Good morning, everyone. We'll kick off the last day here of the Goldman Sachs Healthcare Conference with the management team from Kestra Medical. Very pleased to welcome Brian Webster, President and Chief Executive Officer, and Vaseem Mahboob, Chief Financial Officer. I thought maybe we, since you are a newer company, having recently gone public and one quarter under your belt here, maybe just give folks kind of a brief introduction to the company, and then we'd love to jump into some of the more business performance and strategy.
Yeah, happy to do that, and thank you for having us here today, David. Good morning, everyone. Kestra is a newly public company. We went public in the first week of March. Our first product is a product that's focused on protecting at-risk cardiac patients. The typical patient population for us is sort of broken into a couple of different big buckets, one bucket being a patient who has presented with a heart attack, a myocardial infarction, usually would come in through the emergency room, be referred up to interventional cardiology for a stent to open up their heart, and then from there referred to general cardiology where the cardiologist would put them on drugs and then look to discharge them from the hospital.
That patient, though, has typically been diagnosed to be at risk of cardiac arrest, elevated risk, and that's measured by cardiac output. They would prescribe the Assure wearable defibrillator for that patient. We come in, we fit the patient, they go home, they wear it for generally about between 45 and 90 days. Those patients, which make up about 40% of the patient population for us, most of those are going to go on to get an implanted device. There is another kind of part of the population that are patients who have come in through the general cardiology or heart failure route, and these are people who are non-ischemic cardiomyopathy or heart failure. They again have elevated risk of cardiac arrest from low ejection fraction, and they will wear our device. It will protect them.
It autonomously will decide whether it needs to deliver therapy to the patient. Those are the two kind of big patient populations for us right now, and really well indicated in terms of the guidelines, in terms of the clinical and reimbursement environment for the product.
That's helpful. The way I sort of thought about this market, you think about those immediately addressable populations. I kind of put the business into two buckets. One is the immediately addressable opportunity, and then there's the expansion into the sort of undiagnosed or untreated population. Maybe we start with the former, because I think that's where most of the business is going to be driven today. Maybe just remind us market size and kind of underlying growth dynamics, and then we'd love to jump into competition.
Yeah, so the overall market for the category right now for these high-risk patients is about 850,000 patients a year. That's the TAM in the U.S. It's a little bit higher than that outside the U.S., but in the U.S., it's about 850,000 patients. Last year, it was penetrated about 120,000 patients. There's still a lot of growth in the market that we believe. We're really focused right now, of course, on going after that existing market of, it's about a $1 billion revenue market, that 120,000 patients a year.
If you look at the, this is sort of a unique dynamic where you have a billion dollar market in the U.S., roughly growing mid-single digits, one market participant who has, I couldn't find when their last product launch was, going back through, trying to search through 510(k) clearances. Maybe talk about how you see yourself unseating a well-resourced incumbent and what's been the initial reaction to your launch.
Yeah, I think the benefit, of course, of being number two to the market is a lot of the market development activities have already been done. The reimbursement codes have been established. The initial market has been established. We're coming in with what's a very clearly differentiated product. In any feature that matters in this category, we have a superior product. I don't think there's anybody in the market who's debating that, even our competitor. I think from a product perspective, we feel really clean with our ability to differentiate. It is, you have to dislodge somebody who's been in the market. This competitor has been in there for 20 years running by themselves, and that has its own challenges.
The initial feedback from both payers and also prescribers has been, the first thing everybody says is, "We're happy to have a choice finally." The second thing they say is, "I can clearly see how your product is differentiated." That sort of is the starting point for acquiring some of these accounts.
This is sort of a unique market because you have volume growth probably mid-single digits, but you do have continuous price increases because it's really just tied to reimbursement. Those reimbursement rates tend to go up with CPI, whereas other med tech markets, pricing is a bit of a dogfight, and sort of pricing is a little disconnected from reimbursement. To what extent, what are some of the competitive responses that you've observed in the marketplace from the incumbent? I bring up the pricing things, it doesn't really seem like this is a market where using price actually matters. It's not really an opportunity. What are some of the approaches they've taken to try to defend market share or to play it by offense?
Yeah, I think that it's been a progression for them at the start. We've been on the market, kind of our full commercial launch, about two and a half years now. At the start, it was because the product differentiation is so clear, they're not trying to go feature to feature and talk about the product. What they're talking about is they started out with, "Oh, they don't have any experience. Why should you trust these guys?" It was, "They're a private company. They're going to run out of money." It was, "They don't have insurance coverage, so it's going to cost the patient more." Their most recent one that I always get a kick out of is they are telling physicians that we, because we only have a PMA, a pre-market approval, that we're fully under the FDA.
That is a pretty easy one to defeat. I think they are just the normal tactics for how somebody tries to defend their accounts. The great news for us is we can just refocus the prescriber right back on what really matters, which is, are their patients going to wear the product? Are they going to have great patient compliance? Can they clearly see the product differentiation?
I think we've seen another competitor gain 510(k) clearance here. Any early observations on how their launch might be going or what feedback have you gotten in the field about that element?
Yeah, we do not have much feedback on any launch at this point. They kind of had a delayed product approval from FDA, so I think that extended out a bit. I think what they thought were their launch plans probably got a little bit disjointed from that. They chose a different way of trying to address the issue. They have got a product that they are trying to use, which is instead of a wearable like ours where you can take it on, take it off, they have got a really big adhesive-based product that patients are going to have to wear, which is going to create a lot of issues with patient compliance. At the end of the day, in med tech, I think we all know that if there are more companies marketing the category, it is good for the category. This is not a category that is fully penetrated.
We know there's a lot more growth to be had, as I mentioned earlier. If they come out and they get a niche and help us to market the category and the benefits of this type of device, then I think we all win.
Okay. I want to jump into the technology in a minute, but I know you just had your national sales meeting kickoff for 2024.
2026.
For 2026. Maybe just share with us some of the key themes and highlights coming out of that meeting and any kind of takeaways that you have from now having spent time with your sales force and marketing. I assume there are some customers there.
Yeah, yeah. First of all, it's just always great to get them all together. In the last 12 months, we've added a fairly significant number to our sales team in terms of new sales territories. A lot of folks had never even met each other. There's just a lot of energy coming from that. There's great energy coming from the fact that we recently did the IPO. We did have an opportunity to have a couple of physician panels. We brought in some docs and were able to talk about the opportunities in front of us. I think probably one of the really big takeaways for me, we had a panel where we had an electrophysiologist, a heart failure specialist, an interventionalist, and then an APP, all talking from really different perspectives.
I think what we heard really loud and clear, first of all, is that they really are excited about our product. The patient feedback has been really good. The compliance from the patients has been really good. One of the real key insights that I think is going to help us to redefine this category is they're beginning to understand that the product is more than just a protective shock box. It's really a diagnostic tool because that 850,000 patients that have low cardiac output, they're on a risk spectrum by definition, and physicians have to figure out how to risk stratify those patients. I think what I heard really clearly from these docs is, "Hey, this is a tool that we can use to risk stratify our patients." We can use it to monitor these patients.
We can see other meaningful clinical arrhythmias that we can diagnose using this product. That is another tool in their basket to help them manage these patients. That, I think, probably most clearly applies to the heart failure population, the non-ischemic cardiomyopathy, which is one of the fastest growing populations in med tech. That was a really nice insight. I think the other really nice thing for us as leadership was we heard from them that the ease of doing business with us is there. A couple of years ago, when you're just starting out, it's hard to because you have an incumbent that sort of makes it easy for the prescriber. Now, our prescribers, they sort of describe the situation where they send a text to our rep and then everything happens. That is it. That is really the way they want it.
They know that we're monitoring their patient and we're an extension of the care team for that prescriber.
Excellent. Maybe just kind of pulling on one of those threads, using Assure as sort of a diagnostic tool and identifying additional arrhythmias, what do you think some of the downstream implications of that could be? That boost CRT implants, that boost ablations? What do you think some of the derivative implications might be?
Yeah, we had one of our customers, the Cleveland Clinic, presented at ACC, American Cardiology Conference, recently. They had done a study on their cohort of Assure patients. They indicated that 18% of their patients had some meaningful arrhythmia. A bunch of those, I think it was about 11% of them, were actually new arrhythmias that they were not aware of. What happens for that is usually one of two things will happen. It'll end up in an ablation procedure that they didn't know they needed to do, or it will end up in a different titration of the medication if they're on the guidelines medication treatment. Either way, that really becomes a really valuable insight for the clinicians. It's going to drive some of the things like ablation treatments for sure.
Great. Before I wanted to open up to see if there are any questions in the audience. Sure. Yeah, sorry, just for those on the website, question was, can you just describe what the key differentiator product specs are?
Yeah. The key driver for it is a wearable product. The key thing is, can you get the patient to wear it? Right? In this category, there's no question that there's an at-risk population. That's why the guidelines cover it. Right? There's no question that defibrillation therapy is the right therapy for cardiac arrest. The only remaining question is, can you get them to wear it? That comes down to comfort. It comes down to the clinical efficacy of your ability to eliminate noise and therefore false alarms. False alarms are really the big challenge in the wearable defibrillator for two reasons. One is if left unmanaged, a false alarm can eventually make its way into a false shock, an inappropriate shock, and that's not good.
More likely even is the issue of a lot of false alarms will lead a patient to just take the device off. That's what our competitor has witnessed is they have an extremely high false alarm rate. Something like 46% of their patients experience false alarms according to their own data. In our data, we have under 6% of our patients ever experience even one false alarm. Really clear differentiation there, really clear differentiation with the actual form of the product. We have a male and female version. They just have a unisex version. All the women who are patients really are challenged by their product. We built a full digital suite around our product. We actually monitor the patients real time.
If one of our patients is delivered a shock because they went into VT or VF, within three seconds of that shock occurring, we have a notification goes out to a national 911 call center that is then able to activate EMS to go to that patient. That is a proprietary capability that we have that our competitors do not have. Like I said earlier, it is really piece by piece, feature by feature. We have just really nice differentiation.
That's a good segue to kind of get into some of the, I don't want to make this a modeling discussion, but I think the business model does help understand where the opportunities are to drive adoption. Maybe just I'll throw this out. You can tell me if my memory is any good. You start with, first you need to get a prescription written for a WCD. Then you have to do a fitting. Once you do the fitting, patients say, "Yeah, I want to wear this device or not." Then you need to get reimbursement. You need to get reimbursement approval for wearing the device, and then you clip the revenue. Is that fair?
Yeah, that's the right sequence. I think it starts with a prescription. That's market share, right? Because a physician made a decision, "I'm going to prescribe that product versus that product." From prescription to actual fulfillment via a fitting of a patient, that's sort of the first step. From there, it's do you have the ability with all the medical documentation and everything else to be able to drop a claim? These are monthly rental. You're actually doing that claim drop on a monthly basis. The typical patient wear time is around three months. Once you've dropped the claim, you're engaging with the payers. If you meet the criteria for the payers, then you'll get the collections of the claims, so.
I think where you can really affect the business is obviously first on scripts. But maybe just before we go there, of every 100 patients that gets a script written, what is the fallout rate to revenue?
We do not really talk about sort of the yield rate at each of those steps. We talk about it more grossly at sort of a conversion rate level. I think where we can impact it the most is on the front end, we can impact it by providing a great experience. This is between the prescription and the fitting, a great patient experience so that you do not lose patients on the front end. I think in our competitor, when they did their randomized trial, they lost something like 30% of their patients right on the front end. We are doing a much better job of that. The acuity at which you are delivering all of the claims to the payer, that is all the revenue cycle management practices. We continue to get better in that every month.
I think that's something that if you have in-network payers and you can execute the revenue cycle stuff, then you're going to just gradually get better at the collection.
In terms of just the, there should be some sort of lag, right? Just from now, this becomes a revenue reporting question, right? You have scripts in any one period. In terms of quarterly revenue, it probably shows up more in the subsequent quarter. For example, if you have probably someone has a script written to the time it becomes revenue, it's not immediate, right? It's probably a few weeks, maybe a month. There's sort of some offset between scripts in any one period and then revenue generated.
Yeah, I think that's a right way to think about it. It's a blended because we have all kinds of different payers, including Medicare, all the private payers, and then the patients. You can think of it as sort of a portfolio of payers. Some of the payers come in in a fairly short period of time within 30 days, and then others can be out to 90 days. There is a little bit of a lag there.
I think you had a nice step up in scripts from 2Q to 3Q of this most recent fiscal year, but you've guided to the fourth quarter revenue that your full year FY25 revenue that implies like roughly flattish revenue Q3 to Q4. Why wouldn't we see an uptick in revenue given scripts as a leading indicator?
Yeah. I mean, I think, yeah, let me take that. I think on the there is an implied acceleration in the revenue in the fourth quarter versus the third quarter actuals that we delivered. If you guys remember, we talked about that we did see a better than expected prescriptions number for the third quarter. I think to Brian's point, when you think about those prescriptions, it is a rental model. There is a 30-day wait time and the claims get submitted every 30 days for anywhere from, on average, about 90 days. There is a timing component to that, David. We should see acceleration, but it's just all tied to the fact that what % of your business is in network, what % is out of network. All of the conversion rate discussion that we've had.
It seems like that acceleration implied in Q4 is less than what the growth in scripts was Q2 to Q3.
Yeah, I mean, but there's an underlying discussion there, which is really tied to the fact that prior to the crossover round that we did in July of last year, we were in cash conservation mode. So we were not really adding any new territories. If you remember, we talked about having 48 territories at the end of the last fiscal year, which we have continued to add on. Especially with the IPO proceeds, now we'll continue to add those territories, expand. There's a timing component for all of those reps to kind of scale up and start to deliver. It's just the timing component, and I think we should start to see the benefit of that here in the future quarters.
And.
Yeah, I think don't lose sight of the fact that we're going to deliver a triple-digit growth number for year over year.
We always want more, so.
Yeah, I know. I know.
As you think about that dynamic of the delay between rep hiring and revenue, is that what kind of leads into, if I just use consensus as a benchmark, it's roughly like $1 million of growth that you saw sequentially through 2025, that steps up to $2 million, roughly a quarter next year. Is that reasonably based on rep hiring? Is that the best way to kind of corroborate that view?
I think the components are really the investment in the commercial team. Then obviously the revenue cycle pieces that we talked about, the ability to move patients from outer network to in-network. We will provide formal guidance at our fourth quarter call. At least what I can tell you is all of the KPIs that we are talking about are tracking in the right direction.
I had to try. On the point about investment, one of the things you said that was interesting on the call, which I do think reflects kind of the way you run the business, is you raised more money than you had thought than you originally planned in the IPO. We had asked a question on the call, why wouldn't you use that as a vehicle to accelerate investment in sales and marketing? Because none of the models had contemplated a higher IPO, higher proceeds that you could then put back into the business. I found your response very thoughtful. I think you said, "Look, this is our plan. Happy to have additional resources. We're going to monitor the environment and then decide what to do with those additional resources." I think now we're six weeks or so since that call.
I mean, any updates on kind of that opportunity to accelerate investment given higher proceeds or still in the same wait-and-see mode?
I think we're philosophically in the same area. There's certainly been nothing in that interim period that would cause us to say we're going to slow down the investment we had already planned. I would just say that the key thing for us is the service delivery model in this business is really the key. At the point in time that we earn that prescription, we have to fulfill that prescription generally within 24 hours. You can't just throw a bunch of reps out in the field and say, "Go get them, guys." You have to build a service model around it. You have to have the assets. You have to have the delivery to do that. Our intention here is to build a business that's really durable, really reliable, and really defendable.
We are going to do that by being responsible about the way we expand our commercial footprint. It is great to have the additional capital to give us the flexibility to accelerate if we see the window to do that. First and foremost, we are going to keep our promises to the prescribers.
Excellent. How is the those who follow you on LinkedIn, you can see hiring rates have picked up. How has the hiring gone relative to your plan? Maybe give us a sense of what type of people you're bringing into the company.
Yeah, I think as Vaseem mentioned, all of the key KPIs that we've been focused on are all going to plan and going really well. The hiring is one of those. We accomplished what we set out to do in our strategy for fourth quarter in terms of hiring. I think the going public makes it a little more public company and gives it a little bit more credibility. It helps the hiring process. Although I would just say that we've not had a big issue with hiring. We have an internal recruiting team that does an excellent job. The profile is generally people that have some experience in cardiology, so they know some of those call points. We really like the salespeople that are, they're high touch with customers. They're gritty.
They've got a really big sense of commitment to the mission and what we're trying to do to protect patients. Those are the ones that we go after, and those are the ones that naturally sort of make their way to us. We're happy with the way hiring's going.
Okay. Maybe we could turn to margins for a second. I think the gross margin model here is somewhat unique in comparison to other companies many folks in the room and on the webcast follow. I mean, you've seen the rental model allowed you to, on the one hand, you had to burden a lot of cost upfront, which depressed gross margins. On the other hand, you're in a position now where your incremental margins are very high. Maybe just kind of talk us through where you are on that gross margin trajectory. You've flipped negative to positive already, but where can that go?
Yeah, I think for the third quarter numbers, we had five quarters of sequential margin increase, which was fantastic. One of the feedbacks we got as we were kind of doing the IPO circuit was that we said and we did what we said we were going to do, which was fantastic. For those of you that do not know the model, it is a rental model. You build out a fleet of units, and then you are just running that through the P&L. As the volume goes up, you start to see better leverage on that depreciation pool. We have done that really effectively. There are really two components to our gross margin story.
The first component is really the revenue per fit, as we have talked about, which is as we migrate and become more efficient on the revenue cycle piece of it, we'll start to convert more of those patients, those prescriptions into claims, those claims into cash. Once you're in network, it just totally unlocks the business model. I think we've really, really done a nice job to increase that revenue per fit, and we've shown that sequential increase in that. On the cost side, there's no big CIP programs, no cost improvement projects, low-cost country transfers. All of the work has actually been done. Now it's just purely making sure that as we run through the P&L, the volume through the P&L, you'll start to see that margin accretion.
We feel very good about line of sight to those 70%+ gross margins that we have talked about. That also gives us a good line of sight to profitability within the next couple of years.
Do those two come hand in hand, that achieving 70% gross margins should correspond roughly to the period when you achieve profitability?
Absolutely. I think it's a fundamental building block of that. I think what we have messaged is that this business can, in $250 million of revenue, generate 25% plus EBITDA margin. We're really excited about that. You don't have to wait multiple years. It's going to happen in the next few years.
Okay. And then just one clarification on revenue cycle management. Does that mean there's fallout and you're not getting paid for people using the device? Or there are people who go through the prescription trial, I want to use this, and then they don't wear it? Where does the RCM fit in?
I don't think it's so much as people are not once they get on it. I think it's really a function of the fact that you have payer coverage. We have payer coverage across all of the big names. We have 90% plus coverage on a national level. When you kind of think about it at a territory level, you always encounter those small hospitals, local regional plans. Sometimes those patients don't have any out-of-network benefits. I think it's really hard to have a conversation with a doctor to say that I'm going to do this patient, that patient, but I'm not going to take the out-of-network patient. It is really that as that mix is going to go from being out-of-network to being in-network, we clearly see faster claims, faster cash collections, and more certainty and more predictable cash.
Are there any major payer announcements that we should be watching for?
We've done all of the big ones, David. The last one we talked about was the Kaiser, which was pending. Kaiser is now in network. We have a really nice pricing with them and a good process. We went through a clinical evaluation with them, which was really fantastic. No big ones. It's mostly focused at the regional level. I think one of the things that we're doing very deliberately is now, as we are adding or expanding the commercial team, we're also creating that intersection between high insurance coverage, high prescription density to where the reps are going. That's going to naturally let itself to drive that higher in network.
Okay. I know you were just at HRS and NACC, and you've been in a number of medical meetings. It sort of goes quiet here over the summer. As you go into AHA or some of the meetings in the fall, any key updates or clinical data readouts that you think people should be paying attention to?
I think we'll have really significant news later in the year as we've been from patient number one two and a half years ago, we've been doing our registry and our post-approval study for FDA. We're on track to, it looks like, close that out in probably the next 60-90 days. That's going to be a big north of 20,000 patient study, which will be the largest body of clinical evidence coming in the WCD industry. We'll start to publish at that in the fall. I think we're going to see some super exciting stuff coming out of that.
Will that be individual medical journals, or would you look for more, I don't know, splashy opportunity like an AHA-type conference or AFSMP?
I think AHA is a pretty good target for us. The interesting thing about the post-approval study is it's gated by the number of cardiac arrests that you treat. Cardiac arrests, by definition, are spontaneous. We have to get the numbers. I think we will get the numbers. We're kind of targeting AHA as a great target to be able to do that first announcement of results. Of course, that will be followed by a lot of individual studies that physicians will do on our data. It's amazing when you're talking about monitoring these patients for three to four months at a time and you have 20,000 patients. That's an incredible amount of data that we have collected.
Excellent. I mean, just under a minute left here. Maybe, Brian, I'll turn it back to you and Vaseem if any closing remarks or key takeaways you want to leave people with.
Yeah, I appreciate that. I think that at the forefront of our story is the notion that it's just a really simple story, right? We have a large market that's existing to really big go-get, and that's north of $1 billion. We have a lot more penetration to do to expand the market. We have established guidelines. We have established reimbursement, and we have a clearly superior product. Now we have the capital to go and chase that. We've got a really great and motivated team. I think the thing that having spent the last few days with our sales team and some of the other folks in our team, the thing I'm most passionate about is the way we ended our meeting. That was with a patient coming to talk to us about her experience with being saved by our product.
That is what we are here for. We are here to make a difference in people's lives, and we are doing that, and we are seeing patient saves every day. The Kestra team, that is what drives our team. I think that is what we are really, really excited about, the opportunity.
Excellent. I very much appreciate your participating in the conference and look forward to the next update over the summer.
Sounds great. Thank you, David. Appreciate it. Thanks, everybody.
Thank you.