Q4 2020 iRhythm Technologies Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Iras and Technologies, Inc. Q4, 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and.
And answer session task a question during the session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Leigh Salvo. Please go ahead. Thank you and thank you all for participating in today's call. Joining me are Mike Coyle.
CEO, Doug <unk>, CFO, and Dan Wilson, EVP strategy, corporate development and Investor Relations.
Earlier today <unk> released financial results for the fourth quarter ended December 31, 2020, a copy of the press release is available on the company's website.
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, which are made 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 facts should be deemed to be forward looking statements.
Forward looking statements, including without limitation those statements related to the impact of COVID-19 on our business expectations for recovery market opportunity product performance market expansion and penetration price productivity improvements reimbursement release of clinical data operating trends and our future financial edge.
Patients, including revenue gross margins profitability and operating expenses are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to meet you.
It really differ from those anticipated or implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements. In addition, we will refer to adjusted EBITDA, which is defined debt EBITDA, excluding stock based compensation expense. Adjusted EBITDA is a non-GAAP measure that is used to help investors understand I was an ongoing business performance.
A list and description of the risks and uncertainties associated.
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 with the SEC.
This conference call contains time sensitive information and is accurate only as of the live broadcasting today February 25, 2021, I've rhythm disclaims any intention or obligation except as required by law to update or revise financial projections are forward looking statements.
Whether because of new information future events, or otherwise and with that I'll turn the call over to Mike.
Thanks Lee.
Afternoon, and thank you all for joining us.
I'd like to start by reiterating how excited I am to join the <unk> team.
I've watched the company over many years as much of my career has been in the cardiovascular market, particularly in cardiac rhythm management.
I have long been aware of the widespread under diagnosis of detection of life, threatening Bolivia and the significant impact that disruptive technology can have given the well known limitations of holter monitors and cardiac event recorders.
Appropriate diagnosis is paramount to getting the right patients to the right treatment at the right time.
I read them as a leader in bringing to market a differentiated platform for arrhythmia detection and patient management.
We've been a pioneer in the category of long term continuous ECG monitoring and I truly believe that we are just getting started on the journey to change the way cardiac arrhythmias are diagnosed and manage.
I see the opportunity for significant growth in our core symptomatic arrhythmia detection market, which we estimate to be a $1 $8 billion opportunity and less than 20% penetrated.
With this much of the market Underpenetrated. We believe there was a very long runway for growth ahead.
I'm equally excited about a number of other growth vectors that are rapidly emerging for our technologies, including international expansion of our <unk> platform and the development of the asymptomatic atrial fibrillation market.
Both of these opportunities have a number of recent positive developments that are encouraging and give me confidence that this can be a material growth driver for the mid and long term growth.
In my prepared remarks today I will cover our recent highlights and accomplishments developments related to our strategic initiatives provide our current view of the market environment as we enter Q1 and provide an update on our reimbursement progress given the recent unexpected dynamics that have arisen in the Medicare segment of our business.
Doug will go into more details on our financials and then we will open the call for your questions.
Starting with our fourth quarter performance once again, the Iras and team continue to rate rise to the challenges presented by the current environment and maintain high quality patient care each day, while building a stronger company for the future.
A short time that I've been on board I've been very impressed by the ability of the team to innovate and adapt to ongoing uncertainties.
Importantly, the ability to deliver on the priorities established a year ago from increased market penetration of our zero platform increased operating leverage through continued productivity and automation improvements and expanding the addressable market into new indications and new geographies.
While the Covid situation generally worsening through the quarter.
So a positive recovery trends at our accounts and the resiliency of our digital platform led to another quarter of significant growth both sequentially and year over year.
In summary, total revenue in the fourth quarter was $78 8 million, reflecting year over year growth of 33, 3% and sequential growth of nine 5% over the third quarter.
As we saw in the third quarter fourth quarter results were driven by further penetration of <unk> in both existing and new accounts continued ramp of <unk> and continued utilization of our home enrollment service and telemedicine settings.
We are very pleased with these results given the challenges that remain in the market and believe that the results signified the strength of our platform and our capabilities.
He started Q4 saw a continuation of the strong trends we saw in the prior quarter.
While parts of the United States saw widespread surge of Covid cases in the latter half of the quarter I just had a much less significant impact on our business as our customers our team and our business operations demonstrated resiliency and the ability to continue to provide high quality patient care.
Once again home enrollment for our Z O service allowed physicians to deliver care in a flexible manner and partially insulated our business from negative impacts of Covid.
And through the first two months of 2021, we are pleased with the overall market environment and the continued demand for the Zia platform.
Importantly, we are confident in our platform our near term debt.
Near and mid term strategic priorities and our ability to continue to grow our share of the market.
As we entered 2021, our strategic goals remain driving increased penetration of our zeal platform, increasing operating leverage while building the infrastructure to support our future growth and expanding our addressable market into new indications and geographies.
Starting with market penetration with our <unk> platform, we saw significant adoption in 2020, and a continued appreciation by our customers of the meaningful clinical and economic benefits of long term ECG monitoring and <unk> ability to change the standard of care.
The events over the past year brought to the forefront unique advantages of our platform relative to traditional holter monitors.
This includes being a single use patient friendly device, leading to high compliance rates and of increasing importance the ability to monitor and administer patient care remotely.
Further our 40, plus peer reviewed publication demonstrates superior clinical accuracy and higher diagnostic yield as well as the ability to diagnose patients earlier and more accurately leading to reduced healthcare resource utilization.
This body of evidence, which we continue to build on its driven the adoption of our zeal platform across the health care ecosystem.
The flexibility of our digital platform allows for continuity of patient care independent of patient and physician location, which has become even more important and valued by our customers throughout COVID-19.
Turning to <unk>, we had another quarter of strong market traction and growth, which continues to exceed our expectations.
Our single platform solution resonates with our customers and has shown important operational benefits and streamlined workflows, leading to increased patient throughput for usage of both <unk> and <unk>.
We are focused on generating important clinical evidence to demonstrate the advantage of zone relative.
Relative to traditional MCT technologies, and anticipate releasing data this year to help demonstrate <unk> eight Ts clinical differentiation.
In 2021, we continue to expect growth will outpace the growth of our overall business.
An important element of the market penetration is the continued innovation of our technology platform.
Through these investments we continue to not only expand our competitive differentiation, but more importantly to increase the value of the service we deliver to our customers.
In 2020, we had a significant upgrade and rollout of our information system C suite and are now live with that offering and a 100% of our accounts.
Looking forward, we continue to make significant investments across our technology stack and expect to see meaningful updates within 2021.
Our technology stack includes our patient database with over 750 million hours of curated ECG data are FDA cleared deep learned algorithms and artificial intelligence tools, our patented wearables and our clinical backend all of which work together seamlessly to deliver a clinically superior and complete service to our customers.
These elements also meaningfully differentiate our platform, enabling us to maintain a strong competitive position.
Through continued technology innovation clinical evidence generation and delivering a high quality service to our customers, we are well positioned to drive meaningful market share gains and to establish the new standard of care with an ambulatory cardiac monitoring.
Our second strategic priority is around increasing our operating leverage through productivity improvements and automation, while building the infrastructure to support our future growth.
Our second consecutive quarter, we delivered positive adjusted EBITDA.
While we are pleased with the operating leverage demonstrated in the fourth quarter. It's important to note that our spending was adjusted in the middle of 2020 due to Covid and is only now just starting to ramp back to levels. We feel are appropriate to achieve our long term objectives.
Our focus remains on investing in the long term growth of the business and building our infrastructure to scale the business efficiently.
We plan to continue to scale and refine our commercial infrastructure to most efficiently grow our core business.
In 2021, we expect to add additional territory managers to the sales organization, but at a slower rate than prior years as we expand investment to additional customer engagement modalities that can better leverage the effectiveness of our field footprint.
Along with our traditional territory manager expansion, we expect to build out important support functions such as key account managers and EMR integration resources as we deploy strategies that provide leverage and support to our territory managers and their selling efforts.
We believe these investments will further improve the productivity of our territory managers in our commercial organization and over time lower the cost of sales.
Now turning to our third strategic priority, expanding our addressable market into new geographies and new indications. We remain excited about each of these opportunities and saw several positive developments in the last few months.
I will start with our international expansion efforts and two positive developments within the U K.
On the heels of an important funding award as a winner of the artificial intelligence and healthcare award by the Uk's National Health system. We received notice in early December.
<unk> was the first technology to pass through a new digital health technology pilot, resulting in a successful recommendation for adoption from the National Institute of Health and care excellence or nice.
As a result <unk> has been included in nice guidelines as an option for people with respected cardiac arrhythmias, who would benefit from ECG monitoring for longer than 24 hours.
In addition, we are very encouraged by the three year funding secured with EBITDA Award and began contracting with and launching zero into select NHS sites in Q4.
We expect additional sites to come online in Q1.
With this funding program, we will be focused on building out our commercial organization, our clinical service backend and our in country technology platform to support the expected growth in the U K in 2021 and beyond.
And importantly, the program will allow us to generate the clinical and economic evidence needed to achieve sustainable reimbursement. In addition to offering a path to changing the standard of care within NHS.
And lastly, the nice recommendation as important validation of the cost effectiveness of the <unk>, we plan to leverage the positive recommendation to not only drive growth of zero in the U K, but to selectively seek opportunities to drive into the rest of Europe and globally.
We are actively developing a roadmap of international countries, where we plan to begin market access initiatives during 2021.
We are very encouraged by these recent developments and are increasingly confident that international expansion can be a meaningful contributor to growth over the long term.
Related to new indication expansion, we recently saw several important market development milestones related to asymptomatic a F.
In mid November three year outcomes data from the M. Stop study designed to evaluate the detection of silent or previously undiagnosed atrial fibrillation and moderate risk individuals' was presented at the American Heart Association meeting.
We were very pleased with these results as the trial demonstrated that active monitoring with zero led to a statistically significant increase in newly diagnosed a F as well as the statistically significant reduction in the incidence of major adverse cardiac events, including stroke myocardial infarction.
Femic embolism and debt and.
In addition, it was determined that active monitoring woodsia led to fewer hospitalizations for bleeding and fewer total hospitalizations.
Ultimately <unk> study found that active screening for AF using Zia was associated with the significant improvement in clinical outcomes and safety at three years versus relative routine care.
We believe these data are quite compelling and are actively engaging with payers and providers to develop real world targeted AF detection demonstration programs.
In addition, six month clinical results from our screen AF trial were presented at the European stroke organization and the World stroke organization 2020 Virtual conference yes.
Yesterday, we also announced a publication in Jama cardiology.
The study found that <unk> led to a 10 fold increase from the detection of <unk>.
One out of every 20 patients in the heart monitoring group. It was found to have a new diagnosis a day off and as a result, 75% of those patients were subsequently prescribed oral anticoagulation medication for protection against strokes, which had been shown to reduce stroke risk in patients with confirmed by up to 80%.
This study adds to growing evidence that <unk> can be an effective screening tool for early detection of atrial fibrillation.
Clinical and economic evidence supporting the benefits of zeal monitoring and patients had elevated risk from a apps continues to build across multiple studies.
We continue to work with our clinical partners to see how this evidence can be pulled to draw conclusions about which patients benefit most from monitoring and how that evidenced can help inform clinical practice and ultimately practice guidelines.
Turning to our collaboration with Verily, we surpassed two more development milestones in Q4 and continue to make progress towards regularly regulatory submission of our end to end solution.
As of now we anticipate regulatory submission midyear with regulatory clearance in late 2021 or early 2022.
It is important to note the following regulatory clearance there will be a period of market evaluation work, where we will be focused on validating the technology and the service clinically and testing the business model.
We would expect these efforts to take us through at least 2022.
In the meantime, we are working to make inroads in the silent AF market with zero potentially laying the groundwork for the end to end service, we are developing with Merrill Lynch.
Now turning to an update on our reimbursement process and our discussions to establish carrier pricing with the Medicare administrative contractors, where Max and commercial payers in 2021.
As we have covered in prior calls significant milestone was achieved last December with the establishment of a category one permanent CPT code for extended monitoring.
That is a big win for our technology and believe this will have a positive impact from patient access and physician willingness to adopt the technology over time.
Last December CMS published decision not to apply a national price for the new category, one code and referred pricing decisions to the regional Macs.
The Max then separately establish the rates for the category, one codes and their regional jurisdiction.
As we announced in late January <unk>, the Mac that oversees the region, where the vast majority of our Medicare claims are processed posted rates for the new category. One CPT codes that were meaningfully below the rates that have been established for our temporary category three CPT codes up until last year.
The rates that nobody has published matched existing rates for CPT codes used for ECG monitoring of less than 48 hours, which are used to reimburse existing holter technologies.
Since the publishing of the rates in late January we along with other industry participants have had the opportunity to meet with Nova to us to provide a detailed overview of the clinical and economic benefits of long term ECG monitoring relative to traditional holter monitoring the differentiated components of delivering the sante answers and the valuation work.
The basis for the rug payment recommendations that were supported by HMA ACC and HRS last year, along with our recommendation that he's rates be adopted as the appropriate payment level for the new category One code.
We believe the evidence that we presented was compelling but can provide no assurances as to if and when <unk> decided to change the proposed rates we.
We are greatly appreciated and other taxes level of engagement on the topic and we fully respect your evaluation process and timelines.
Until we have final confirmation from Nova to us as to what rates will be applied to the new codes. We will continue in the near term to deliver zero services to Medicare patients. All those claims pending final rates and importantly, not make any changes to our business model.
In conclusion on this topic I'd like to say a few words about the value and importance of data in this process.
Over the years I rhythm has made substantial investment in clinical studies and cost effectiveness studies in order to demonstrate the outcomes benefits to patients and the value of the <unk> to the health care system.
Data generated in these studies validate the importance of <unk> T to the patient and the health care system.
We look forward to working with <unk> and our industry partners to ensure Medicare patients retain access to these proven benefits of long term ECG technology and services.
Another important update I wanted to highlight is our recent completion of an extensive rebranding effort that incorporated an enhanced website and the publication of our environmental social and governance policies.
Recognize that these topics are appropriately becoming a greater focus for investors and they have long been a part of our DNA as an organization.
And are in order and our girl ESG report, we highlight our focus and commitment to patient safety and our customers' access to quality health care as well as our commitment to diversity and equal opportunity.
We will be posting this report on our website tomorrow and are excited to share this with all of you.
And most importantly, we're looking forward to further progress in our ongoing journey of being the best corporate citizens possible.
Before I turn the call over to Doug to review, our financial results in more detail I'd like to close by discussing our outlook for 2021.
While we are not in a position to provide financial guidance until we have resolution around the 2021 reimbursement.
Expect to see continued strong volume growth for the business we.
We remain less than 20% penetrated in our core markets and expect to see continued strong growth from <unk>, and new and existing accounts and even greater growth from <unk> and from the U K.
The demand for our <unk> service continues to be strong and our customers are expanding their utilization of the service riding zero as the new standard of care and ambulatory cardiac.
And finally.
I would like to thank the algorithm team our partners our physician customers and the patients we serve for a very successful 2020, despite unprecedented challenges.
Selectively we ensure that patients have continued access to high quality care when needed most.
<unk> T and adaptability and responsiveness with truly impressive and gives me confidence that 2021 will be another year of great accomplishments with that I'd like to turn the call over to Doug Doug.
Thanks, Mike.
Our fourth quarter results demonstrated steady growth from stability sales metrics improved incrementally in home enrollment was once again, a stable part of our mix EBITDA remained positive first let's take a look at financial highlights for the fourth quarter of 2020.
Revenue increased 33, 3% year on year.
Sequentially nine 5% quarter on quarter.
Gross margins were 74% down two 5% year on year and 0.7% quarter on quarter.
Adjusted EBITDA defined as EBITDA less stock based compensation low.
$6 5 million up $15 $7 million year on year, and down $8 3 million quarter on quarter.
Finally, cash and short term investments were 33 $335 million at quarter end up $8 million from Q3 2020.
Taking a more detailed look at the fourth quarter financial results revenue grew incrementally in the fourth quarter with quarter on quarter growth of nine 5% slightly exceeding the 2019 Q3 to Q4 growth was eight 1%.
We saw less seasonal slowdown in December versus historical patterns.
Revenue is now solidly above pre COVID-19 levels with the fourth quarter of 2020 revenue.
24% above revenue in the first quarter of 2020.
Zeal XT volume drove the majority of our growth in the fourth quarter, while <unk> growth continued to outpace total company revenue growth.
New account onboarding improve to historical levels in Q4 compared to Q3, new account onboarding of approximately 90% of pre COVID-19 levels.
Looking at New store same store mix, new store accounted for 39% of year on year growth down slightly from 45% in Q3, primarily due to lower new account onboarding in the second quarter of 2020.
Home enrollment was steady at approximately 25% in the fourth quarter.
Turning your attention to the rest of the P&L gross margin in the fourth quarter of 2020 was 74%.
0.7% decrease compared to gross margin of 74, 7% in Q3 of 2020.
The decrease was due to higher shipping cost to mitigate U S postal service delays and testing and overtime costs related to Covid.
Comparing Q4 2020 gross margin to pre Covid in Q1, 2020 gross margin of 74, 7%.
Gross margin is down due to the higher cost of home enrollment.
Zero.
Expedited shipping costs, and Covid related labor and testing costs are offset by cost reductions and volume benefits.
Higher costs due to home enrollment decreased gross margin in Q4 2020.
2%.
<unk> pre COVID-19 levels.
Operating expenses in the fourth quarter of 2020 were $67 9 million up 16, 1% from Q3 of 2020 and up seven 9% year over year.
The sequential increase in operating expense was the result of the early milestone costs of $4 million.
Restoration of the remaining COVID-19 compensation reductions of $1 5 million.
Restoration of bad debt expense to normal levels, resulting in an increase of $2 million.
And hiring and restoration of programs, resulting in an increase of approximately $3 million offset by reductions in stock based compensation expenses.
Comparing year on year, Opex Q4, 2020, Opex was up three 2% compared to Q4 2019, excluding verily milestone expenses.
Verily costs, including non Opex were $4 6 million in Q4, 2020 compared to $1 million in Q4, 2019, and zero point $5 million in Q3 2020.
Variable expenses were higher in Q4, 'twenty due to milestone expenses of $4 million the.
The company expects the next verily milestone to occur in.
In Q2 2021.
Quarterly adjusted EBITDA was again positive in Q4, 'twenty at $6 5 million.
Spence expenses reductions due to COVID-19 or approximately $5 8 million in Q4 'twenty versus.
Thus EBIT would still have been positive at zero point $7 million without COVID-19 impacts.
Finally, the net loss for the fourth quarter of 2020 was $9 7 million.
Or a loss of <unk> 33 per share.
Paired with a net loss of $17 3 million or a loss of <unk> 65 per share in the same period of the prior year.
Moving to internal controls, we are pleased to announce that.
Two of the free material weaknesses from 2019 have been remediated related to the financial statement close process and accounting for revenue and related accounts receivables and reserves.
We've made significant progress on the third material weakness related to the effective control environment commensurate with our financial reporting requirements and expect to close that item in the coming quarters.
The company remains committed and focused on continuing to improve our control environment and investing in our infrastructure hiring and training to support the future growth of the company.
Turning to our expectations for 2021.
As Mike mentioned due to the continuing uncertainties in reimbursement and the continued COVID-19 related uncertainties, we will not be issuing revenue margin or operating expense guidance at this time.
However, we can provide commentary unexpected volume growth from the first quarter.
<unk>.
Gross margin puts and takes and changes in operating expenses that we have visibility to today.
We intend to provide more complete guidance when reimbursement uncertainties are resolved.
We are fully able to assess the impact on our business.
So the first quarter of 2021, we expect volume growth of 5% over the fourth quarter of 2020.
Gross margin is expected to continue to be impacted by the approximately 2% headwind from home enrollment costs and by Covid related testing and overtime costs, assuming stable pricing.
Additionally, we expect to launch a new manufacturing facility in 2021 to support capacity growth and future automation of our manufacturing processes.
The new facility and planned automation will result in medium to long term improvements in gross margin.
But will decrease gross margin in the near term due to transition costs and initially lower facility utilization.
Yeah.
Opex is expected to increase.
By $9 million from <unk> $11 million versus Q4 of 'twenty due to higher stock based compensation expense related to the CEO transition.
Seasonal increases in bad debt and payroll taxes of $3 million.
And the ramp in hiring.
The ramp up hiring and investment programs offset by the $4 million reduction and verily milestone payments.
For the full year, we expect stock based compensation to increase by $20 million evenly throughout the year due to the CEO transition and the retention of key executives during the transition.
And finally as an update on our claims processing at the start of the year as we transition to building the new category. One CPT codes I rhythm is currently holding approximately 90%.
Of 2021 year to date <unk> XT claims.
About half of these claims are being held due to ongoing negotiations with payers with the remainder being held due to timing requirements for implementation of the new category, one billing codes with Payors.
We expect the level of health claims to remain high through the end of Q1 'twenty one.
The high level of health plans will delay most Q1 'twenty one cash flows into Q2, 'twenty, one or potentially to Q3 'twenty one.
We have adequate balance sheet liquidity to manage through these delays in cash flow timing.
A delay in commercial claims submission will most likely push some Q2 'twenty one revenue recognition in the second half 'twenty one.
Additionally, as noted previously we are in discussions with all the cash on Medicare reimbursement levels. If these discussions do not result in updated pricing or if updated pricing has not made retroactive to January one 2021, we.
We expect to recognize Medicare <unk> revenue at the <unk> pricing published on January 29, 2021 for the applicable time periods.
Mike Dan and I would now like to open the call for questions operator.
Thank you as there.
Reminder, to ask a question you will need to press star one on your telephone to withdraw your question Christa bound Keith Please standby, while we compile the Q&A roster.
Our first question comes from David Lewis from Morgan Stanley You May proceed with your question.
Great. Thanks for taking the questions just maybe one for Doug and then Mike maybe one for you, but maybe you can pass it off a little bit here. So just a nova to us I appreciate the commentary on the.
The update there when did the meeting occur and.
Ken we can be roughly assume that six to eight weeks is a reasonable time frame for a decision or update one way or the other from from Nova to us.
And maybe for Doug for you. It sounds like this <unk> decision will begin to impact kind of Rev. Rec and bad debt around the time that you have to file the first quarter and then I had a quick follow up.
So thanks, David on the question about the <unk> timing of the meetings have been relatively recent over the last few weeks and in fact have been too.
Meetings.
The consortium members of industry members with no <unk>.
Very constructive in both meetings.
We're basically not.
In a position to describe timing other than to say that we clearly are getting a lot of focus and attention from the <unk> team in terms of evaluating.
Evaluating this question would be appropriate.
Rates for these for these new codes and so we expect them to be diligently working on it so.
I don't have better visibility to the timing, but they they seem to have a lot of effort going behind it right now.
Yeah.
Okay, and then a question on billing and then I have one quick follow up after that.
Yeah. So.
In general, our our contractual allowances accounting, which impacts revenue and our bad debt.
Net expense accounting.
There are 12 months averages.
But they are offset by a quarter. So so my comment on Rev. Rec in Q2 is more based on that.
When we close Q1.
Our period for averaging for doing accounting purposes is pretty much calendar year 2020, and then that rolls for in one quarter.
Okay very helpful and then for first quarter.
Yes, you're guiding above the street for the first quarter just help us understand what assumptions are embedded in that number obviously, you have sort of a bit of a delayed billing cycle, which kind of changes how COVID-19 impacts your business I'm just kind of curious what assumptions you've made here in that first quarter and then has there been any change.
Either channel friction tied to the reimbursement dynamics that are impacting volume is there any change the competitive environment, Mike in light of the reimbursement dynamics that are worth considering so just broad assumptions on Q1, and then channel friction and reimbursement dynamics on the competitive environment. Thanks, so much.
Sure Let me start with the second question I'll, just ask Doug to comment on the.
The assumptions in Q1.
Obviously, the customers who are writing scripts for our product.
Generally are not directly connected to the economics of it that is we do direct bill right two to the payers and so it's been relatively.
Invisible to them that this whole discussion is going on other than the fact that they have become aware so.
A number of our customers have become aware that the.
The cross reference pricing to holter is of concern to them given that debt clearly they understand that that would be below the cost of providing service. So.
Other than that that concern, obviously, it's not hitting our <unk>.
Our volumes in any meaningful way as you can see from the strong revenue performance.
During Q4, and the guidance that we're providing for Q1.
Do you want to.
Yes, good volume.
So the 5%.
Volume up quarter on quarter that isn't reports posted which is our standard trigger for revenue recognition.
And.
Under our usual accounting flow, we recognize revenue when we post the report.
And so even if you took the corner case of.
Normal flow of something of that.
Say report posted on March 31st and we submitted to the payer.
Two days two days into April that that would still be under our normal flow.
Q1 revenue and.
So even though that that.
The timeline is gonna be greater we would still be recognizing any path for any report we posted in Q1 to Q1 revenue.
Okay.
Great. Thanks, so much.
Thank you. Our next question comes from Robbie Marcus with Jpmorgan. You May proceed with your question.
Oh, great. Thanks for taking the question.
Maybe just to follow up on reimbursement, Mike I was hoping.
When you had your discussions with <unk> did you at least get an answer of why they decided to crosswalk to holter monitor rates.
The 310.
CPT III code wasn't there anymore for them to crosswalk too is that the reason that day crosswalk date or anything you can give us on the rationale for choosing that rate.
It really wasn't a big focus of discussion in our in the meetings around why that mapping of the holter rates went in there clearly there are administrative reasons why it was beneficial to them to have a number in there and.
It's clear that debt.
The lack of the ability just to map to the existing codes because of temporary codes went away what was a challenge, but obviously the level of attention that they are paying.
Paying too.
Understanding the differentiation of the long term ECG relative to holter.
The increased cost components that go into being able to provide that significant clinical and economic advantage relative to a holter monitoring and their interest in understanding fully the direct recommendations and how they work how they were base tell us that they are very clearly looking at what the right answer is for being able to.
Put in sort of sustainable rates into those codes.
Got it okay.
And you gave us a little more detail on verily and the rollout plan.
Should we expect to be able to see a mockup of the product to get more information on the details and and sensitivity of the product and a little more color into the new business model. Thanks.
So as we said in the body of the.
Prepare tax we expect to be seeing a regulatory submission here mid year and the likely regulatory approval of both from the form factor itself. So the sensor.
As well as the the supporting.
Enable diagnostic software.
Either late this calendar year or early next calendar year and that would be the time for us to talk about the form factor and the design, but clearly as I as we mentioned in the in the body of the text.
The work that we will be doing clinically what that will be really to evaluate its.
Applicable to its performance. This is a whole new way of doing detection of atrial fibrillation, we're going to want to assess the business model and so.
Work that we will do clinically after the approval was really in support of just understanding the technology and understanding the economics of the business model. So that we can support our reimbursement strategy.
Okay. So we wont see it or get any sort of.
Site into data versus CEO and until around submission later this year.
Right.
Then most.
Mostly where Greg we're really just going to be focusing on doing the clinical evaluation. So.
We're not talking about a commercial rollout even after those approvals.
Got it okay. Thanks a lot.
Yeah.
Thank you. Our next question comes from Margaret cash equivalent.
Blair you May proceed with your question.
Hi, everyone. Thanks for taking the question. This is Brandon on for Margaret Firstly, I just wanted to ask a question around guidance and reimbursement.
Just to be specific is the is the lack of guidance or the inability to provide guidance at this point due to uncertainty in rates with Medicare or is it also uncertainty in some rates with the private commercial side as well.
Well the guidance that we have given us a volume expectation right in terms of what we expect to see in terms of.
So with registration growth.
And so we are we are providing a view of what we see the primary demand for the product is the question it'll be of course, what rate to apply for the Medicare.
Business, given where the current.
<unk> rates are and obviously, yet when that gets clarified that we will be able to make an assessment of any potential bleed over in fact onto the commercial side of the business.
But the the open item here is that the.
Rates that will be applied to the to the <unk> business. The other piece I would just point to is having some level of uncertainty to it is how quickly we emerged from a debt.
The holding of the claims as we bring on the CPT one code on the enter into customer contracts across our our commercial direct bill customer base.
<unk> is a timing aspect from the from the standpoint that the whole process involves obviously, having to take every one of those contracts and map them from the old codes into the new CPT one code that process involves.
Obviously agreeing on a price for those for.
For those new contracts it involves setting up the it systems for the day.
Commercial payers to be able to accept our claims.
And then to do testing to make sure that before.
Before we send large numbers of claims into the system that everything is working the way it needs to work and some of that debt is a multi week process. Even after we get a signed agreement to actually bring up to speed. The each of these payers onto their new systems and so the timing of that is going to be what determines when we are essentially you are able to.
Completely.
Have our claims submitted and that will then normalize our revenue flow.
Okay, and just to clarify part of I guess, what I was trying to ask what are you seeing any of the commercial payers follow the decision that <unk> had put out there a month or two ago.
So as we watch.
In our discussions of converting over to the CPT one code.
Codes with the commercial payers generally what we're seeing is those conversions being done at essentially the same prices that we have today. So.
We do obviously see from customers, who are aware of the ongoing discussions with the with <unk>. Some of them have indicated that they're going to.
Go ahead with our with these contracts, but they will be looking to see where those new rates come in to decide if they want to sort of reopen discussions but the.
The majority of those.
The accounts that we have today.
Are essentially very long term relationships that we've had at existing pricing and most of those conversions are taking place at essentially the same price levels.
Okay.
Then last one from me maybe for Doug on.
The manufacturing facility are there any kind of.
<unk> benefits you can give us maybe what will the output of the new facility would be what would the capex be on building. This facility out and maybe is there a meaningful head count reduction or anything like that to kind of get us a little bit of details on how meaningful the new facility could be thank you.
Sorry on munis are on zone.
Okay, so going back to the comments that I made in the <unk>.
In the <unk>.
<unk> remarks.
This is going to be.
A bit of a cost drag.
Decrease to margin structure in the short term and partially because we're gonna be operating two facilities for a period of time and partially because it will take time to.
Wrap it up we will give you more details on the Capex from the cost of all this is not a capex intensive business. So it is the number is not going to be huge in terms of the capex in the longer term this is going to.
Medium to long term this is going to enable us and we do plan to substantially induced.
We are substantially greater automation into our workflow.
However, as I emphasized before that's medium to long term that's not in the short term or that's going to happen.
In terms of capacity sizing.
Talking new facility, we're not going to build out.
Purchase all the capital to build out the new facility to its ultimate capacity.
Immediately of course, we're going to bring on capacity and Capex and capital investments are commensurate with our volume growth.
This facility will be able to go to ballpark five times more volume of that Macquarie.
The current facility.
Yeah.
Thank you. Our next question comes from Kevin Krumm with Truth. You May proceed with your question.
Great Hi, guys. Thanks for taking our questions. So I just wanted to be clear on the revenue recognition commentary I mean.
No the cost doesn't update its rates by the end.
March it sounds like the plan is still.
To submit these claims.
And recognize revenue at the 43 rate first is that right or could you and would you hold those client claims in the second quarter.
So let me let me ask Doug just to comment on the timing of the revenue recognition.
Yeah. So first on the claims pace with with Nova to us and with most but not all of our payers we have up to 12 months to submit the claim. So so there is no.
Particularly with Nova to Us Theres, no looming deadline to submit the claims.
And then it really.
If we were to get if we were.
To get a new price.
After.
The March 31, but before we have closed the books on Q1 net price was to be retroactive to some.
Daily to January <unk>.
We will be able to use the new price in those circumstances.
Yeah.
Got it okay.
That makes sense and then I. Just you know you guys mentioned you know your hospital customers are are concerned about the lower reimbursement rate. So I guess are you seeing hospitals step up as advocates here too I'm just curious how how they're responding to this day.
So both the American college of Cardiology, and the heart Rhythm Society submitted letters to mill, the TASS restating their support for the rock recommendations on pricing and obviously in the process. All of that also validating the importance of long term ECG technology to their clinical practice and that was a response from the drip.
By multiple members in each of those sizes.
<unk> out to ACC and HRS day to ask them to do that so that there is a strong advocacy as there was in the rec process from ACC and HRS.
And we're very appreciative of that.
All of our customers in those societies in particular court for helping advocate for this important technology.
Great No. That's super helpful color and then just a last one from me I mean, it's.
Quite quite a few of your competitors at this point have either been acquired or are there expected to be acquired with the deals closing by midyear or so can you just speak to some of the opportunities and risks around the recent consolidation in the space and just how youre thinking about the competitive environment evolving over the next 12 18 months. Thank you guys.
Sure. Thanks, Kevin well, obviously, it was a bit of a surprise to see.
Our three biggest competitors.
The three most important competitors are all being acquired in a fairly short period of time and what was particularly interesting is that.
The commentary by the acquirers are all focusing on different reasons as to why they are found to the opportunity to be compelling I think the one thing we take away from it is number one its validation of.
The importance of the larger ECG technologies.
As being a real.
So with the new standard relative to the very large holter and event monitor shares that exist in the U S. Also several of those acquirers.
Indicated an interest in really helping to drive the adoption internationally and that I think can only be helpful too to a company like IRA them with with limited presence as if we have much larger players are advocating for why the holter and event monitor market should be.
Replaced with these much more.
Diagnostics effective.
Approaches to to identifying the live me is it can only be helpful.
To us.
And then obviously the I mean, that's true in the U S. As.
As well.
I think the other thing it does for US is by having more larger voices speaking to the fact that this conversion should take place more rapidly.
The fact that we have a very clear lead in I would I would almost call. It a multi year lead in terms of the all the aspects of our innovation stack.
It's going to be very helpful to us now I don't underestimate the fact that some of these acquirers out.
A large footprint our presence and in things like the primary care market or with.
Physicians are younger.
Thought leading physicians in the electrophysiology area.
But I think the differentiation of our offering is such that I think we're going to really benefit from just having much more.
Let's say time and attention being paid from a promotional standpoint to the space.
Great. Thank you.
Thank you. Our next question comes from Marie Thibault with BTG. You May proceed with your question.
Hi, Thank you for taking the questions. This evening I wanted to ask just one on the claims side I'm a little bit in the nitty gritty in the weeds here, but wanted.
I wanted to see if I could get a sense of how likely it is that <unk> be willing to make this retroactive. If you have any insight into their past experience. There and then one for Doug what is the latest that I rhythm is able to close their books for Q1 I know that's very detailed.
Do you want to take the second one and then I'll.
You'd have to buy a couple about two weeks from.
From a coupon.
Okay.
And then on the question.
Route relative to.
Nobody to us.
In terms of Oh, I'm, sorry could you just repeat that.
Yeah, the possibility of a new pricing being retroactive do they do that typically or would that be unconventional any insight into that.
It's our understanding that they have full flexibility to implement pricing changes into their schedules at any point and make it.
Retroactive if they choose to do so and it's been clear in our interactions.
With Nova to us what they're interested in is making sure that the Medicare patients get served with the right technology.
Fair price due to the Medicare system, so to the extent that they think they've arrived at a fair price.
It would not be.
Outside of what they have indicated to us debt to make it up from sort of appropriate for the time period, but I have to stress that that's completely at their discretion and.
While they have the capacity to do that we have no way of knowing right now whether it's whether they would choose to do that when they arrive at it volume pricing.
Okay, that's very helpful and understood and then one on the business here was pleased to hear that December you were less impacted than some other businesses and I know you cited home enrollment is one of the reasons for that and any other drivers of of that volume growth that sequential volume growth. Despite the COVID-19 headwinds.
So of course that is a continuation of a trend that we've had in terms of.
The improving situation around new new account openings I think we mentioned that we were very encouraged by the fact that we now have new account openings.
Back to pre Covid levels after some pretty significant declines in net new.
Or.
A lack of opening up new accounts in Q2 and Q3, so obviously that momentum.
He is helping us and of course that this is a pipeline business. So as we are able to open those new accounts it pays dividends to us out two and three and four quarters down the road.
I think the primary.
The opportunity here is that there's just a lot of customer enthusiasm for the benefits the clinical and economic benefits of long term you see June vs versus holter monitoring and that's just a continuation of the trend that got a little interrupted for Covid for a very short period of time, but just continues to now.
Now drive adoption of the technologies, where we remained less than 20% penetrated into the market.
Alright, thank you.
Thank you. Our next question comes from Bill <unk>.
The net with Canaccord you May proceed with your question.
Great. Thanks, Good evening and thanks for taking my questions first is just to level set us I just want to be clear.
<unk> pricing CMS is about 25% to your business.
And then secondly on the level, one CPT code that impacts.
The other contracts because they need to be renegotiated because you have the new level C. P. One level of CPT codes. So all your other commercial contracts and other types of countries is that am I is that level set as I am I correct in those statements. Yes that is correct roughly 25% of our business is in Medicare.
And that is what the discussion is about on the CPT One code conversion all of our direct bill private.
The customers so the private payors.
<unk>, we set their contracts because now that's new cohort existent as what is being built out there. So each one of them has to essentially.
Adopt the new contract with us that recognizes the those codes are how we're going to be doing the billing.
And then just I wanted to make sure I understood. The statement of in terms of the building and using 12 month average is it's offset by a quarter. So if you haven't gotten the final payment rate from Nova to us by the end of the quarter you would use the 'twenty 'twenty average payment.
Right for all your contracts, including CMS for the first quarter is that accurate or would you use the new lower rate. If you didn't get it by the time you need to close the books.
To close the first quarter and I understand that you don't you wouldn't send the invoices out because you book revenues when you post the reports.
Yes.
So let me ask Doug to take that.
Sorry, there was a little bit of a mixing of apples and oranges there.
[noise], there's there's two there's.
Two different components here. So the first is we.
We invoice our.
Our payors.
At an agreed upon rate.
Yes.
For various reasons, which are all grouped together as contractual allowances.
Yeah.
<unk>.
Either adjudicate to a lower amount or in some cases, they will deny the claim for more information from a medical necessity.
Et cetera.
And so as I was talking about the impacts from the delayed claims on revenue recognition.
It's on that latter part of what percentage.
What what percentage of our revenue.
Basically is.
Taken away from these contractual allowances.
And if we don't submit the claims.
If we have a very delayed from somebody in the claims then obviously.
There is there.
The initial amount that is adjudicated on the first submission of claims and then in our soups.
The actual number of our cases, we resubmit with more information to address the payers concern.
But the issue with contractual allowances from the delayed claims is that youre not going to if you submit the claim a month a quarter late.
'cause of these various issues you don't have time to work those contractual allowances issues and so we could be facing temporarily until we get caught up on claims are significantly larger contractual allowance percentage that has been our historical average.
So that's so that's a separate the two from when we can invoice.
And and the impact to contractual allowances.
<unk> of our revenue commercial revenue.
Contractual allowances reduced net revenue.
Understand.
I guess, the simple thing I'm trying to ask I'm, sorry, if I'm not understanding it is when you.
For Q1, if you don't have the final Nova toss number would you.
Book revenue under the assumption that it's the lower number for Q1 for in terms of just closing the books is that how you'd move forward and then when you do finally kind of collected all area. If it all gets fixed you adjusted adjusted in the future I am just trying to understand trying to figure out Q1 is what I'm just trying to figure out so.
So.
We switched from a category three code to a category one code January one.
We cannot under any circumstances continue to build all the task for the category III code that not one there is no longer in service.
So.
As we've talked about before at Nova Tosh.
<unk> has published an official price.
So that price is what we would have to recognize revenue unless they publish.
Published a new price is we are certainly hoping they will.
And then when they published the new price.
If they make it retroactive to January one or some other day, then we would be able to use that new price to recognize revenue and then even if the quarter has ended we would go we would be able to go back and do the catch up transaction in the second quarter and that cash but in the absence of any new as I said in my prepared comments and the absence.
So the new price there is an official <unk> price for the cabinet category one code.
And that is the price we would have to use in the absence of a new price being below that price being updated.
Great. Thanks, and then does it in terms of the discussions and I don't know if you can answer this or expand on this but yes. It is.
There are discussion with less than seven days versus greater than seven days of receptor waiting that out and then lastly, just with the screen AF published does that have any impact on the payer discussions and that's all I have thank you.
Yeah, so on the debt.
The question of screen AF.
That is a new data on the asymptomatic as Apis.
Opportunities so it's not.
Particularly relative to the payer discussions other than the fact that clearly linking to the M stops data, we're able to show clinical outcome benefits associated with long term UCD that simply aren't available.
From from the Holter technologies, and then I'm sorry could you just repeat the first question you had.
In the discussions with Nova to us.
They basically gave one rate for <unk>.
Less than seven days and greater than seven days in terms of the discussions do you think that debt is you go through this is it are they looking at under seven days and greater seven days or is it looked at one bucket.
Any color would be helpful. Thanks.
So certainly there are two codes that have to be assigned.
A rate right. So we basically presented data during the discussion that showed a higher resource intensity associated with the longer term.
The longer term code right. So you have essentially more than twice the level of data that you're that you're having to adjudicate that it's much more complex with the longer runs of data and so the the oversight of the certified cardiac technologies is actually greater and those are those longer codes and so.
We highlighted the cost differential.
Associated with providing that service for the lager.
But for the longer code now whether that winds up resulting from Ah in two different rates for those two different codes.
It will be entirely up to Nova to us, but it clearly was discussed in our meetings.
Two sort of distinct code requirements.
Thanks for taking my questions.
And our next question comes from Suraj Kalia with Oppenheimer. You May proceed with your question.
Good afternoon, Mike Doug can you hear me alright.
Yes, he can't thank you suraj.
So Mike Doug forgive me for Belaboring. This it's been up.
You know quite a confusing set of commentary so I'm just trying to get my head wrapped around so Mike.
Let's do it this way it just piggy backing on what builds question was if we don't have updated rates from Nova to us by April let's say.
Is it safe to say we are headed towards the CMS proposal, then it's essentially too late and there is a chance now we're heading into that CMS cycle is that even a possibility.
Well I think it's fair to look at these two as to the strength work streams right Nova to US is basically looking at the pricing of codes.
That are in their system.
And they are therefore economy to decide how they want to determine what methodologies day when he used to determine what the appropriate rates should be for those two new codes and obviously they they.
Engaged with us as a as an index industry consortium to discuss it in detail. So so that's a work stream. We would expect they are going to pursue and then decide what the answers whether they leave the code where it is whether they accept the recommendations debt.
The rock process or whether they arrive at a different methodology for arriving at their rates.
That seems to be a distinct work stream. The second obviously is the CMS work stream around the potential for a national price to these codes.
And that's a process that is really now entering into a meaningful common period in March.
We will avail ourselves of the opportunity to provide additional data and methodologies for being able to revisit the question of whether a a national price can be established and and we will do that independent of the northern pass.
Activities now whether there's interaction between those two things after no no the cash.
It has been set.
No, but we are certainly pursuing them as two very distinct work streams.
Mike You mentioned about a consortium youll met with Nova.
Leave a couple of weeks ago forgive me, if I got that wrong.
Fundamental question I think so all of US are trying to figure out what any invoices provided by any of the participants in this in these meetings that seems to be sort of the the hiccup in this whole process that could yield a tangible result pretty quickly love to get your comments on that.
Sure I think one of the benefits of having the four largest producers of the suppliers.
Suppliers have the service available.
Available and the four companies who are involved in these discussions represent about 97% of the building under the old temporary code.
I rhythm frankly, representing about 85% of that but.
But all of the major players who are actually provide the service is called out for the code, where there and all of us were able to identify that.
Key components of being able to successfully deliver that service is inclusive of a patch technology that can reliably provide 14 day data.
With high patient compliance and is labeled as such by the FDA that when you start to talk about that length of a.
Period of time for collecting what is essentially a million and a half cardiac cycles, but then have to be analyzed doing that in the manual process or where the base.
Holter like software approach simply doesn't work because of the.
Complexity and massive amount of data that's being analyzed so having rite aid and advanced analytic platform and in our case driven by by AI and machine learning.
Algorithms is critical to being able to have an efficient identification in a sensitive way of where there could be potentially risk high risk rhythms in that 14 days of Covid you may only be looking for five to eight minutes of time.
<unk> over that entire period as being able to find it with high sensitivity as you know requires these advanced analytics and then once those are areas of potential risk or.
Of concerned parts of the Electrogram you need a team of highly trained individuals who can then look at those those data and make conclusions about in our case, the 13 different potential arrhythmias that could exist versus what you would typically see with a holter, which is about four so the idea of of.
A patch being identified at at some cost point that isn't part of a fully integrated system isn't going to get you. The fundamental report that is whats becomes useful for the physician enabled and determining whether there is actionable.
Rhythms, there and what that action should be and obviously, that's where the fully integrated.
Long term ECG technology comes in and all of the players in the space.
Point to the fact that having these fully integrated systems is what's important to be able to get the outcome that the code is looking for.
Got it Doug one final question on hop back in queue again. Please forgive me just trying to get my arms around all the commentary so debt are.
Percent of direct commercial contracts.
Net are indexed to Medicare and you all are holding back claims on that also did I get that right for them.
I think Jeremy your debt.
Yeah.
Okay.
Technology.
So.
First there's two reasons that we're holding back claims.
One is that the contract is in negotiation.
And the other one is.
Or at least hasn't been signed I mean, there's cases, where we're and verbal agreement about Havent, Inc. The agreement with them.
And then after that the pair I T has to implement this payer it is our debt.
That's not a that's not a matter of days, that's all from a matter of weeks even months repair it.
Apartments to implement a new contract.
And then we have and then we go through a testing process because we of course will send through like a half a dozen claims and make sure they adjudicate properly before it.
If we've got thousands of claims rather than risk out there being a glitch. So so it's roughly evenly split between the two of those.
Places, where we're in agreement, but we're still going through that administrative portion and places where we're holding the claims because we haven't reached an agreement yet although no VITAS being the larger fraction of that.
Doug what would this approach be more I mean, it comes across as a negotiating tool in terms of holding back claims right. The reverse would also be true, let's say I agree on your $43 price target right to file a claim today I go to get a certain revenue level find I fundamentally don't.
Like the dollar amount, but then when I argued on the same premise that what people are doing today, but then let's say whatever timeframe it gets reset.
Then you can come back and do it retroactively also am I right in thinking the reason.
And rightfully so should be if I accept the price right now my negotiating leverage in essence GAAP.
It's weekend. Thank you for taking my question now.
So that's not an angle here.
This is purely administrative.
If they if they change the price I mean, even if I could go ahead and submit all the claims at the current price and if they change the price and make it retroactive to Jan one.
We'll be able to resubmit the claims.
The new higher price.
Collect the differential so I'm, so I'm, not losing or gaining anything.
By holding other than the fact that it's administratively much more time consuming and resource consuming to submit the claim twice versus ones.
And the one thing I would just point out as to what's going on here as a good faith negotiation between us and the industry around what's the appropriate level of these fees.
Payments should be for these new codes I mean, there's there's nothing else going on and we're very focused on.
Respecting the process that <unk> has and providing them all the information they need to be able to make the decision in as timely fashion as we can all have it. So that's that's really all that's going on.
Thank you.
Thank you I would now like to turn the call back over to Mike Coyle for any further remarks.
Well. Thank you all very much obviously.
Barry.
Citing from me for my first earnings call to be with you all in free.
Yeah. It all the time and attention focused on the company and we look forward to future communications that'll be coming up in the.
In future months. So thank you all very much.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Sure.
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