Was curious about your comments on the possibility of working with Medicaid. Can you give us a sense of pricing discount or possible timing on when we might start to hear from some of the Medicaid organizations on that? Secondly, as part of that, where are we in the shift toward a San Francisco facility? Any chance you could give us any metrics on that? Thanks so much for taking the questions.
Yeah. I'll speak to this one as well. You know, from a Medicaid perspective, it's a bit too early to get out ahead of, you know, what our expectations are there. I will tell you, really any progress that we make in and around Medicaid is gonna be an incremental benefit to us. We serve a lot of those patients today without charging anything at all for the product when they can't afford it. Once we get coverage in place, that'll start to create a nice bit of a benefit for us just in the fact that we can begin to get reimbursed for some of those patients. The reality was it was very hard to sit down and have discussions with any of these state Medicaid programs without having a CMS national rate in place.
Now that it's in place, we can begin to have those conversations. Early conversations have begun to be had, but in terms of where the pricing lands, you know, it's too early to say exactly what that will look like. Just know that any pricing at this point would be upside to what we're getting right now in serving that Medicaid population. On the San Francisco side, you know, our expectation is that we'll have enough folks hired and in the seat to do about 25% of the CMS XT volume in San Francisco here in the Q1, first part of the year, and then ramping beyond that in the back half of the year. Right now, that still feels like the right assumption.
I think, you know, we're making good progress against our goals to hire relative to those percentage mixes in the early part of the year. We got a long way to go to get to where we want to in the back half of the year. Still a lot of hiring to be done, but, good progress being made to date.
Okay, thank you.
Thank you. Our next question comes from the line of David Rescott with Truist Securities. Please go ahead. David, your line is now open. Thank you. Our next question comes from the line of Cecilia Furlong with Morgan Stanley. Please go ahead.
Hey, good afternoon, thank you for taking the questions. I wanted to ask a follow-up question on AT. If you could just speak to where you are at this point, running through the legacy SKUs of the prior AT before the addition of the notice. Then, looking forward too, as you think about just what is incorporated in that 16%-18%, can you speak to how you're thinking at this point at least about AT volumes recovering to a level or similar levels that you saw in 2022 pre the issue?
Yeah. I think from an AT perspective, you know, coming off the Q4 and, certainly how we thought about the guidance is that that business is gonna grow right around 30% for us. That's where we saw it in the Q4. That compares to, you know, the first nine months of last year being closer to the 50% growth range. We certainly have seen a difference in that growth profile coming out of that field advisory notice. We've made all the updates in the labeling that we need to do and in the packaging that we need to do. Now it's about just, you know, the confidence coming back in the commercial force and with the customers to see that growth return.
Our 16% growth expectation would assume that we sort of continue at the current rate over the course of the entire year. Getting to 18%, the higher end of our guidance range would assume that, you know, around the midpoint of the year, we're seeing ourselves get back into those prior growth realms. That's how we've thought about it. Obviously, if we can, if we can do better than that, then we're very pleased with it. Our focus is certainly on getting that business back to where we saw it historically. I think that the recent FDA approval with the AF burden, for example, that will make its way into that product certainly continues to position it as one that can be attractive in that space.
We wanna see those results play out before we guide to them.
Great. Thank you. If I could follow up on gross margins as well, how we should think about first half versus second half, especially as you launch the Zio monitor to a greater scale and also into 2024, with Zio, the MCT service, just the impact from initially ramping those products versus the longer term benefit from a COG standpoint.
Yeah. Thanks, Cecilia. Great question. Gross margin. In our guide, the way we think about it is, as you probably have seen, the seasonality of gross margin is a little bit softer in the early part of the year, call it Q1, because it's the lowest volume quarter of the year. You'd expect to see something similar in 2023. The other thing I would note is, you know, with it scaling throughout the year as it traditionally does, as you push more volume through the system, there is a bit of a caveat in there to your point on the Zio monitor side, where the launch of Zio monitor will, you know, create a bit of inefficiency in the short run as we're, you know, less than optimally, you know, utilizing that machinery up front.
You can expect a bit of a blip maybe in Q3 or so associated with it. The real benefits of the Zio monitor solution really come into play in 2024 as we're able to fully leverage that machinery and equipment we have in place. Also, that's when the full automation will go into place as well. Honestly, you know, at the back end of that, MCT becomes or comes online as the same form factor as well, and that's where you'll really get that scale and efficiencies associated with the Zio monitor. Cadence, I would think about it a little bit softer in Q1 as it traditionally is from a seasonality standpoint. You know, a little bit of pressure in Q3, and then, you know, the other two quarters relatively standard with what you've seen historically.
Great. Thank you for taking the questions.
Yep.
Thank you. Our next question comes from the line of David Saxon with Needham. Please go ahead.
Good afternoon, everyone, and thanks for taking the questions. maybe I wanted to start with a follow-up on guidance and just the assumptions around pricing being in line with 2022. just with the San Francisco facility getting to 25% of the volumes in the Q1 here and then ramping, I guess why wouldn't there be upside from an ASP perspective relative to 2022?
Yeah, David, I think, you know, it's a good question. Keep in mind, over the course of 2022, we had different dynamics playing out with respect to reimbursement around that XT product with the different MACs that we were able to contract with, right? Over the course of the year, that rate got higher and higher as well, so the comp gets more difficult. Even as we increase the utilization of Zio XT in 2023, it might have a higher effective average selling price that's being compared to a prior year that also had a higher effective selling price as we move throughout the course of the year. For the full year on average, we do think that XT price is gonna be pretty comparable year-over-year.
Maybe there's a little bit of a benefit now that the PAYGO aspect has been resolved from our original expectation when we were saying the XT pricing was gonna be relatively comparable. You know, there's about a 4% benefit relative to that original expectation. The AT pricing also came in a little bit lower in that final rule, which sort of negates the PAYGO benefit. Net-net, you're about neutral year-over-year related to those items. I hope that helped clarify it for you.
Yeah. No, that's super helpful. Then maybe I'll follow up with a maybe a longer-term question. You guys had a slide deck published in January that had a 25% EBITDA margin referenced in it. Just wanted to ask how we should think about that margin target relative to the LRP. Is that something you can hit in 2027, if you see contribution from some of these adjacent markets, or is that more of a longer term, you know, post 2027?
You know, it's a good question. Our LRP that we put out there around 2027 had us getting to roughly $1 billion in revenue at that point in time. It really didn't contemplate contribution coming from the adjacent market opportunities that we're certainly bullish on and hope to be able to open up. The point of 15% was simply a point in time as we're going through that billion-dollar mark and still growing at, in our minds, roughly 20% or better. In no way would that be a point that we'd be happy to stop at, though.
The business model here, when you think about it from a structural perspective and what is possible, there's no question that we can get into those mid-20s and even the upper 20s from an adjusted EBITDA perspective. When that happens, you know, I'm not willing to sort of say exactly when that's gonna happen, but I see that happening in the future of iRhythm. It's probably when we move north of that $1 billion in revenue, but it's something that can be achieved here. That was the purpose of putting that out there, is that we wouldn't be happy at 15%. That's just a point in time when we cross through that $1 billion mark. The long-term trajectory ought to be able to get us into the mid-20s.
Okay. Got it. That makes sense. Thanks for taking the questions, congrats on the quarter.
Thanks, David.
Thank you. Our next question comes from the line of Nathan Treybeck with Wells Fargo. Please go ahead.
Hi. Thanks for taking the question. Can you comment on how far along you are in your EHR integration, and how much of a driver is this in your 2023 guidance?
It's a great question because the EHR integration for us is such a critical aspect of how we think about creating stickiness with our accounts. I would tell you there is significant runway ahead of us as we continue to build out the EHR integration with our accounts. We are making good progress. It's been a focal point internally, and we know that once we get an account integrated with us. I couldn't give you an account throughout the history of iRhythm that once integrated from an EHR perspective has walked away from iRhythm. It creates a tremendous amount of stickiness, and at the same time, the growth trajectory hits an inflection point once you get to that point of EHR integration. In terms of the amount of accounts that are integrated, I don't think we've put that data point out there.
It's well less than 50%, and it's something that we are working to increase as quickly as we can.
Great. Thanks for that. Can you comment on what you're seeing in your Know Your Rhythm commercial pilots, and is there any contribution in the guidance?
Yeah, we have not contemplated any contribution in our guidance relative to Know Your Rhythm at this point in the pilot. We expect to launch multiple pilots over the course of the year, but at this point, we're still building out the operational capabilities of how those pilots would work. To be completely transparent that there aren't patients on our product in a Know Your Rhythm pilot just yet. That'll start before too long, but right now it's about getting the operational aspects of how we're gonna work with our partner, get the devices on patients, capture the data. We're in the midst of nailing down the final throes of the operational aspects as we speak. That'll ramp over the course of the year and, you know, to the degree that there is contribution from it ultimately will end up being upside to expectations.
That's how we've thought about it at this point. We're not gonna get out of ourselves with it.
Great. Thanks for taking the questions.
Thank you. Our next question comes from the line of David Rescott with Truist Securities. Please go ahead.
Hey, can you guys hear me now?
We got you.
Yep. Oh, great. Sorry about that. Thanks for taking the questions, and congrats on the quarter. I guess first, just on the longer range plan, you talked a little bit about PAYGO essentially, potentially being a slight tailwind. Just wondering on that long range plan, if one, you know, that the kind of benefit that you have from PAYGO going away or not being enacted this year, is, you know, is potentially upside or whether or not that was included in the long range plan or your initial view of the long range plan. I guess the second part of that is, did your long range plan from a top-line growth perspective also account for maybe expansion to this Medicaid patient population?
You know, on the PAYGO aspect in particular, we had assumed based upon what we knew at the time that PAYGO would be in effect. In other words, it would be a headwind a bit in 2023. Ultimately, what we learned is that it wouldn't be, right? That we would get the benefit back. That was about a 4% benefit that we hadn't contemplated in pricing over the entire long range plan. At the same time, we hadn't contemplated really that AT would be cut by CMS the way that it was. When you look at the two of those, I mean, literally, they offset each other almost to the dollar when you calculate the impact based upon the mix in our business.
I don't see PAYGO, you know, really driving any difference in the long range plan, as a result of the AT pricing being updated as well. Overall, I think the two of them net each other out. What was the second part of that question again?
The assumption around Medicaid or expanding into Medicaid.
Yeah.
whether or not that was included in the LRP.
No. We haven't really contemplated the incremental benefit that can come from Medicaid. Part of the challenge there is just it alludes back to the question that was asked earlier. You know, exactly what price are we able to establish in that population? That's something we're working through as we speak. How quickly can you get all the states to come along? We know that not all states are gonna come out of the gate, and it's gonna take, you know, work on a one-off basis. The way we'll think about Medicaid contributing to that long range plan is that we'll give you updates as coverage gets put in place, and then we can update our expectations in line with when that happens.
It's too early to try to anticipate and know exactly when that would happen. If we don't happen to get it exactly right, we're talking about a variance. I'd rather let that play out than then roll it into expectations as we get it dialed in.
Okay. I'm not sure if I might have missed it earlier, but, you know, in the past you had kinda talked about, the way in which you improve those underlying return rates of Zio XT is through, potentially shifting some more home enrollment cases toward those inpatient, or the cases were otherwise prescribed by a physician in the office. Wondering if that was a big driver of the improvements here. The second part of that would be, you know, if there is a increased
... rate of home enrollment as a portion of total revenue, in order to kind of keep those, lower return to the higher level or back to historical levels. Does that, incrementally add any type of expense, that would make you think about potentially shifting, the kind of overall view on how you know, how you leverage the profitability profile of the company? Thank you.
Yeah. I don't think. You know, nothing really came in much different than what we expected from a return device rate with respect to mix of volumes through home enrollment or in-clinic or the newer sort of take-home model that we were seeing. I think that pretty much came in line right as we expected it would. We made some improvements in that take-home model that was putting a bit of pressure on us, you know, throughout the course of the Q4. Once we learned about it and could sort of adjust our approach to those patients and those physicians with product that was. We provided better indications for use, how to apply the device, follow-up calls, those sort of things, we were able to see some improvement in that return device rate.
It's not in line with an in-clinic return device rate, but it has the potential that it can be better than a home enrollment return device rate. I believe the home enrollment program for us is an opportunity to really deliver sort of a competitive, differentiated solution experience for our patients. It's so easy to take this device, apply it at home, and not have to be in the physician's office to have that done. Then to be able to provide the report back to the physician without the patient never really having had to come in. I think home enrollment can be a significant part of how we grow the business into the future.
At the same time, you know, the return device rate with our home enrollment program is roughly 90% compared to, call it, 98% with in-clinic devices. I think there are some things we can do operationally that can improve that 90% over time and see us close that gap. I think the value of home enrollment is that it can help us drive faster volume growth or faster adoption of the product, given the flexible model that it allows and it gives the physicians to utilize to address some of the capacity challenges they have in their own clinic. While it has a lower return device rate, I think it has the potential to drive faster unit volume growth that can offset that lower device rate and then give us opportunity over time to operationally focus on improving the 90%.
I think home enrollment can be a significant driver of growth for us into the future when we think about some of the challenges we see in the market, you know, around capacity or just seeing patients or having to schedule them, you know, many weeks, if not months out. I think home enrollment can start to alleviate much of that. I think it becomes a nice solution for us.
All right. Thank you.
Thank you. Our next question comes from the line of Joanne Wuensch with Citi. Please go ahead.
Hi, this is actually Anthony on for Joanne. Thank you for taking our questions. Do you wanna talk about how the international business performed this quarter and what your expectations are for this year? As a follow-up, can you just discuss any competitive dynamics you witnessed in the quarter? Thank you.
Yeah. From an international perspective, you know, the value continues to be realized quite nicely of what Zio can bring into the marketplace, and we continue to see volume growth there perform really, really well. I think one of the things that we have to navigate through, you know, in the U.K. business is coming off of the AI Award and into formal NHS coverage of the product, right? That's something that we continue to work through with them and we continue to see great volume growth. Getting a permanent rate established by the NHS is something that's really gonna open up the public sector for us into the future. I expect it's gonna continue to grow really well. Volumes are gonna continue to grow really well for us as we get into the private sector.
We've now entered into agreements with 3 of the largest private hospital groups in the UK. That's gonna continue to progress nicely for us. Over time, I think international is gonna be a pretty significant contributor for us in total. From a competitive perspective, I would tell you there's nothing unique that we're seeing in the marketplace relative to competition. We're very much aware of it. We pay close attention to it. We track it, you know, as well as we can through third-party market data that we have. I don't think that you're seeing any change in competitive trends over the course of the Q3, the Q4. Frankly, I think some of the challenges that we saw, you know, in that third and Q4, from a staffing, you know, perspective, I think they were felt industry-wide.
I don't think they were specific to us based upon all the market data we were able to pull together. I don't see any dynamics changing on the competitive front, although it is something that we pay very close attention to.
Thank you. Our next question comes from the line of Bill Plovanic with Canaccord. Please go ahead.
Hi, it's John on for Bill tonight. Thanks for taking our questions. Can I first start just on the PCP opportunity and maybe some more color around there? What are you seeing in terms of success, and how would you describe clinician comfort? Are these generally take-home or home enrollment patients? Are you seeing any pushback from existing EP or cardiology customers?
Yeah. What was the middle question in there? You were asking about the success or what success looks like and then home enrollment, but I missed.
Oh, just the clinician, the PCP comfort around.
Oh
around prescribing Zio.
Yeah.
Thanks.
Yeah. No, terrific question, because it's a dynamic that we are learning to navigate through. I will tell you that the success around the primary care space, the GP space, has been more than what I would have expected at this point in time. I mean, getting partners like One Medical signed up has certainly help move the needle. We've had a couple other large network, PCP network, folks sign up as well. We won't disclose those out of respect for their wishes, but we're certainly seeing the interest in the Zio product making its way into that primary care space. I think given the clinical data behind the product and just how easy it is to utilize both from a patient perspective as well as interpreting report, the comfort levels are quite high.
I think it just validates for me that we're absolutely gonna open up the primary care space. Again, there's 14 million patients seeing their primary care physician today that already have cardiac-specific palpitations noted in their medical records. You know, that compares to 5.5 million ACM tests being prescribed in the US. I remain convinced that you're gonna see this market expand dramatically as we continue to push into the primary care setting, just given how easy it is to use the product, how accurate it is, and the downstream benefits that you get with monitoring these patients sooner.
It helps address so many of the capacity issues that we're hearing by the specialists, by the EPs, even to the point where there are networks that we're now working with where we let into those networks by convincing the cardiologist or the EP of the value of Zio, and they've been using the product. They see how easy it is to use to where they're actually presenting within their networks to have the primary care physician begin to prescribe the product, have it placed on the patient, and then let the cardiologist or the EP do the actual overread, which they can do very easily in our ZioSuite, and help streamline who they're actually spending time seeing versus not.
In many ways, the specialists have embraced the ease of use of this product and how it can impact their own practices and make it much more efficient and effective. I think that's gonna be a model that continues to really move into the future and drive some nice growth. You know, ultimately, the home enrollment model is the model that we would prefer to see utilized more than anything else in the primary care setting, only because there's so many primary care specialists that are out there. Rather than sitting product on a shelf in every one of their offices, the home enrollment model just makes a whole lot more sense for us.
At the same time, we wanna see that return device rate improve beyond 90%. That's where we got operational efforts internal, focused on enabling that and making that happen. The home enrollment model is the way we wanna think about serving that PCP or GP space.
Thanks, Quentin. Just as a follow-up, how should we think about the international contribution in 2023 outside the UK? I know you talked about that a little bit, but the other European nations that you'd previously called out as targets, any revenue contribution from there? Have you submitted your Shonin application for Japan yet? Should we still expect approval late this year and reimbursement in 2024? Thanks for taking our questions.
Yep. In terms of the incremental international countries beyond the UK, we still expect to be in at least three of those countries, selling product in the back part of this year. How quickly that goes is something that, you know, we'll monitor as we get into those countries. We certainly expect to be in additional countries, three at least, by the end of the year. We probably go into the private sector first and then move into the public sector is how we think about that. It's not gonna move the needle in a meaningful way with respect to growth for the overall company in 2023. I mean, today, international, which is predominantly the UK, you know, is 1%-1.5%.
Think about it as 1.5 points or so of total revenue. That's not gonna move the needle in a significant way just yet. I do think international in time has an opportunity to be an incredible contributor to the overall size of the company and the growth profile of the company. With respect to Japan, we've had initial discussions with them around the high medical needs designation. Clearly, we wanna go into that market with a high medical needs designation if we can. It will certainly help from a reimbursement perspective. We had that first meeting with them. There's a follow-up meeting that'll happen here in the not-too-distant future.
Right behind that, I would expect us to submit for Shonin regulatory approval, which we would hopefully get, you know, towards the back of the year, if not right at the beginning of the new year, and then ultimately get into discussions around reimbursement and hopefully have our product in that market in the back part of 2024 sometime.
Thank you.
Thank you. Our next question comes from the line of Suraj Kalia with Oppenheimer. Please go ahead.
Good afternoon, everyone. Quentin, can you hear me all right?
We got you.
Perfect. Hey, Quentin, one of your comments caught my attention. I believe it was for the next gen Zio XT for longer use. Can you characterize that a bit more? Is the battery size bigger? Are you looking to accommodate 30-day usage? Just curious given, you know, past commentary always with like Zio AT, its current form is good enough for 14 days of use. Would love for you to flesh out some additional details if you could.
Yeah. You know, Suraj, our development teams have been. They've done an incredible job with the Zio monitor. I mean, I continue to believe it's gonna be a much bigger deal than what we've been even anticipated as I hear feedback from it in the marketplace. This is gonna be the exact same form factor that we used on the Zio next generation of the Zio AT product or the Zio MCT product. You're gonna find some data even at ACC with respect to the Zio monitor that demonstrates sort of the wear experience we're getting out all the way up to 30 days, which is pretty encouraging and pretty remarkable. It's not, you know, it's not larger size. As I mentioned, the form factor is 72% smaller than the existing form factor today.
It's just really a testament to what the team's been able to do from a technology perspective, getting it much smaller, much lighter, that allows it to stay adhered to the body for a longer period of time and generate a good patient experience. We know that one of the gaps in our existing AT product is while we think we can, and the data would tell you this, we can monitor as well as any product in the market, during the course of those first 14 days. We know that a large part of the market is looking for something that goes beyond 14 days. Our first step will be to extend that out and the Zio monitor platform that you see is gonna be that platform that will enable that with the AT product.
We're excited by what we can see or what we're gonna realize there in time.
Forgive me, Quentin, for belaboring this point. You're saying the new form factor, the Zio monitor for the AT application will have the same size battery? I presume it will. It needs to have real-time connectivity. Just trying to understand your comments. Basically, you'll have real-time connectivity, but the form factor or battery form factor has not increased. Did I paraphrase that correctly?
You're thinking of it correctly. That's right, Suraj Kalia. The battery life in the existing Zio monitor, we believe can get out well beyond the 14 days that we're at today.
Interesting. Okay. Quentin, one last question. Quentin, one of the things that you've been crystal clear in terms of, you know, OpEx, leverage, in terms of shifting between IDTFs to 15, 25. As you exited 2022, FY 2022, can you set stage, how was the IDTF distribution for your scripts so that as FY 2023 and beyond progresses, we can just sort of compare and contrast and map it for our own modeling purposes? Thank you for taking that question.
Yeah. Well, I think maybe at the highest level, Suraj, you know, we didn't have any contracts in place from a MAC perspective with IDTFs really outside of Novitas and then NGS in Chicago that we were utilizing. We did end up getting some additional contracts put in place over the course of 2022. Knowing or expecting that we were going to be able to get a national rate put in place, it didn't make sense to set up physical facilities and hire people into these other locations. We ended up, you know, managing most of the XT workflows through the Novitas and NGS MACs, if you will. Over the course of 2023, as you know, we're hiring and expanding our presence in San Francisco and in that IDTF.
Frankly, just the volume growth in the business requires us to hire more folks into the business, just to keep up with the overall volume. We'll be hiring the majority of those folks into our San Francisco location. That will begin to be able to do some of the XT product for us as well. Keep in mind, we've done AT out of San Francisco historically. Now we'll begin to do some of the XT. In the prior year, you know, in terms of the mix between the Novitas and NGS, I can't speak to that specifically off the top of my head. We started off with Novitas and certainly moved towards NGS over the course of the year here in 2023.
About 25% will be in San Francisco in the first part of the year, and the expectation is to move north of 50% in the back part of the year as we hire out resources to do the work in San Francisco, keeping up with the overall volume growth in the business.
Thank you.
Thank you. Our next question comes from the line of Michael Polark with Wolfe Research. Please go ahead.
Good evening. Thank you for the questions. I'm curious on Manila timing. Over what period of time will this facility ramp up? Is this a facility for clinical operations, G&A functions, both? Is it gonna be positioned to serve US patients or designed to serve, you know, your future OUS growth opportunities?
Yeah, Mike, I'll take that.
Yeah, Mike, I'll take that. Sorry, Quentin. Yeah, I'll take that one. It will ramp up over 2023. The biggest utilization there will be for our back office functions. There will be some clinical ops and customer ops functions that we'll roll through there as well. As you know, there's compliance aspects that we need to adhere to and we're very mindful of on the Medicare front. Nothing that needs to be processed domestically will move into those locations. That's not at all the plan. For commercial contracts that, you know, that have that ability to move over there, that's what we will do. It's gonna ramp up over 2023, and then it will be fully up and operational by the end of 2023.
That is helpful. For my follow-up, just to level set models, there was some 1Q commentary already, but you know, the pricing and volume has bounced around here through the COVID era and through the reimbursement cycle. I guess 1Q revenue in your plan versus 4Q down, flat, or up sequentially, what's the best direction?
Traditionally, if you look at the seasonality of the business, it steps back a bit. If you work your way into the sort of the commentary of Q1 being on the lower end of that guidance range, it'll help you get into the place that we think it's gonna be from a Q1 perspective. Again, that's natural seasonality playing through the business. Nothing unique to this year than what we would expect outside of that. There is a bit of a tailwind, as we talked about from original expectations with regards to PAYGO and then XT. you know, there's a bit of tailwind there, but most of that is offset by the AT pricing pressure.
If you work your way into the bottom end of the guidance range there, you'll get the feel for what the seasonality looks like. Historically, it's call it 22-ish percent, and we don't think it's gonna deviate much from that.
Cool. Thank you.
Yep.
Thank you. There are no additional questions waiting at this time. I would like to pass the conference back to the management team for any closing remarks.
Well, thank you. In closing, I want to take the opportunity to thank each of you for joining our call, and I want to thank each of our team members at iRhythm for the tremendous work that they do each and every day to make our company what it is. We have a tremendous future in front of us at iRhythm and look forward to an exciting year in 2023. We exited 2022 with strong registration volumes in both Q3 and Q4, including another record number of new account openings in the Q4. We have exciting clinical data that's going to be presented at ACC in just a week and a half that continues to demonstrate the superiority of our Zio XT product. We're preparing for the launch of Zio Monitor, which will be the largest launch in our company's history.
In addition, we're focused on getting the newly designed Zio AT on file with the FDA, leading to a potential launch in 2024 in a space that we are well underrepresented in today, as well as submitting in the next few months for regulatory approval in Japan, the second-largest market in the world. Our future's never been brighter. I look forward to speaking to all of you again on our Q1 earnings call. Take care.
That concludes the iRhythm Inc. Q4 2022 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your line.