All right. Good morning. Welcome everyone to the second day of the Wells Fargo Healthcare Conference. For the session, I am pleased to have Dan Wilson, the CFO of iRhythm, and Lisa Pecora, the Senior VP of Finance. Thank you for joining us.
Thank you, Nathan. Great to be here.
Of course, a lot of exciting things happening at iRhythm, but I thought we would start with VitalConnect, which is probably the most pressing for investors. I guess maybe just at a high level, walk us through the underlying deal strategy.
Yeah. Thank you. Something we are very excited about, added to the list of things that we are excited about. I would say simply put, the deal strategy is really combining great technology and differentiated product features with our commercial engine and clinical service delivery capabilities. If I was trying to sum it up in a few words, it would be that. In terms of their product and technology, we do see it differentiated and complementary to Zio AT and ultimately Zio MCT, which we will likely talk about.
Some of the capabilities that we see resonating in the market, four-in-one capabilities. So, with a single product and platform able to serve four different modalities seamlessly for patients. Getting out to 30 days of wear, particularly in the MCT segment, where we really see their technology differentiated. As you know, Zio AT does not go out to 30 days today, and we do see that as important to certain customers and patients in the market.
Some other features as well that are unique, live look-in capabilities. So at any point in time during the wear period, a clinician can look into the patient's record, see the raw ECG, and that is of value for certain customers in the market. A lot of things that we're excited about, see very complementary to both AT and MCT, and we're excited to put the product in the back.
Great. On the earnings call, you pointed out that this product is going to let you address 50% of the MCT population that you didn't think you would be able to with Zio AT or Zio MCT. I guess, can you put a finer point on what this 50% of the market is? What type of patients are these, and why VitalPatch is the right product here?
Yeah. So we said Zio AT addresses roughly 50% of the MCT segment. We do believe with Zio MCT coming, that opens up a bit more of the market, call it another 20% of that market or so. There's still a good part of the market that we don't believe we can address right away with both Zio AT and Zio MCT. Bringing Vital into the portfolio allows us to fully access that market, and it's really around those kind of features that I pointed to.
There's absolutely customers in the market that want 30 days of monitoring, and that is a key feature of the Vital platform, that it gives us those capabilities as soon as we add it to the bag. That's a big one. Then there are, again, customers that expect downgrade ability capabilities in the platform. We don't offer that with AT today. Some of the other kind of tangential features as well.
Certainly the live look and the multi-vitals, those are becoming more and more expected and desired by clinicians in the market. With Vital in the bag, we believe we can meet the full spectrum of the market. Unlike long-term continuous monitoring with our Zio monitor product, the MCT segment is fragment, and we're seeing that very clearly. There's no one size fits all, and so having multiple options in the bag to offer our customers, we believe is a good strategy.
Okay. As we think about your mid-teen share of MCT today, where can this go in the next one to two years? You have well-entrenched competitors in the MCT space, and I think they have integrated systems at the hospitals. I guess, what are the key factors that would enable you to take share? If any way you could kind of frame 15%, where does it go in the next one, two years?
Yeah. We have been gaining share nicely in that MCT segment with Zio AT. We had a great year last year with Zio AT, and in particular, saw that combined with Zio monitor, which is the workhorse tool for hospitals and accounts. Combining those together in a single platform, there is a lot of operational benefits for customers. That is an important piece of it. Continuing to innovate within that MCT segment, certainly.
We are committed to Zio MCT, looking forward to getting that cleared first half of next year, and then bringing the Vital platform in. We believe that, combined with everything we are doing on the commercial side, clinical evidence, market access strategies, EHR integration, that is a big component. Putting that all together, we are confident we are going to be able to continue to grow our share in the MCT segment.
We are at over 70% share on the long-term continuous monitoring side. That is the biggest segment of the market. We believe we are in a kind of differentiated position to ultimately win share in the MCT segment. We need the right products in the bag to do that, and we believe with Zio AT, then ultimately Zio MCT plus Vital gives us a really good portfolio to go grow our share in that market.
Another question that we get is with VitalPatch in the bag, is it really necessary to continue to pursue Zio MCT? Can you explain why you are still pursuing it? What is the commercial case for launching both VitalPatch and Zio MCT?
Yeah. We do believe they're complementary. Zio MCT, it's on the same platform as Zio monitor, as you know, and there's benefits both on our side as well as to a customer. In situations where customers desire simplicity and patient experience where a patient can put a device on, they don't have to do anything through that wear period, 14 or 21 days, there's a lot of value there. That's how we've been going to market with Zio AT.
That's how we've been winning in the market. But again, there are clearly customers, clinicians, and patients that want to see 30 days of monitoring. We don't offer that today with AT and get a bit closer with MCT out to 21 days, but there's still that gap and then some of the other features that I was mentioning as well. Again, believe they're complementary. We're committed to Zio MCT and keeping that in the bag with Vital. Certainly, in the near term, as we think how the product and technology evolves, platform evolves over five year plus period, we'll see what that looks like. But certainly in the near to medium term, we see both as complementary.
Yeah. There are obviously similarities between the products. How do you prevent channel confusion? Which product do you lean in with? You want to make sure rep productivity stays good. I guess what will be the rule for which product you will lean in with?
Yeah, I think there it really is understanding the customer needs first. We want to offer a solution that meets the customer's needs and solves the problems that they're looking to solve for and that requires listening to what the customer wants. Now we have a product that we can address in a bigger set of problems they're looking to solve, I guess. So, it really starts with that. Certainly, we believe Zio monitor, long-term continuous monitoring is the right kind of frontline tool, the workhorse device as I was mentioning. Don't see that changing. But then for the MCT segment, having multiple options to serve, again, that fragmented market, we're really excited about.
Great. You disclosed for VitalConnect $65 million of trailing 12-month revenue or annualized revenue. Any color on the underlying growth rate and where the revenue synergies are with, obviously you talked about your 70% share in LTCM.
Yeah.
Just how are you thinking about revenue synergies and growth in that platform?
Yeah. On the $65 million that we put out, figured it was important to give investors an understanding of where VitalConnect currently is. Importantly, that is under our revenue recognition counting policies where we recognize net revenue. Historically, they've been a very strong grower and have consistently taken share in the overall market and in particular in the MCT segment. They did see a little bit of an operational impact late last year as they cut over from a clinical software backend to a different provider.
They have grown through that now and the business is back above where it was prior to that cut over. So, excited about what that growth can mean in our commercial infrastructure. They have I think it's 30 commercial reps versus our commercial team, call it 200 people. So they've been pretty limited and focused from a geographic standpoint commercially. When we close the acquisition and train up our sales force, we intend to launch this nationwide. So we're really excited about what that can mean.
Okay. As far as the third-gen algorithm, will this be ported onto the VitalPatch as well?
I wouldn't say right away. There is an opportunity there certainly. I mentioned their clinical backend. They do licensed software from a third party as we think longer term. Obviously, those are capabilities we built internally and we'll look at that opportunity. We haven't put any timelines out there related to that, but we do see that as an opportunity. We've talked about the benefit the algorithm is going to have in our own business and that would extend out to Vital's business if we ultimately get there.
Okay. Our understanding is VitalConnect's gross margins are significantly below where your gross margins are today. Part of the opportunity with Zio MCT is similar form factor to Zio monitors, so there are manufacturing efficiencies. How does bringing in a new patch presumably with new manufacturing process impact your margins? You stated I think your goal is to maintain gross margins above 70%, but I think their margins were significantly below. How do you do that?
Yeah. We do think our scale and the operational infrastructure that we've built we can leverage that against the Vital platform as well. That 70% metric that we put out there, that doesn't assume a lot of cost synergies. I think those are real over time. The algorithm is certainly one of them. Just broadly leveraging our procurement capabilities, manufacturing capabilities, et c. They have done a really good job over the last 12, 18 months improving that gross margin profile.
It's a company we've tracked for a number of years and have always liked the technology. There were a few barriers that ultimately were there that resolved themselves, allowed us to make the acquisition at this time, and gross margin profile was one of those barriers. But we're comfortable where they're at today. We see opportunity to continue to improve that, and certainly maintaining 70% gross margin on the combined company.
Okay. On your earnings call, you reiterated your goal of a 15% EBITDA margin in 2027. It would be helpful to unpack, with VitalConnect and that, I think investors are trying to understand, is it dilutive right out of the gate? Does the 15% also assume any cost synergies from the deal?
Yeah. Maybe the last part of your question first there. Very limited. The intent of the acquisition is really around growth. Of course, we want to do that profitably, and that has been our focus in the core business, profitable growth. That is true for the acquisition as well, but really want to get the product in the bag and grow the combined business as best we can. That is going to be our first focus. So there are certainly opportunities there over the longer term. What is contemplated when we reiterated the 15% next year is very limited amount of cost synergies. Sorry, and remind me of the first part of your question.
Just the EBITDA dilution.
Yeah
Is it baked into that reiteration, or do you feel like you could flip it to positive EBITDA right out of the gate? How are you thinking about that?
Yeah, I would say it's baked into that 15%. We always try to run the business in a balanced way, where we're balancing both growth and profitability. When there's upside in profitability, like we've seen in the first half of this year, we look for opportunities to reinvest back into the business, to ultimately grow the business both in the near to long term. I would say we see the acquisition similarly.
We got the business to a really healthy spot from a profitability standpoint. We're a growth-oriented company. We're looking for those growth opportunities, whether it be inorganic or organic. Saw this opportunity. We're able to absorb the acquisition while maintaining that 15% adjusted EBITDA. Again, there's certainly opportunities for synergies over the longer term. We'll provide updated guidance post the close of the acquisition.
Okay. I just wanted to go back to MCT market share. I think in the past, you guys have said on multiple events, I guess, that maybe your share could go into that 30%-40% range over time. I think the Street is modeling 30% by probably 2030, 2029. Would you say these estimates are fair for market share expansion? I guess, how much upside is there in your view?
Sure. We haven't obviously put any guidance out in that way in terms of market share, but certainly believe that we can get to number one in that category. That is our intent. That's our ambition. We believe with innovation and combining that with everything we're doing on the clinical service delivery, the operational capabilities, and having the right product portfolio is going to allow us to ultimately get to that position. So 30%-40% is absolutely achievable. We haven't put a timeframe around that, but importantly, that is our focus. We want to move as quickly as we can, and that's really the ambition of the VitalConnect acquisition as well as innovation with our own Zio MCT product.
Great. Can you just remind us how quickly the MCT category is growing right now?
Yeah. I want to.
High single digits, 8%-9%.
Okay. If you could just talk about the implications of having a multi-VitalPatch for entry into sleep apnea and maybe even heart failure monitoring.
Yeah. We do believe there's opportunity there. That's been a strategy of ours for some time. If you recall, we licensed some technology from BioIntelliSense a couple of years ago, and that is on our product roadmap. We haven't put any kind of timelines around that just yet. But we do believe adding multi-vitals to the platform both adds value to the core market we're serving today in ambulatory cardiac monitoring.
We're seeing that as a kind of differentiated feature of the Zio platform, and then ultimately starts to open up other markets like sleep, like heart failure, hospital to home, other markets that we're not actively serving today. That is an ambition of ours. That is part of the rationale of the VitalConnect acquisition, as well as the BioIntelliSense licensing. We're excited about what we have in the works there from a product standpoint. Haven't shared a lot of those details intentionally for competitive reasons, but looking forward to continue to innovate there and opening up those market opportunities.
Is there an overlap of capabilities between the BioIntelliSense licensing and VitalConnect, and maybe any areas of differentiation between the two technologies?
Yeah. To a degree, there's overlap. Where there's really differentiation is BioIntelliSense's SpO2 capability, so blood oxygen. That is on their product platform. VitalConnect can integrate that into their platform, but it requires a third-party sensor to pull that data into their platform, whereas the BioIntelliSense technology, the technology that we licensed, that can be embedded on the patch.
Okay. Just lastly on this, the open warning letter and the 483 observations, does this have any impact on VitalConnect manufacturing transfer or anything?
No, we don't believe so.
Okay. Just one thing. You have an LRP out there, it's going to end in 2027.
Yep.
Any plans for an Analyst Day?
Yeah, we are certainly thinking about that. You can expect we will likely have something at some point next year. Haven't set timing on that, but we have been focused for five years on delivering that LRP that we set back in 2022, on pace to delivering that, which we are really excited about. And we will certainly look to update investors with an updated long range outlook. Certainly getting Vital closed and in the business in the combined outlook would make sense. But we will look to do that at some point next year.
Okay. If there aren't any more questions on VitalConnect, I think we will just move on to other topics. So maybe just on guidance. In the first half, you grew over 20%, but the new range basically implies second half growth of around 15%. I guess talk about what drives this deceleration and how much conservatism is baked into it.
Yeah. I wouldn't say conservatism. We do try to be thoughtful when we set guidance. We have been on a great trajectory, a lot of momentum in the business, have grown revenue over 20%, seven quarters in a row. That obviously sets us up for difficult comps, which we start to see in the second half of the year. But like the set up, like the momentum in the business, certainly want to be thoughtful as we set guidance. And that's no change from how we have approached it historically.
The Q3 guidance implies a sequential step down. If I look last year, you actually stepped up about 3% sequentially in Q3. I guess talk about is this conservatism? Is there something going on with the seasonality in Q3?
Yeah. Last year I would say was a bit unique. 2025, we talked about having some big bang launches at the beginning part of the year that really grew through all of 2025. We saw that in Q3 last year. If you look prior to that, in 2024 and 2023, you don't see quite that same level of step up. One thing I should say about first half to second half this year, we did have price benefit, call it a point or two in the first half. We don't expect that to repeat in the second half. That explains some of the Q2 to Q3 sequential decline. Seasonality is real in our business, and we talk about that at pretty much every September at this conference.
That's no different this year. Like the momentum in the business, try to be thoughtful when we set guidance. We've had the benefit of a number of things hitting and allowing us to over-deliver on guidance that we've set historically. That won't obviously happen every single time. But like our business, like the momentum in the business, try to set guidance thoughtfully and certainly don't want people running ahead of us.
Innovative channels are mid-single digits of your revenue, and you've called it out as the fastest-growing segment in Q2. I guess talk about what you're seeing in these channels in terms of reorder rates and how sustainable is the recent growth that you've seen, and I guess what is assumed in the second half for innovative channels versus the first half?
Yeah. Really good progress there and momentum. Mentioned that innovative channels stepped up to mid-single digits as a percent of revenue in Q2. Prior to that, it was trending around the low single digits. So remains the fastest growing channel in the business, and we do believe we're still very early days against what that bigger opportunity is. A lot of encouraging signs there.
Every partner we've gotten to a pilot has ultimately continued on to a full commercial program. That tells you the value proposition that they're looking for is playing through. We present back to them data that shows here's how many patients you monitored, here's the diagnostic yield, here's the different arrhythmias that you found in that patient population, and that gives them the confidence that this is delivering on the value proposition. So that's very encouraging.
Every partner that we have started a program with continues to monitor today. Those are all really, really positive signs. We do believe we're still early. We are working towards some economic evidence with a couple partners. We hope to see some of that evidence by the end of this year. We believe that can be a catalyst in the market as well. Really encouraged by it. We've been pretty consistent to say we want to be thoughtful around that part of our business in particular, given it's pretty concentrated across a small number of partners. There is real seasonality in that business, too. If you think about it, these patients are not presenting with symptoms.
These are pre-identified patients. Naturally, you're probably going to see a bit more seasonality through the summer months in that part of the business versus core business where patients are presenting with symptoms and kind of a more urgent need to get them on monitoring. Really excited about how that business is showing up and certainly like the outlook for that part of the business as well.
Okay. Have you given a recent update on how many partners you have now?
We have not. That's likely not a metric we're going to give. What we're seeing is the lines are really starting to blur between our core business and innovative channel. Oftentimes, our innovative channel partners, which can be value-based care, primary care groups, ACOs, in the similar, they'll start sometimes with pre-identified patients and then move to their symptomatic patients. They can approach it in the reverse as well and start with symptomatic patients. It does start to blur quite a bit with our core business. We'll think about what the right metrics are to give investors to track that part of our business. Number of partners isn't really the right metric.
Okay. Can you just update us on the innovative channel contracting model and I guess, what is the realized revenue per patient versus, let's say, a cardiology or a PCP channel?
Yeah. I would say, from an ASP standpoint, it is consistent with overall company averages. There, we are billing the account directly. We are not billing the payer on the back end, which does have some benefits just from a revenue recognition, claims processing, that sort of thing. But very similar ASPs. We have talked about the one-to-many selling model in this channel. We have a small dedicated team focused on this channel. They are selling into the top of these groups, and when a group turns on, they are turning it on generally across their entire patient population. We believe it is a very profitable high operating leverage part of our business. Hopefully that answers your question.
Yeah. Sure. You previously talked about innovative channel activities becoming more consistent and repeatable. I guess can you help to frame it relative to cardio and PCP order patterns and utilization? Any metrics you could put around that?
Yeah. Starting to get there certainly. As the base has grown from a partner standpoint, from a revenue standpoint, starting to be a little more consistent. I will reiterate my comments, though, that we want to be thoughtful on that part of the business, not get ahead of ourselves. Still a little bit of lumpiness, to that part of the business, given the concentration and the number of accounts. Every partner is unique, too. Which patients they want to target to start varies partner to partner. How quickly they ramp from pilot to full commercial program varies partner to partner. There is a little more unpredictability there, which we want to be thoughtful around. But again, once they launch a program, we are seeing consistent behavior in maintaining the program.
Your LTCM growth has been pretty strong for quite a while now. I think investors are trying to understand how much of this is iRhythm specific, how much of it is the market broadly, and what is driving that. Part of that is how much of it is related to the EHR integrations that you did over the last two years or so. Just help us to understand the EHR integration. Are you the sole LTCM provider on these integrated accounts or how does that whole concept work?
Yeah. It does require if an account, a customer wants to integrate multiple vendors, they are separate integrations. When we're working with a customer on an integration, it is specifically for Zio. This is a strategy we have been working for several years, and we've always been focused certainly on the clinical service and the clinical superiority part of it, but also being operationally seamless with our customer workflows, and EHR integration is a big part of that. It embeds Zio directly in their native workflows. They don't have to come out of the EHR to order or interpret the results coming back from iRhythm. We've seen pretty consistently with accounts that even accounts that have been with us for years, once we get to EHR integration, we do see a nice step up from a volume standpoint.
That clearly tells you that you're making it easier to prescribe, you're opening it up to the entire prescriber base within that account. There's real benefits on the customer side, which is why it's been a strategy of ours for several years now. Well over 50% of our volume is through EHR integrations, and that's something we're going to continue to push.
Will VitalPatch and Zio MCT automatically become an ordering option on these integrated accounts?
I would say we're still evaluating that. Our ultimate goal would be to make it seamless for the customer through a single platform, through EHR integration. That'll likely take some time to build, too.
Okay. We're in September. Investors are starting to think about 2027. Your full year 2026 guidance implies about 15% growth in Q4. Is that the right jumping-off point for 2027? I mean, Street is modeling 17% right now. Any framing you could put around that?
Yeah. We haven't provided 2027 guidance other than the long-range target that we put out five years ago calling for over $1 billion in revenue. Mentioned that we are on pace to delivering that. I would say post the closing of the VitalConnect acquisition will certainly provide updated guidance potentially even for or give some metrics for 2027 to help investors get that dialed in correctly. We'll do that at the appropriate time.
Okay. If we could just touch on a third-gen algorithm, which the FDA recently approved, and you expect to launch in the first half of 2027. You expect $100 million of cumulative savings over five years, which would lead to 50% less technician review time. I think that's what you said. I guess how should we think about the $100 million phasing by year, and how much of it is already kind of embedded in the 2027 15% EBITDA margin?
Yeah. We set that 15% EBITDA margin target back in 2022. We were working on our next-gen algorithm, and certainly that is one way to improve margins. We will see some benefit from the algorithm next year. Initially, it will be offset by some amortization, and the benefits really start to show as we scale. Think about the need to hire additional cardiac technicians as our volume scales. We are going to reduce that meaningfully with the benefits of the algorithm. You will really start to see the benefits really 2028 and beyond, and those benefits start to stack up as we continue to grow.
Okay. Just one last question on VitalConnect. Will you port everything onto your IDTS immediately or-
Not immediately, no.
Okay.
We will, again, want to make sure we are setting ourselves up for growth. We do not want to disrupt anything there and believe the two will kind of operate somewhat independently, obviously outside the commercial aspect where we do want to train our entire sales force on their technology. From an operational standpoint, not an immediate kind of integration.
Okay. Q2 EBITDA margin was 19.3%. You are guiding Q3 down to 12%-13%, I believe. I guess talking about what is driving the sequential step down, anything to consider? I mean, 19% is also above your 2027 LRP, so just help to frame what is happening in the second half in Q3 with the EBITDA margin.
Yeah. I will let Lisa take that one.
I can take that. Q2, we are very proud of the 19.3%. Definitely strong progress on the ability for us to deliver operating leverage. That said, as Dan mentioned earlier, we are very much a growth company, and we want to continue investing to ensure that long-term growth potential. We talked a little bit during earnings around specific investments that we were making to further unlock primary care.
When we talk about the 27 million, at least 27 million undiagnosed patients out there that we want to try and reach, we do believe that primary care is the biggest way to get at that. So you will see us increasingly investing towards initiatives with primary care, inclusive of, we talked about a direct-to-patient marketing initiative that we were kicking off, and that investment will continue through the second half of the year.
This direct-to-patient marketing initiative is around creating awareness in the practices for both patients as well as the primary care physicians within it. As much as there can be increased awareness, we feel that that will increase that funnel towards the undiagnosed population. The other aspect I would point out is adjacencies to increasingly build out that TAM and grow the market. We have talked about different adjacencies such as sleep. We are continuing investing towards the sleep market as well, and R&D and development projects will continue to step up through the balance of the year. So that 13%-14% for the full year, 12%-13% in Q3, it is really just about continuing to invest for the long-term health of the business.
Okay. Last 25 seconds, any update on the warning letter 483s?
Not at the moment. We've made really good progress there and put ourselves in a position we believe to ultimately get that cleared. The timing will be dictated by the FDA and when they come back and do a closing inspection. Really excited about the progress we've made over the last 18 months, two years, and looking forward to ultimately getting that resolved.
Great. We're at time, Dan, Lisa.
Thank you so much.
Thanks so much.
Pleasure.
Thanks so much.