Q2 2023 iRhythm Technologies Inc Earnings Call
Good afternoon, and thank you all for joining us price, Bob <unk>, Our Chief Financial Officer, and Dan Wilson EVP of corporate development and Investor Relations. Joining me on today's call. My prepared remarks today cover business updates during the second quarter of 2023 and progress we've made against our growth and operational initiatives. I'll, then turn the call over to Bryce to provide a detailed review of our financial results and updated guide.
Since in the second quarter of 2023, we realized continued growth across multiple channels and built on the solid momentum. We saw in the first quarter of 2023, we recognized record quarterly revenue of $124 $1 million in the second quarter, which was ahead of our expectations and represented 22% growth compared to the prior year. These results were driven by continued strong volume from both.
<unk> XT and <unk> as we continued to see near record levels of new account openings opened additional large national accounts continued to gain traction within the primary care space and increased our market penetration within existing accounts fueling. This growth was the continued market shift away from the short term holter usage towards long term continuous monitoring.
As well as <unk> outpacing the growth of an expanding HCM market. The second quarter was also the first full quarter that Camelot data was available for our commercial teams to use in the field the clinical value of Z O S. T versus other modalities and brands is resonating with our customers driving account wins and impacting account retention. While early payors are also.
Responding positively to Camelot data and it is influencing payer policies, including recent successes, where previous utilization of halter's or prior authorization requirements for long term ECG are now updating their policies and removing these requirements for manuscript publication of the Camelot data in a peer reviewed journal is in process and we are also beginning to expand.
And into additional analyses of these real world data to further demonstrate the clinical value of the zero services to patients physicians payers and health care systems. We are also making meaningful inroads with driving EHR integrations, which are intended to allow for an administratively simpler process and integrate Zealand two existing workflows of our customers and their staff.
Through incredible cross functional efforts by our internal teams and great collaboration with our customers. We achieved a significant milestone this past April with $1 million all time registrations for the <unk> services received through EHR integrated accounts. We believe this has translated to an estimated 175000 hours of time back to our customers staff to support.
Patient care in which we project may have saved health systems, an estimated $4 million and staff ton cost the pace of EHR integration of both new and existing accounts has only accelerated throughout 2023 with a total volume of registrations through EHR integration up more than 60% year over year. We are very excited to continue this progress and to continue.
Developing innovative solutions for our customers as we strive to serve millions more patients within the coming years as we move into the back half of 2023. We also are eagerly awaiting the upcoming zeal monitor launch later this quarter to provide our next generation device for a best in class long term continuous monitoring service, we believe that compared to <unk>.
Thinner smaller wider more breathable device can improve patient compliance and diagnostic yield as a result of extended wear times initial real world data from the first 673 patients who were zero monitor were presented at ACC. This past March and the first market evaluation Phase was concluded in may with the zeal monitor being used by 6000 plus pace.
<unk> over a 12 month period, the market evaluation data confirm the findings from ACC and showed that when compared to <unk> zeal monitor showed an increase in patient compliance and diagnostic yield as well as delivering the same high quality service as we move into full commercial launch we are planning a purposeful rollout strategy designed to support our customers and patients.
With the best in class service they have come to expect from my rhythm to do this we are implementing a phased rollout that allows us to bring availability of zeal monitor to patients as quickly as possible, while making sure that we transition away from <unk> in a measured fashion, we look forward to sharing additional details with you in the months ahead, turning to additional pillars for IRA them as long term sustainable growth.
We've recently had several milestones are central to strengthening our international presence in Japan. We are thrilled to announce that we were granted high medical needs designation by the Japanese Ministry of health and welfare or the MH L. W. In early July worth, noting this designation is specific to <unk>, giving us a differentiated position in this large market as a reminder, Japan.
<unk> is the second largest ACM market in the world with one and a half million ACM tests prescribed annually, Japan still utilizes the holter monitor as a standard of care with very limited adoption of patch based technologies, resulting in a very attractive point of entry for zero as a disruptive innovative technology and service by working closely with the Japanese Heart Rhythm Society. Our teams did an.
<unk> job using <unk> extensive clinical trial evidence and differentiated AI to help the NHL W. Appreciate <unk> clinical value when compared to the existing holter standard of care. Following this designation we submitted our showed an application for regulatory review in July importantly, the designation enables priority review for marketing authorization by the Japanese farm.
Masuda coal and medical device agency or the P. M D E and it also paves the way for potential premium pricing specifically for <unk> in Japan, We will continue to work closely with the <unk> during their review of our shown in submission and look forward to updating you on our progress in future quarters. In Europe . We were also pleased to announce that we have opened our first market evaluation engagement in Switzerland.
With early Onboarding of one of the country's five University hospitals. This initial engagement will allow targeted health care providers to experience. The Z O service in preparation for a broader commercial launch in the future as shared in our strategic plan at our Investor Day last September this market priming phase represents the initial steps of our international growth plan to accelerate access to long term cardiac monitor.
<unk> to more patients worldwide as we gain experience with regional reimbursement dynamics in parallel while we are hyper focused on execution within our growth pillars. I've also been pleased with the progress made to drive operational excellence throughout the organization enhancing our financial profile and preparing to scale the business for future growth, we achieved a significant milestone in our global business services Center.
Manila during the quarter as we welcomed the first wave of full time employees. We've been very pleased with the progress made in our ongoing business transformation activities as is being demonstrated by the nice improvements in our financial profile. This quarter Lastly, as previously disclosed we received a warning letter from the FDA on may 25th which focused on our Z O a T system and the alleged.
<unk> related to medical device reporting requirements and quality system requirements since receipt of the warning letter in late May we are engaged with the FDA and submitted a thorough response, we've been encouraged by the collaborative engagement with them and believe we have now clarified with the agency. The labeling modifications that are needed to improve the user's understanding of the Z O a T system and how the devices used for the provision of <unk>.
Ambulatory mobile cardiac telemetry services. In addition, we have proposed enhanced design features to the product that further address areas of focus while also following the fda's direction to work with the C. D. R. H product review team regarding changes that occurred under letters to file and the potential need to submit a five 10-K as a catch up for changes to the Z O a T system, while we understand the <unk>.
D. A continued to review our responses. We are pleased with the progress and will continue to work collaboratively with them to address their concerns while always subject to change until the review is completed we have agreed to make their requested labeling changes that will allow us to continue to market Z O a T.
<unk> is a device for ambulatory MCT services, we remain committed to our customers' patient safety quality and compliance and we will continue to work diligently and collaboratively to resolve the warning letter to the FDA satisfaction, considering the proposed design enhancements and other commitments related to the Z O. A T system, we do expect our original timeline for the submission of our <unk>.
Generation Z O M C T system to be impacted based on current estimates, we anticipate Z O M. C T to be delayed by approximately 12 months as we work through the product modifications, Brazil, a T and potential regulatory filing requirements, resulting in a 2025 market introduction of our next Gen Z O M. C. T system, given the additional time our strategy regarding.
Z O N C. T system enhancements has shifted such that we intend to move directly to Z O M. C. T. Two dato by pulling additional product design features into our initial submission that we had previously planned for later generation. We will continue to evaluate options to expedite our product timelines and ensure that we can bring innovative technologies to market as quickly as possible in closing I could.
Not be prouder of the rhythm team. The teams have remained focused and committed to the goals that we laid out at the beginning of the year. Despite the potential of being easily distracted and have achieved outstanding results to date, we delivered tremendous growth in the first half of 2023 and are making the necessary investments into the business to continue driving growth through multiple levers in an operationally efficient manner.
We continue to believe that the global ambulatory cardiac monitoring market will grow significantly in the coming years, and we are well positioned to capture our share of the sizable opportunity ahead, we've never been more excited about the future of our company with that I'll now turn the call over to Brian to discuss our financial performance. Thanks.
Thanks Clinton as a reminder, unless otherwise noted the financial metrics that I discussed today will be presented on a non-GAAP basis reconciliations to GAAP can be found in today's earnings release and on our IR website. As previously mentioned our second quarter results demonstrated significant momentum in our core U S market as we realized revenues of $124 1 million or <unk>.
21, 6% year over year growth looking at new store same store mix new store defined as accounts that have been opened for less than 12 months accounted for over 30% of our year over year volume growth. This was driven by the second quarter being the second highest quarter ever of Z O X T. New account openings. While we also continued to increase penetration in existing accounts and reduced account churn.
Enrollment for zero services was approximately 20% of volume in the second quarter average selling prices during the second quarter were in line, both year over year and quarter over quarter with pricing stable within the commercial portfolio and national rates in place for our Medicare business as of the beginning of 'twenty 'twenty. Three we have continued to leverage our DCF footprint in the most efficient manner to serve our patients.
After the second quarter close CMS did released proposed updates to their calendar year 2024 physician fee schedule that included relatively minor reductions to the physician conversion factor used to calculate payments were all CPT codes as well as proposed clinical labor cuts to relative value units for all CPT codes. However that proposed rule also incorporated in <unk>.
Increase in San Francisco's geographic practice cost index modifier. Thus, we believe the net impact of the CMS calendar year 'twenty for proposed rule will be immaterial to Irish <unk> business as we understand it today as this is only a proposed rule at this point, we intend to proactively engage with CMS and the industry groups until the rule is finalized in the November timeframe.
Longer term, we intend to continue to work with CMS and other stakeholders to properly understand the value of AI and innovative medical devices, such as Vizio systems moving down the rest of the P&L gross margin for the second quarter was 69, 5%, representing a 160 basis point improvement compared to the first quarter of 2023, and a 70 basis point improvement versus the second.
2022, both sequentially and year over year improvements were driven by a reduction in unit cost to serve as we ramp volume significantly and continue to leverage our fixed cost infrastructure second quarter. Adjusted operating expenses were $99 7 million down 9% sequentially and up 7% year over year sequentially decreased spend was primarily driven by seasonal <unk>.
In the first quarter that did not reoccur in the second such as timing of payroll taxes as well as annual sales and leadership meetings slightly offset by higher personnel expenses to support growing volumes also as expected some of the duplicative costs incurred during the first quarter of 2023, starting to slowdown as we operationalize the global business services Center in the Philippines and <unk>.
Again to leverage third parties compared to the second quarter of 2022, the increase in adjusted operating expenses was primarily due to payroll related expenses to support the businesses significant volume growth, particularly encouraging is that SG&A as a percentage of revenue was dramatically reduced compared to the prior quarter's lend sequentially by the benefit and G&A leverage we believe that.
This is a trend that is sustainable over the long term as we begin to realize value from our focus on operational efficiency adjusted net loss in the second quarter was $13 1 million or a loss of <unk> 43 per share compared to adjusted net loss of $33 4 million or a loss of $1 10 per share in the first quarter of 2023 year over year, we saw a 36% an improvement.
Adjusted net loss per share as we continued to drive operating leverage in our core business second quarter 2023 business transformation costs were $5 4 million generally in line with expectations. As we continued to stand up our global business Services Center importantly, adjusted EBIT in the second quarter 2023 was positive $4 4 million, reflecting an.
<unk> was $16 4 million sequentially, and an increase of $9 $3 million year over year, you can clearly see the momentum building in the organization as we put greater focus around operational efficiency turning to guidance. We are updating our 2023 outlook to reflect the anticipated full year revenue growth of approximately 18% to 19% compared to 2022.
<unk>, representing a range of approximately $485 million to $490 million. This takes into consideration our performance in the first half of 2023 and seasonality typically seen in the third quarter. While also remaining thoughtful as we continue to navigate the remainder of the year, we anticipate approximately 25% of full year revenues to be realized in the third quarter.
In line with non Covid years, we continue to believe that gross margin will range between approximately 69 and 70% for the full year as previously detailed our full year guidance contemplates pressure to gross margin in the back half of 'twenty three as we ramp to launch our zeal monitor services into the U S. Commercial marketplace. This will include an evaluation of our current XT inventory levels.
And may reflect unrealized cost for our zeal monitor system as we scale the new product. We continued to anticipate that adjusted operating expenses in 2023 will range between approximately 417 and $427 million, notably our adjusted operating expense guidance now contemplates cost associated with the FDA engagement and the department of <unk>.
Justice inquiry, however, we've been able to drive efficiencies in the business that will offset these incremental increases for the remainder of the year with the updated revenue guidance and the efficiencies created within operating expenses. We now believe that adjusted EBITDA margin in 2023 will range between approximately zero and 5% of revenue as a reminder, adjusted EBITDA will continue to exclude.
Restructuring costs transformation costs and stock based compensation expenses in 2023, we continue to anticipate incurring approximately $15 million to $20 million of one time, non-GAAP business transformation and restructuring costs related to the ongoing globalization efforts to drive efficiency improved scalability and provide continued high quality <unk>.
<unk> patient experience, we believe that the expenses incurred related to these activities in 2023 will further enable operating leverage into the future, especially as we grow to serve more patients in our core markets and internationally. Finally, we ended the second quarter in a strong financial position with $164 7 million of cash and short term investments to draw.
Continued growth in our core business invest in innovation and lay the foundation for future expansion with that Clinton, Dan and I would like to now open the call for questions operator.
Thank you.
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We request that each person limit yourself to one question and one follow up thank you.
Our first question today comes from the line of Margaret <unk> from William Blair. Please go ahead, Mark with your line is now open.
Hey, good afternoon, guys. Thanks for taking the question.
Maybe just to start I wanted to see if you guys can give any breakdown in terms of the growth of X gene versus 80 this quarter.
I referenced that in part because of guidance right. So we saw a guidance on the low end.
You, obviously had a really nice this quarter at least relative to our numbers yeah, you're talking about near record New account adds national accounts, we're seeing accelerating growth so long story short.
Trying to understand.
Why not raise the high end of the guidance range I O <unk>, which part of that in the past.
Sure. Thanks for the question Margaret.
I think overall, we continue to be.
Really encouraged with the momentum in the business on both the NDA.
For that matter.
Continuing to step up above where it was at in Q1, I'll, let Brian get into some of the specifics around exactly how the two figures grew within the quarter itself, but in terms of the full year I think more than anything else. We're just we're not going to get ahead of ourselves at this point in time on the on the high end of the guide.
Certainly we're heading Q2, we're very bullish with respect to the momentum that we're seeing but going into the back half of the year, we want to be thoughtful about it so theres nothing to read into there, but I'll, let Brian speak to the results of the quarter.
Yeah Margaret.
Good question and we've talked about this in the past.
From a registration perspective, we're seeing pretty significant growth across both lines of business.
When you think about the <unk> component isn't that high <unk> range.
<unk> talked about in the past and you can think about that where that needs from an equity perspective, its north of the 20% range. So we feel great about the progress being made and where we're at operationally to Quinn's point, we just need to be thoughtful as we navigate the back half of the year and make sure we're not getting ahead of ourselves.
Okay. That's helpful and then.
The second thing I wanted to touch on a little bit is the warning letter and your comments on the label changes that the FDA is requiring to kind of leave the product Thompson market. So that one did I understand that correctly, you all be able to lease 80 on the market and then two what's the <unk>.
Impact of that label change that they are asking for it does that limit your ability to sell at all or add new accounts or anything of that sort.
Yes, Margaret that is the right way to think about it we worked through with the FDA sort of our suggested labeling changes they've had suggested labeling changes as well, which we're in fuller.
We're in the process of working those into the label as we speak and most of that is just wrong clarifying more clearly for the patient and the physician.
Matters around trigger limits duration of the life of the product.
Those sort of things, but nothing that's going to impede our ability to sell the product or market the product and to your point, yes, we've reached alignment there.
We can continue to monitor the market as an MCT monitor into the future.
Alright, thanks, guys.
Thank you.
The next question today comes from the line of Allen Gong from J P. Morgan. Please go ahead Allen your line is now.
Hi, This is actually Lili on for Alan Thanks, So much for taking the question.
Maybe just following up on that could you talk a bit about the trends you've been seeing in C. O. A T. In light of the warning letter and have you seen that result in any sort of softness in demand since that was announced.
Yes, I think for the most part over the course of the quarter keep in mind that the warning letter came in the latter part of it but we were very proactive to get out with our customers.
To address the fact that there was a warning letter to speak to exactly where the focus was that <unk> and.
And make sure that we're proactively engaged with our customers and I'll tell you. We've been really encouraged by the results that we've seen in that business even post the warning letter. So the momentum continues to be strong I think we're as excited as ever about that product line, Brian point earlier, we're going to be thoughtful about it in the back half of the year.
We do get a bit easier with AC in the back half considering we had the challenges with it in the fourth quarter of last year. So the setup is nice, but we're just not going to get ahead of ourselves at this point with respect to the high end of our guidance, but with AC incredibly bullish on it we think there's a tremendous amount of market share to be gained and that MCT space, we think the AC.
<unk> is differentiated certainly we're excited to get the next generation of our MCT device out there, but theres a lot of runway in that space and the momentum continues to be very strong and our business there.
Great that's helpful.
Then maybe just on the Doj inquiry is there anything new that you'd be willing to share in terms of what theyre actually looking into any timelines, we should be keeping in mind and how youre thinking about this impacting the business. Thanks so much.
Yeah with respect to the Doj not a whole lot to update on at this point in time I mean, we are producing documentation for them.
Hard to get any real clarity on exactly what the area of focus is I would point back to we.
We believe we are not the only one in the industry that received the document request subpoena knowing that one of our competitors in the ICT space also received that so.
We are complying with them, we continue to cooperate with them the interactions have been very cordial, we're going to continue to.
<unk> worked directly with them, but in terms of giving you a timeline around what to expect it's hard to say.
I really don't know what to share with you there.
As we have updates will be committed to updating the investor community as we have those but at this point in time, there's just not any new information to share.
Got it thank you.
Thank you.
The next question today comes from the line of <unk> <unk> from Morgan Stanley . Please go ahead. Your line is now open.
Thanks, guys just one on international for me if possible. So obviously good development here in Japan can you maybe talk a bit more about this and how we should think about modeling the ramp.
Once approved I guess relative to what we saw in the U S relative to the launch there. Thanks.
Yes.
We're excited by what we're seeing in Japan, I think capture.
Capturing a high medical need designation as a meaningful milestone for us and I think most importantly, the fact that it's specific to zero and not long term monitoring in general is even even more encouraging to us because it creates some real differentiation for us.
In a market that frankly hasn't valued past based technologies, just yet and then.
Within that group is.
We're on file now.
With respect to the shown an application I think that probably run nine to 12 months is our best estimate and then we will immediately go into discussions around reimbursement, which is probably another six months.
Certainly having the high medical need designation I think puts us in a position to do it.
Push for premium pricing in that segment I think it will be very attractive pricing for us in that market, which again is the second largest market in the world more than one.
$5 million ACM thespian prescribed each and every year well when you think about timing of contribution I think you'd probably see a product coming into the market late in 2004, as we turn into 2025. So we'll speak more around what to think about the way a contribution as we get more clarity on when it will be available to come into the market, but probably not a revenue drag.
For us and in Europe , 24, but a product that begins to come into the market early 'twenty five.
Got it and then maybe just one follow up please.
So just on penetration of <unk> in the U S ACM market and quite a few numbers out there at the moment maybe would be helpful. If you could break down and quantify where you think penetration sits right now I guess relative to the traditional ultra devices and then any impact you've seen from the emergence of competing products.
Change the rate of penetration.
Yes, I think that penetration rate sit somewhere right around 30%.
Overall market utilizing patch based technology. So I think there is a meaningful runway that continues to sit in front of this entire industry.
I think we have the fair share of that 30% I think we have the best in class product Thats out there certainly camelot the data that we released earlier in the year with validate that.
Back to the point that you've got a long runway here as.
Patch based technology has become the standard of care in this industry and I think that's going to fuel significant growth not only for ourselves, but for our competitors as well I think the rising tide lift all boats in this scenario that's going to be the case for several years I think where it gets really exciting is the progress that we see around the primary care physicians utilizing this device meaningful.
The degree and the interest level that continues to grow there. The bigger question is that the overall market grow significantly with this technology, considering how easy it is to use and I think that becomes a real opportunity where you could more than double the overall size of this market over the next several years. So you've got two things working in your favor you got early adoption of the technology.
Standard of care and then you've got the opportunity to really meaningfully increase double if not triple the overall size of the market.
Got it thanks, a lot guys.
Thank you. Thank you.
The next question today comes from the line of <unk> from BTG. Please go ahead Mary.
Your line is now open.
Alright, thanks, so much for taking the questions and congrats on a great quarter.
I wanted to ask you a clarification on the FDA warning letter process I think I heard you say that in your discussions with the FDA. You've also proposed enhanced design features and are still determining the potential need to modify a 10-K any clarity on the sorts of timelines you are thinking about with the agency anything that they've communicated on that.
Front and just wanted to understand those proposed enhanced design features certainly understand MCT is that as a separate thing, but just wanted to learn a little bit more about that.
Yeah, Hey, Barry Thanks for the question.
With respect to the letter to file or would they like to see it catch up by the 10-K that is something thats still in the review with the SEDAR SEDAR age and therefore, the FDA and.
And I'll tell you the collaboration there has been terrific a lot of great dialogue and.
And back and forth there and they certainly are looking at our letters to file an IND and getting comfortable with whether that was an approach there okay with or if they would like to see us move to catch up 500 10-K in terms of the timeframe around that I can't give you any specific timing around it other than it's the active part of their review right now.
We're in the midst of it so it could be quick.
It did take a bit longer the way, we've thought about <unk> and those timeframes frankly is that its going to take a bit of time to work through this with them and that there may be a catch up five 10-K, that's required of which we're highly confident that we would be able to continue to market the product and leave that.
In the marketplace, while we worked through a catch up five 10-K, but but we would need to get that through the FDA and then we could submit NCT. So when we talk about the lay in the MCC product a lot of that is sort of contemplating navigating through this with the product and the FDA. So that's what's impacting those timeframes a bit with respect to the design features.
They're relatively straightforward.
Identify the capability to put on the patch itself a way to notify the patient when they might be approaching that in that figure limit. So think about that as a like that to get the flash on the device itself, it's working interest ACO suite.
A trigger limit counter so that as youre approaching it you start to see that so these are relatively easy to design enhancements that we've identified and are working with the FDA.
That changes the features and functions of the product in any way or how we would sell it.
It is more informative to the patient and the physician so.
We think about it and of course as I said.
When the FDA sort of clarify if they are okay with our lunar to file approach or if they'd like to see us pilot catch up by the 10-K, we can provide more information at that point in time, but we feel good about the interactions of the day, the tone and the interactions and exactly how we can continue to navigate forward with this and the product that staying in the market throughout that process.
Okay, that's well understood. Thanks for all that detail Clinton.
My follow up here is on Xeon monitor good to hear all of that really positive feedback coming out of that product. How are you thinking about the phase one should we be in a broad launch by the end of the year end and how should we be thinking about changes in return rates or any uptick in prescribing any any ways to think about that new or enhanced product. Thank you.
Yes, we're super excited about these monetary being in the marketplace and that launch will start here in the back half of Q3, and we're really excited to get it into our patients in our customers' hands and it will continue throughout the remainder of the year. As you know these things take a bit of time at <unk> as youre pushing them out into multiple channels and multiple.
Current customers, but we're really excited.
As far as contemplation of any improvement in the churn device right, we haven't necessarily thought about it thus far it's going to take some time for for it to be out there and start to be utilized and frankly don't come all the way back through.
So nothing contemplated from a guidance perspective, so any benefit that we would get and we do believe there is a benefit over time is not contemplated in the guidance as it stands now we also have not contemplated any incremental volume associated with the deal monitor launch.
Penetration levels ramping volumes those sorts of things had been performing incredibly well with XP and we think theres an opportunity for that to be enhanced with monitor absolutely there and but that has not been contemplated in the guidance came down.
Okay very good good luck with it thank you.
Thank you. Thank you.
Thank you.
Next question today comes from the line of Richard <unk> from <unk> Securities. Please go ahead, Richard Your line is now open.
Hi, This is Sam on for rich. Thanks for taking my questions. Just first wanted to put a finer point on <unk> is it contemplated in the guide is it reasonable to expect and does guidance expect an acceleration in year over year growth for <unk> in the second half given that those comps get easier.
Yes, so the comps definitely get easier the way we're thinking about it.
We're keeping it in line with what our original expectations were.
And 100%.
It is on some easier comps so we could see accelerated growth there.
But we want to see it play through the numbers before we.
We get out ahead of ourselves. So that's the way we thought about it really no adjustment to what we had originally assumed from from the original guidance.
Got it that's helpful and then second one just on costs.
Impressive impressive margin result here in the quarter and as we think about some of those costs coming out.
How sustainable can they be and as we think about 'twenty four with that.
Some of these hopefully one time costs coming out with the Doj and warning letter how should we think about leverage in the business.
Into next year.
Yes.
Gross margin in the quarter were really happy with the results 69, 5% coming off a quarter of 67 nine in Q1, So nice improvement from a sequential quarter standpoint honestly to your point. There is some duplicative costs that were in Q or Q1, and some of those came out in Q2, but there are still others that are there and a lot of that is.
Creating efficiency in these areas of focus that we've had and not be leveraging some third party resources for our customer care and our clinical op side.
As well as standing up the global business Center in Manila. So there is some duplicate duplicative costs still in the system, but we didn't see it start to tail down.
For me as I think about gross margin.
We talked about the zero monitor launch being a a bit of a headwind.
The short run because we actually evaluate the inventory levels and then it'll take a while to get to scale. So youre thinking about the model I think gross margin probably pulled back a little bit in Q3, but spend I think extended a 100 million or so it's going to be relatively consistent now there will always be some volatility and that's why we put out the range of $4 17 to four.
27, you'll work that into your model, but I do think over time. This is absolutely sustainable it's just going to take.
Few quarters for us to fully have those.
Operations up and running and until we really see it play through we'll talk more about 'twenty four as we as we move throughout the year, but we feel great about the trajectory.
Thanks for taking the question.
Thank you.
Our next question today comes from the line of Nathan <unk> from Wells Fargo. Please go ahead Nathan Your line is now open.
Hi, Thanks for taking the question.
Just to clarify on the warning letter is there any change to your marketing claims at the moment for <unk> T as an MCT device.
Yes.
No.
No. There is further clarification in the label itself as I indicated earlier.
Just to help enhance the understanding for the patient, but there is there is no difference in how we're marketing the device.
We will continue to market it as an MCT device.
Okay, great. Thanks.
In terms of so what can you comment on the Nextgen <unk>.
You will kind of bring it to the market.
The convention delay will this be a 30 day device anything you can give on the next gen device.
Yes, so great question.
First generation of the MCT device, but certainly looking to extend the wear period out but beyond the 14 days thats in our <unk> product today.
Getting north of 20.
By going to the two Dot O version it does start to introduce capabilities like utilizing our smart device.
Versus our our gateway that we use today when you introduced that it now starts to open up opportunities to go even beyond 'twenty, one days get out closer to that 30 days, if not 30 days.
Yes, it opened up that feature set opens up things like.
Making information more available through the smart device on a more timely manner to inform a patient to inform a position. There's a lot of things we can do it through a smart device now there are some other things that we'll bring into the product itself that we're not going to disclose at this point in time more for competitive reasons, but I think there are some real differentiators that we.
Had planned originally and a second generation of MCT to be delivered after the launch of the first generation will now pulled that forward. So as we get closer to submitting that and ultimately getting that through clearance. We will start to talk about some of those enhanced features but we're excited about <unk> I think it's a tremendous opportunity for us in the future.
Great. Thanks.
Thank you.
The next question today comes from the line of David <unk> from Baird. Please go ahead David.
It is now open.
Okay.
Hey, guys. Thanks for taking the question congrats on the.
The strong quarter here, just first on the zero MTGE.
Extend the timeline here I guess two part question one I wanted to clarify is that what youre talking about with the zero kind of MTT to point out is essentially more of just an enhancement that's coming in 2025 and there is not a new device coming between the price you have now in view of MCT and then the second part to that question I'm just wondering if the extended.
Timelines here.
Impact the kind of five year, 20% growth outlook that you have for the way in which you've kind of described that you get there I think you've previously talked more about linear growth and just wondering if the timeline here impacts out at all.
David.
Thanks for the question I don't see it impacting our path to where we're trying to get over the five years to a $1 billion in revenue I don't see it impacting that at all I think we continue to be encouraged by the momentum in the ATM business, that's growing very nicely for us I do think there are some things we could even do on that product before we get to the <unk>.
Next generation of the NCC device that we will bring to market that can continue to enhance it. So I don't see any change to the long term trajectory of where we're taking the business and getting to the $1 billion in revenue in the Timeframes that we've talked about there will not be another device that will get introduced between say <unk> and ultimately getting to that MCT, what im not calling.
<unk>, but it will really be our initial version of our <unk> product into the market is just we're bringing features that were originally in the second generation forward into that into that first generation.
It's important to note we were within a matter of weeks or month, or so of being able to submit our <unk> product with the FDA for approval.
First generation device.
The reality is as we navigate through the warning letter with the FDA and we want to make sure. We address all of their concerns appropriately our focus is on IP with them as well.
We're not we're not going to focus on anything other than.
But the agency until we get them comfortable and we feel like there is a clear path there, but we want to navigate through that before we introduced MCT.
As a filing so we're really happy with the progress on MCT. We're excited by it a lot of that first generation is designed now we move on to designing in some of those second generation features while we continue to work with the agency on <unk>.
At the end of the day it speeds up our ability to get an even better product into the market.
Okay. It makes it makes sense I guess just on the warning letter then.
I think you said you talked about kind of the clarification around the label changes I'm just wondering based on what you submitted if the FDA essentially has accepted these clarifications and maybe the risk that we've all kind of thought about.
For the device to maybe come off the market has been removed or if that kind of risk is more or less off the table. At this point just based on where you are in the discussions with the FDA on the warning letter. Thank you.
Yes, and I think look out of respect to the agency we realize that the review is still open and anytime the review is still open.
Agency could go any direction.
And to your digital question have we aligned with the agency, we absolutely have with respect to the labeling requirements that that both one we have suggested some update that they suggested some updates we are absolutely aligned with them on both those labeling changes need to look like when we're putting those into.
The label as we speak and there is alignment there that with those labeling updates we can continue to market the product doesn't MCT device. So there is alignment there with the agency.
Part of the review that we're not through yet is there digging into the letter to file now they're looking into that and ultimately they're going to have to get comfortable that there is a letter to file approach that we took as one that they are comfortable with we continue to believe that it was the right approach we've had external experts and consultants look at this as well that.
Aligned with our point of view around letter to file, but we respect the fact that that the agency could have a different point of view and if thats. The case then.
Likely would run down.
But a catch up I think K to where you would put those letter to file changes into.
<unk> K to get it on file in that scenario, we continue to believe that the product would stay in the market and that we would continue to market the product and there would not be any disruption with it and my view is we've had multiple months of interactions with the agency. If they were interested in halting the product or delaying.
Getting other products seizing shipment of the product they would have made that clear in the warning letter or they would have begun to make that clear in the interactions that we've had with them to date and there's nothing in those interactions that give us any indication that that is.
Where they would go at this as a matter of fact, the fact that we're raising the midpoint of our our guidance I think shouldnt further confidence that we have and in the interactions to date and sort of that.
The fact that we're pleased with where this has gone thus far so we continue to be excited about the future continue to believe we can navigate through this.
And a very successful way and that the product will remain in the market.
Great. Thank you.
Thank you.
Our next question today comes from the line of David Saxon from Needham. Please go ahead, David Your line is now open.
Yes, good afternoon, guys and thanks for taking my questions I wanted to start with reimbursement maybe a two parter here maybe.
Maybe first just give an update on where you are with transferring volume to your <unk> ETF and then secondly, maybe can you just remind us what you've seen historically in terms of.
Changes that commercial payers.
Obviously see what CMS is proposing but I think it'd be helpful. If you could frame what commercial rates have done.
As contracts are now.
Sure.
So as far as the progression to the San Francisco at ETF I would say, we're operating in line with our expectations. We still believe that roughly 50% of our total volume in 2023 will run through that in San Francisco I'd Etfs. So I think we're progressing well and again, we'll continue to bring the investor community up to speed should anything change from there, but where we are.
Operating in line with what our plan was.
As far as the reimbursement side, you probably saw.
The announcement on the CMS side for calendar year, 2024, and there were some small reduction contemplated in the.
In the proposed rule and with some small changes to the physician conversion factor the clinical labor labor reductions for relative value units across all CPT codes in our mind, that's probably another four.
4% to 5% reduction in the reimbursement for CMS with those two impacts.
As importantly, I think you probably saw the San Francisco geographic modifier being increased by about 2%. So as we think about at that 2% to 3% net net on 25% of our business immaterial from our perspective. So it is a proposed rule will certainly continue to work with CMS and <unk>.
As much information so we can as to why we should.
Continue to look at these and maybe a reduction that is necessarily necessary, but that's a relatively small reduction towards the commercial pricing goes we've said low single digits from the from the beginning on that guided to it and we're landing right in that sweet spot right in that range. There are a few commercial payers that do follow CMS price.
Those would be incorporated based on this 2024 proposed rule again, it still falls into that low single digit range. So no deviation from what our expectations would have been originally.
Okay. That's super helpful. Thanks for that and then I.
I guess as a follow up I haven't heard anything on the watch and maybe just give an update data on how youre thinking about pilot timing.
And kind of monetizing that product thanks for taking my questions.
Yeah, great so with respect to the watch.
Again development teams continue to make progress in and around that our focus has.
Here in the near term turned entirely to the product and just navigating through the questions that were posed there I would expect we'll be in pilots.
More of the turn of the new year and into the very beginning of next year, but progress is being made there.
I'm excited by what the watch can bring overtime.
Great. Thank you.
Thank you.
The next question today comes from the line of Bill <unk> from Canaccord. Please go ahead Bill Your line is now open.
Hey, Ryan it's John on for Bell Tonight, Thanks for taking our questions and congrats on the quarter. Maybe you can go to the PCP side. I know you commented that continues to be strong and you're seeing lots of success, there, but could you provide any.
Metrics around that maybe talk about the number of new accounts. We opened in Q2, how many of those were from TCP and the company.
The commercial field force, maybe dividing its time between the two opportunity.
Yeah, I don't think we've given a specific color around exactly what percent of the new accounts are coming from <unk> and that may be something that we'll look to disclose further into the future I can tell you. We're having a lot of good success in that segment of the market.
We've spoken about some of the new National account that we've brought onboard many of those are primary care focused national accounts. If you will and so really excited about the success that we're having there and maybe more importantly that the interest that continues to build around that model I think there's no question in my mind that the <unk>.
Primary care is where the majority of the application of this patch is going to happen in the future. It's just it's so easy to use and the benefits are so significant.
Yes.
It's beyond even sort of diagnostic capability with the patient, but workflow benefits that that these networks. These ideas are beginning to see.
It kind of hits on your question of how are the reps devoting their time well.
A lot of the success, we're having in the primary care channel frankly comes from the accounts that we already have a relationship with where we were dealing with a cardiologist or the EP the specialist.
The value of having this device placed much earlier in the care pathway by the primary care physician, which then helps them identify who do they really need to spend time with two that are going to schedule, an office visit with a patient or not and they will make that determination based upon what they are seeing in the report coming up with the deal that you.
Do you see as part of these existing accounts now having the primary care specialists within there there are network prescribed the device and then they'll look at the reported zeos, we'd make a determination.
In terms of refocusing our sales Rep time, our call point not a whole lot of that at this point in time. They are focused on the specialist these networks, where we can go deeper into the channel and then we've got a large national sort of national accounts team Thats really focusing more at that national level to go broad across these big strategic play.
<unk> like the one medical that we've announced in the past.
That allow us to come from a top down approach.
A lot of great progress I'm incredibly excited about where this is going to go into future.
I appreciate all that color and then maybe just as my follow up.
Any update on the algorithm program I know you spent a lot of the Investor day talking about this the at risk model and the <unk> opportunity, especially with the catalog you have now just any updates around app program that would be great. Thanks.
Yes continue to have a lot of discussion in and around it I would expect we'll be in form of pilots here in the third quarter.
With some of these parties, but I think we're also seeing that the know your rhythm as we define the historically around that asymptomatic population quite honestly starting to branch beyond that it's more about an undiagnosed population. We're seeing this in the interest of payers, where they are starting to see connection say in disease state that go beyond this.
Arrhythmia.
How does an arrhythmia connect to say a diabetic population or a COPD population are hypertensive population or sleep disease. They see these connections and the idea is where we see those connections in medical records can we identify populations that have been undiagnosed arrhythmias that can <unk>.
Kris the opportunities to find those things and then better treat those patients and therefore reduce cost downstream.
Getting a lot of discussion and a lot of traction at this point in time in terms of identifying ways to validate that put pilots in place and ultimately open up those markets. So I would tell you. We're very excited about know your rhythm. Although I think it is broadening a bit in terms of how it fine today are how we see it growing versus maybe how we defined it earlier.
Just the asymptomatic population so it is growing a bit.
Great. Thanks, so much.
Thank you.
The next question today comes from the line of Suraj Kalia from Oppenheimer. Please go ahead, Sir your line is now.
Good afternoon, Quintin price can you hear me all right.
Yes, we can hear you suraj.
Perfect, Hey, Quintin congrats on the quarter.
Quintin many calls going on so please forgive me.
As redundant I must have missed it.
Perfect and going back on.
Quentin I just wanted to make sure.
I heard your comments about labeling changes.
But if you recall the warning letter was also talking about mis branding. So I just wanted to make sure.
There is a clear understanding you all can build Medicare as I'm caught.
The event a trick.
Trigger thresholds.
Throttles that is.
Status code. There is no change there is not going to be no surprises on the a few months down the line.
On that aspect.
Yeah.
Thats correct Suraj, so as we work through this with the agency around the labeling updates that again some that they've suggested some that we've recommended a naval line two and we've certainly aligned to their recommendations and.
And we're in the process of making those updated labeling changes, which again are really informing the patient more clearly in the physician more clearly around the device and the features of it.
Not changing any of the features of the product at all.
We can continue to market that devices and MCT device and now keep in mind. The FDA does not make determination around what you can bill or how you bill right that the AMA billing, Brian Great question, but I will tell you we feel very comfortable that we meet the requirements of <unk> definition of MCT as well and also the very.
<unk> requirements in the billing code for MCT, so in our mind nothing nothing changes there.
At <unk>, we continue to see.
As an MCT product.
And we will continue to market that way.
Fair enough.
Quintin in terms of pressure points in the field for your Nextgen two point all MCT.
30 day $24 seven I go with the assumption.
This is going to be like real time $24 seven.
Obviously, the business model by your competitors versus IV rhythm is completely and fundamentally different.
Should we think about any aspects of shared economics.
MCT.
That's envisioned rolling out in the future more specifically just given the.
The center is really don't make any money on MCT with.
Zero approach.
Yes, I don't know why the approach was deal is any different than any competitive approach.
<unk> is an MCT product.
It works very similar to any of the competitive products, yes, we have the the trigger limit which is in our product by designed to.
To address battery life issues, and frankly, as a patient or a physician would approach the trigger limit we would send a second device to replace it it's no different than a competitive product that has a battery limit issue when theyre battery dies. They are no longer recording they have to take that often recharge it or put a new patch on so it's no different than the.
<unk> devices that are in the market today.
We position ours is 14 days, we believe that the data that you can get off that 14 days is very valuable and as good as anything youre getting off of the traditional MCT device, but there are opportunities for us to extend the wear period into the future, but in terms of competitive positioning.
We're going to position the new MCT product I don't see a whole lot different than that.
This has got some enhanced design features to it that continue to the differentiated within the marketplace and we're excited about that.
Forgive me Quintin I should rephrase, what I meant was the.
Professional <unk> technical fee collections.
Bye.
Cost side is you guys collect.
The $800 or so in Medicare.
The other side, it's not collect it is collected by the cardiologists right and Thats. The economics that was talking about if there could be some aspect of shared economics eventually to point to was rolled out.
Yes, I think look as we get closer to rolling out to that though we can talk about how we're going to position in the market or <unk>.
Pricing were to change in some fashion then I suppose we could talk about that I don't envision that at this point in time.
That's getting into something that we probably will discuss more of that closer to that launch date. If we were to think differently on how we would position it in the marketplace.
Fair enough gentlemen, thank you for taking my question and congrats again.
Hey, Thanks Raj.
Thank you. The next question today comes from the line of.
Michael Polack from Wolfe Research. Please go ahead, Michael Your line is now open.
Hey, good afternoon, and thank you for taking the question I wanted to pick up the know your rhythm thread in.
Broadened that and ask for a reminder, on something as impactful as like USPS TF kind of a full.
Unlock of screening.
Is there a path there that you can articulate today of the kind of 234 year horizon or.
Or is that kind of a dream at this point I know, there's obviously been tons of evidence generated over a long period of time, but one of the major trials that was positioned to answer the question USPS TF was.
Sure.
Wanting to be asked or answered guard AF kind of fell short on enrollment and some might be underpowered and so just where does this all stand today and then what are the next steps with our with our.
With an organization like that.
Yeah look we certainly will continue to work with the USPS.
Around getting them to identify the need for proactive screening I think thats, an important part of the <unk>.
The future opportunity here and certainly open stores more readily although I don't think you necessarily have to have that to open the doors with commercial payers.
And look the USPS, yes, typically works on cycles right. It's not every year that they are reviewing these sort of things.
To that point.
We expect there's going to be data out later this year economic data around the <unk> study I think youre going to see some incremental information coming out around guard AF, we've already seen some of the economic data that's been presented around <unk> in particular in terms of the quality.
Adjusted life year, and sort of the economic value of that which came back very very attractive $17000 per quality adjusted life year, We know that when you start to get less than 50000, it becomes very very attractive to payers and frankly, it's capturing a lot of attention as we sit in front of payers with it so folks are paying attention here.
This is not something that we've put on the backburner and not focused on but to move the USPS TF. It. It takes time and they work on cycles. So we will continue to work with them, but we're going to continue to to pull data together that makes the case for the value of this device delivers.
Okay.
My other ones on international I know, it's early days and small numbers.
And all of that but like so something like Japan.
Is that a country, where you build.
Local I'd ETF or you leverage what youre doing in Manila, or a little of both and maybe in Europe . As an example, as well as you start to open up more European markets are you building.
Local.
I'd Etfs support or using vanilla or a little bit of both I'm just curious how this kind of evolves and.
Cross border.
Or inter country service support what the vision is and one more piece of this or any of these countries.
Places, where you might want to go in as kind of a product.
Product first company as opposed to a product enabled service company. Thank you so much.
It's a good question, Mike actually it's a great question because I think those are the various things that we navigate through.
On a daily basis, as we think about the international opportunity and the reality is every country is a bit unique and different.
And early on those countries that we believe can leverage say the UK stack that we put in place and already built.
Just sort of higher up on our on our areas of focus from the aspect of being able to move with speed.
Over time, we'll continue to build out capabilities that meet local requirements, particularly around privacy thats very important to us and very important to our patients, but we want to make sure. We can meet those needs before we would go into any one of those markets. So.
All of that comes into consideration as we think about which markets. We go into first I mentioned.
We'll get started here in Switzerland here in the very near term.
Spain, Netherlands are next on that list in terms of ease to get it to the market and really start to evaluate the product there Japan were on fire from a regulatory perspective.
We will build out capabilities there local lead to a degree but we will also leverage those across the company that we can in a way that is compliant with Japanese requirement. So those are still things that we're working through with the local.
Administrators in that country. So all of that will define more clearly as we get closer to commercial launch, but I think we've got a clear path here in your question the right one, but every country, just a little bit unique and different than a different pathway for each one.
Required some of those will leverage infrastructure, although we might have to build a bit ourselves in terms of the country, where we go product first versus services. Those are certainly things, we're looking at as well so not going to get ahead of ourselves there, but there are opportunities.
Thank you.
Thank you.
There are no additional questions waiting at this time, so I'd like to pass the conference back over to the management team for any closing remarks.
Terrific well again, thank you for your time today, we're incredibly pleased with the progress to date and the business and the strong operational performance that our teams have put together we've never been more excited or believe stronger in the future that sits ahead of US we will see many of you on the road over the course of the next quarter and I look forward to sharing our next quarterly update in just a few short months with that take care.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
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