iRhythm Holdings, Inc.

Welcome to the iRhythm Technologies, Inc. Q1 2021 earnings conference call. My name is Erin, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I'll now turn the call over to Lisa, although you may begin.

Thank you all for participating in today's call. Joining me are Mike Coyle, CEO, Doug Devine, CFO, and Dan Wilson, EBP Strategy, Corporate Development, and Investor Relations. Earlier today, iRhythm released financial results for the first quarter ended March 31, 2021. 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 fact should be deemed to be forward-looking statements. All 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, productivity improvements, reimbursement, release of clinical data, Operating Trends, and our future financial expectations, 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 materially 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 as EBITDA excluding stock-based compensation expense. Adjusted EBITDA is a non-GAAP measure that is used to help investors understand iRhythm's ongoing business performance. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor 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 broadcast today, May 6, 2021. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I'll turn the call over to Mike.

Thanks, Lee. Good afternoon, and thank you all for joining us. During my prepared remarks today, I will provide an update on the actions underway with regard to ZOXT pricing and our support of Medicare patients. We will also review key highlights of our first quarter performance and discuss our strategic initiatives to continue to drive towards durable, profitable growth for the business. There's a lot to cover, so I want to start with five key points. First, ZOXT's innovation delivers superior clinical benefits in the way cardiac arrhythmias are diagnosed and managed, and there is strong market demand for the service. The clinical and economic benefits of ZOXT are underscored by the over 40 peer-reviewed studies supporting its superior diagnostic yield and customer preference of the ZOXT 14-day monitoring system is demonstrated by the consistently strong demand and positive feedback we have received both from physicians and patients. This strong demand continued throughout the first quarter with record volumes and has stayed strong as we enter the second quarter. I would first and foremost like to thank the iRhythm team for their dedication to serving our patients and their excellent execution in delivering this strong growth. Second, we are actively pursuing multiple paths to achieve pricing that is more in line with the benefits our technology provides. Since Novitas published updated rates on April 10th this year, we have had discussions with them to better understand their analysis and to propose an alternative costing method. The model we have shared with them has been successfully applied in other areas of the CMS position fee schedule and we believe is a more appropriate methodology for establishing rates for the long-term continuous ECG Category 1 codes. Novitas has been open to discussing this approach. However, we cannot provide certainty at this time on the potential outcome of those discussions or on the timing of any action taken following those discussions. In parallel, we are pursuing national pricing with CMS for the 2022 calendar year physician fee schedule and are having conversations with other MACs. Since the Novitas decision, our physicians and their patients have been outspoken in sharing the benefits they have experienced with Zio and their strong desire to have the service available to all of their patients who can benefit from it. It is core to our purpose as a company to provide access to innovative technology that benefits lives and lowers the cost of health care. Given the multiple avenues we see for obtaining revised pricing in Medicare, which I will discuss in a moment, we've decided to continue to ensure Zio XT is broadly available to all patients, and we will make no changes in access to the service for Medicare patients until the paths we are pursuing for more appropriate Medicare pricing have been fully explored. Fourth, we are committed to making the necessary adjustments to our business model to deliver operating efficiencies that support both profitability and growth. This is not an exercise in pure cost savings. We plan to drive more discipline in the business so that we can have a solid operating foundation as we scale up to meet our market opportunities. This discipline will better position us to profitably operate at lower price points over the long term and we can and will accelerate our plans to help us efficiently and cost effectively deliver the ZO service regardless of where Medicare reimbursement rates ultimately land. We have initiated several related projects in manufacturing, clinical operations, customer service, and revenue cycle management areas of our business. This work is progressing well and Doug will share more detail on the specific areas of focus later in the presentation. Lastly, iRhythm continues to have substantial opportunities to drive sustainable growth and value creation, including international expansion and expanding indications for use. In addition to the UK, we have identified several other OUS markets that we believe are ripe for expansion due to clear clinician enthusiasm for the service and identified pathways to obtain regulatory approval and reimbursement. As previously discussed, we also see opportunities to extend our reach into additional indications for use, positive clinical data continues to highlight the opportunity in asymptomatic AF patient populations, and we have initiated efforts to open up this market. Long term, we believe there are many other possibilities to leverage our technology platform. Importantly, we have the financial strength and flexibility we need to invest in these growth avenues and also support our business as we work toward more reasonable Medicare pricing for ZOXT. With these major themes in mind, I will now start with an update of our efforts to establish more appropriate Medicare pricing for ZOXT. As you know, on April 10th, Novitas posted updated rates for CPT codes 93243 and 93247. These rates are substantially below our historical rates and do not appropriately reflect the clinical and economic value that long-term continuous ECG monitoring offers patients and their care teams. Since our April 12th call with you, we have had the opportunity to talk directly with Novitas to learn more about how they derived these rates. Through our conversations, we have learned that Novitas used a valuation methodology based on assumed cost inputs. Unlike our experience with NICE in the UK or with our commercial payers, the overall impact on healthcare costs was not directly considered in this analysis. It is also important to recognize that the codes posted by Novitas cover monitoring periods from three days up to 15 days. We believe the assumed cost inputs that generated the rates posted by Novotas more accurately reflect costs for less sophisticated devices and services that are most commonly used for shorter-term monitoring. Unlike those devices and services, the ZOXT technology combines longer-term monitoring with sophisticated, proprietary, deep-learned, advanced AI algorithms that enable sensitive and specific processing of the more than 20,000 minutes of ECG signals that go into a single patient's 14-day record. The value of ZOXT is not just in the device, but in this analysis. Indeed, it is the output of the AI technology and the sophistication of the data curation process carried out by our highly trained certified cardiographic technologists that has been demonstrated to enable higher diagnostic yields, better clinical outcomes, and lower healthcare costs compared to less sophisticated and shorter monitoring services. And it is our unique implementation of this model that explains why ZOXT represented the vast majority of long-term continuous ECG monitoring claims filed under the previously existing temporary CPT codes. In our discussions with Novotan since April 12th, we have outlined an alternative valuation methodology that we have seen applied successfully in other parts of the physician fee schedule, such as clinical diagnostics, that we believe are a more appropriate method for establishing the true cost to provide the ZOXT service. We are working to adapt these cost models to long-term continuous ECG monitoring codes, which we believe will better demonstrate the true cost of delivering the service. Historical investments made in hardware and software that enable us to deliver the service efficiently and at scale can also be considered in this model. Novitas has given us preliminary indications that this model has been a methodology that has worked well in other areas, and they believe it could be appropriate for use in this case as well. While we are encouraged I want to caveat that no commitment has been made by Novitas to accept this alternative costing approach, and we have no clear indication as to the timing for completion of that work may be. In parallel with the Novitas discussions, we are also holding discussions with other MACs, both in geographies where we have existing independent diagnostic testing facilities as well as potentially new geographies. In these discussions, we will continue to reinforce the clinical and economic value of long-term ECG monitoring. and it is our intent to share the same cost model that is being developed for our Novitas discussions as the basis for establishing appropriate rates with these MACs. We expect the process with other MACs to take some time and do not yet have visibility as to whether we will ultimately be successful in establishing higher rates. As a third pathway, we continue to pursue national pricing with CMS. National pricing is our ultimate aim given we are now operating under Category 1 CPT codes. We will aggressively continue to pursue national pricing for calendar year 2022 physician fee schedule through the final rule in the November-December timeframe. As mentioned by April 12th, we had the opportunity to meet with CMS in mid-March and present an alternative pricing methodology for valuing the long-term ECG monitoring codes. This alternative methodology utilized cost inputs from other advanced analytics and analysis platforms already existing in the CMS database. as an alternative to the imputed methodology that had been used in the original AMA RUC analysis. We expect to have an initial indication of whether CMS will establish national pricing for calendar year 2022 when the physician fee schedule proposed rule is released in July or August. In longer term, we're seeking opportunities to engage with CMS to establish what we consider to be more appropriate pricing methodologies for digital health business models. Digital health and AI-based technologies and solutions are novel and underappreciated in our healthcare system, and new solutions may be necessary to get the value of the technology underlying our products recognized by CMS. We have been in discussions with several other industry participants with AI-based business models that are seeing the same inherent difficulties in achieving appropriate Medicare reimbursement. We will look to partner and join efforts with them and will embrace our role as a leader in the digital health space. All of these efforts are being supported by a comprehensive advocacy campaign, which is amplifying the voice of our physician customers, patients, physician societies, industry associations, and elected officials to influence decisions at Novitas and at CMS. This campaign is meant to ensure that the clinical value of long-term continuous monitoring is understood and recognized. More than 140 letters have been sent to Novitas that highlight the value of the ZOXT in providing the highest quality and life-saving cardiac care and how reducing reimbursement can negatively impact our physician customers and the patients that they serve. These letters have reinforced the strong recommendation of support provided by the American College of Cardiology and the Heart Rhythm Society during the Novitas rate review process. We'd like to offer our sincere thanks for the additional validation and support from our partners, customers, and other constituents. We will continue to work hard to reach a positive outcome on behalf of our patients and the industry. Now, turning to commercial payer business. While we continue to pursue more appropriate Medicare reimbursement, we are also talking directly with commercial payers to reiterate the clinical and economic value of ZOXP. We expect that some of our commercial payers will reference Medicare pricing in their negotiations. We believe they will also consider the total clinical and economic value that the service provides. As previously communicated, a large majority of our commercial customers have recontracted the ZOXT service since the establishment of the Category 1 codes on January 1, 2021, with most crosswalking to preexisting rates. Overall, commercial pricing in the first quarter of 2021 was down low single digits on a percentage basis when compared to 2020 pricing. We have a handful of contracts that remain open or come up for renewal in July of this year. We will view these negotiations as an important indicator of our ability to separate ongoing negotiations with the MACs and CMS from established commercial pricing, and we will be transparent about these trends. If we are unsuccessful in improving the Medicare rates before calendar year 2022, we believe it is prudent to expect that commercial rates may begin to more negatively be impacted next year.