Edited Transcript of IRTC.NMQ earnings conference call or presentation 27-Feb-20 9:30pm GMT

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [3]

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Thank you, Leigh. Good afternoon, and thanks for joining us. I’ll start with a brief recap of our 2019 accomplishments before turning the discussion to our focus and company goals for 2020 and beyond. We entered 2019 with significant momentum. And as we’ve done successfully in the past, built on that throughout the year.

Our full year 2019 revenue was $214.6 million, representing 46% growth over prior year, and exceeding our initial guidance range of $201 million to $206 million, as well as the guidance of $213 million to $214 million issued most recently in late December.

Gross margin for the year was 75.5%, a 1.8 point improvement over the prior year. Fourth quarter revenue was $59.1 million, up 41% compared to the prior year period. And gross margins increased to 76.5%, a 2.4 point improvement over the same period in 2018.

Confidence in our ability to grow and expand the business remains very high. Our competitive differentiation driven by our complete platform demonstrate a clinical superiority, and our intense focus on serving the needs of our customers plus puts us in an incredibly strong position to continue to grow in 2020 and beyond.

Accordingly, we anticipate full year 2020 revenues to range from $280 million to $290 million, which represents annual revenue growth of 31% to 35%. Matt will provide our complete full year 2020 guidance metrics later in his remarks.

We continue to make substantial progress driving each of our growth initiatives, as evidenced by several achievements in 2019. Briefly, this past year, we expanded the size of our sales channel to include 2 new areas, 7 new regions and added approximately 30 sales reps, along with increases to our customer-facing support infrastructure.

Sales force productivity improved meaningfully, both in terms of time to ramp and peak productivity. We initiated a full commercial launch of ZIO AT in October, and we began deployment of our new information system ZioSuite in the fourth quarter. ZioSuite is a multiyear architectural software redesign effort that provides a faster and more intuitive experience for physicians and their clinical staff. Designed for desktop, tablet and mobile access, ZioSuite streamlines clinical workflows and makes report interpretation easier.

Two major studies were published in peer-reviewed journals, bringing the total to over 30. 1-year health care resource utilization data from mSToPS was presented. We initiated the development partnership with Verily and focused on next-generation atrial fib solutions. We expanded our market opportunity by beginning a participation in a new randomized control study called GUARD-AF. And this study measures ZIO’s ability to diagnose atrial fibrillation, potentially reducing the incidence of stroke and the target population of asymptomatic patients.

And lastly, we raised net proceeds of approximately $107 million from a follow-on offering in September, which will be used to fund our various growth initiatives.

Turning to our strategic initiatives. The 3 primary components that are key to our short- and long-term growth strategy are: increased market penetration with our single ZIO platform, increased operating leverage through continued productivity and automation improvements and expanding our addressable market into new indications and geographies.

Starting with market penetration. Sales force expansion continues to be an important factor in fueling our sustained growth rates. In 2020, we plan to add 20 additional reps, ending the year with a total team of roughly 160 sales reps. As we’ve always done, we intend to grow our commercial team to meet the most cost-effective size required to capture the full and untapped market potential.

In addition to our quota-carrying reps, we have built a support team that complements the sales team and ensures that our customers achieve the full clinical, financial and operational value of our ZIO Service. These support teams focus on account readiness, implementation, systems integration, including EHR, revenue cycle management and customer experience. Collectively, these teams enable us to truly partner with our customers and are a key factor as to why we win and retain customers.

Turning to our ZIO platform. The full commercial launch of ZIO AT in October of last year, has enabled us to be a single supplier to large integrated delivery systems. Faced with patient and information overload and constantly pressed for time, our customers place significant value on using a single platform to improve the effectiveness of their cardiac monitoring capabilities.

Our early experience with AT has been quite promising as demonstrated by both the pull-through of XT as well as the benefits of AT relative to traditional MCT devices.

On the first point, we recently presented data that demonstrated on a cumulative basis for accounts that launched AT in 2018 and ’19. XT volumes grew 27% in the 120-day period following AT launch as compared to the 120-day period prior to AT launch. And including AT, volumes grew by almost 50% in that same period.

The significant acceleration is encouraging and clearly demonstrates the value of our single platform. Customer feedback on AT remains extremely positive with customers noting the accuracy of our analysis as well as the consistency and reliability of the platform. AT utilizes the same form factor as XT, resulting in high patient compliance and wear, and is backed by the same detection algorithms and AI tools we’ve developed with XT over the last several years. This has led to important clinical advantages for AT.

When you compare ZIO AT to MCT peer-reviewed data, ZIO AT’s diagnostic yields or the ability to find clinically significant arrhythmias in those high acuity patients is 83%, approximately 20 points higher than the peer-reviewed published data for traditional MCTs.

In addition, the days to detect these clinically significant arrhythmias is shorter by a factor of 2 or more days. Timely detection and notification is exactly the reason physicians are choosing to put a patient on a Mobile telemetry device. We believe AT is well positioned to disrupt the MCT category, much like XT has done with traditional Holter and Event monitors.

It is important to note, however, that while we believe AT is a highly innovative service and device, we remain steadfast in our view that ZIO XT is the most appropriate solution for the vast majority of patients.

Turning to our second growth strategy. While focused on continuing to increase operating leverage, I’m pleased to see that we’re scaling — increasing our scale and leverage within revenue generation, cost of service and operating expense categories for the business.

Matt is going to provide details on how we’re focused on doing better in each of these categories in 2020.

Finally, turning to market expansion opportunities. The silent AFib market is a major part of our expansion strategy, and we’re currently participating in 3 important large-scale clinical trials. This includes the mSToPS study, which demonstrated in its first year data that patients who are diagnosed with AFib in iRhythm’s ZIO service monitoring group had significantly lower rates of hospitalizations and emergency room visits in the 12 months following the initiation than the non-monitoring group. We expect 3 year mSToPS data, including clinical and economic outcomes, to be published at the American Heart Association Annual Meeting in November of this year.

Our second study, SCREEN AF, which is monitoring the incidence of newly diagnosed AFib at 6 months, we’ll also report final results in the coming months, potentially at the upcoming joint European Stroke and World Conference this May.

We announced our third study, GUARD-AF, a 52,000 patient study sponsored by the Bristol-Myers Squibb, Pfizer alliance, which seeks to determine if earlier detection of AFib through screening in previously undiagnosed men and women of at least 70 age — years of age in the U.S. impacts the rate of stroke compared to standard medical care.

Through our partnership with Verily, we’re working to develop next-generation atrial fibrillation products that combine both companies’ technologies to improve the screening, diagnosis and management of patients with asymptomatic atrial fibrillation.

Verily Study Watch is an important potential piece of the solution, and recently received 510(k) clearance as a Class II medical device.

In 2020, our teams will continue to develop and integrate our collective technologies in the development of a complete end-to-end solution. We’ll provide further updates as we move forward with this development and achieve certain milestones.

Before I close, I want to provide an update on the process of transitioning our Category III CPT code to a Category I code. From previous updates, you may recall, the cotransition was approved by the AMA in September of last year, and we went to the next stage of initial joint pricing review by the AMA and CMS. That review occurred last month at the AMA RUC meeting. While we cannot comment on specifics, we believe the AMA RUC will make an RVU recommendation to CMS based on the model reviewed during the January RUC meeting.

In the final stage, CMS either approves or modifies the recommended RVUs, with public communication of its initial determination in July of this year. The process has continued to go as we have expected it, and our confidence and views of the ultimate outcome are unchanged. We look forward to providing updates when appropriate.

In closing, we look forward to continuing our momentum in 2020 with strong execution across our business. Our innovative approach to driving market penetration and expansion is rooted in our ability to demonstrate clinical superiority with our proven and complete service-based platform, and driven by our best-in-class commercial teams. We remain confident in our ability to deliver on our short- and long-term goals, while making a tremendous impact in patients’ lives.

And with that, I’ll turn it over to Matt Garrett, our CFO, for a review of our 2019 financials and guidance for 2020. Matt?

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [4]

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Thanks, Kevin. We are very pleased with our performance in 2019. And more importantly, continued initiatives and strategy for the company has set us up well moving into 2020. Our continued focus on sales force productivity, sales support infrastructure, integrated system penetration and gross margin expansion remain the key drivers for the company as we move into 2020. And after 3 years of heavy investment in the organization to support revenue growth, we see 2020 as a key year to demonstrate productivity up and down our P&L.

Highlights for the fourth quarter 2019 are as follows: revenue growth of 41% year-over-year and sequential growth of 8%; non-adjusted gross margins of 76.5% and 76% as adjusted, an increase of 2.4% and 1.9% over the prior year, respectively; the success — excuse me, the successful launch of ZIO AT in late October, making our MCT monitoring solution available to all customers across the country; and finally, continued improvement in sales force productivity levels through the development and onboarding of new reps, investments in the sales organization, continued penetration of large integrated systems and, of course, the launch of ZIO AT.

Taking a more detailed look at the fourth quarter financial results. Non-adjusted revenue for the 3 months ended December 31, 2019, was $59.1 million, an increase of 41% year-over-year and 8% sequentially. As we described on our December 23 call, revenue was negatively impacted in the quarter by the onetime reserve of approximately $1 million for non-contracted revenue. This is in direct response to actual collection rates, falling short of historical rates due to rising patient deductibles and copayments.

While we continue to monitor this trend closely, non-contracted revenue now accounts for only 5% to 6% of total revenue, diminishing the potential for any material impact moving forward. Without the adjustment, revenue would have been approximately $60 million, an increase of 44% year-over-year and 10% sequentially.

As we have done in the past, we’d like to highlight some of the trends we are seeing, which support our confidence in the business and our ability to continue to deliver benchmark revenue growth. These trends include extension of sales productivity levels with a significant number of reps now surpassing $2.5 million in annual revenue productivity.

Coming off the summer months and as we move into the — and we moved into the fall, same-store new store revenue growth mix returned to our anticipated 60%-40% split. We view this mix as a positive sign of our ability to penetrate existing accounts with both AT and XT, and as we focus on new large integrated health systems.

Related to integrated systems, we also achieved significant milestones in EHR implementations during the year with double-digit growth in onboarded accounts. Further, in December, we are approaching 10% of all registrations being completed through customers EHR systems.

In summary, these trends continue to demonstrate our ability to scale this high-volume business in a meaningful way.

Turning our attention to the rest of the P&L. Gross margins for the fourth quarter 2019 was 76.5% compared to 74.1%, a 2.4 percentage point improvement over the same period in 2018. Gross margins as adjusted for onetime items in the quarter was approximately 76% or 1.9 percentage point improvement over the same period in 2018.

Non-adjusted operating expenses for the fourth quarter of 2019 were $62.9 million compared to $44.1 million for the same period of the prior year, an increase of 43% year-over-year. Excluding costs associated with the Verily development, OpEx was 61.7% or an increase of 40%. While OpEx adjusted for Verily was higher than expected, there were a number of onetime costs in the fourth quarter that will not impact our run rate moving forward. These onetime costs include approximately $1.5 million for our Q3 ’19 financial statement revision work, $2.5 million in bonus adjustments over planned booked in the quarter, and $2.2 million in expedited consulting work before — performed on behalf of the company for continued improvement of our revenue cycle management processes.

Finally, the net loss for the fourth quarter 2019 was $17.3 million or a loss of $0.65 per share compared with a net loss of $16.3 million or a loss of $0.67 per share for the same period of the prior year.

Turning to guidance for 2020, and as Kevin noted earlier, we anticipate revenue for the full year 2020 of $280 million to $290 million. This represents annual growth of 31% to 35%, demonstrating our ability to scale the organization with our single platform, while continuing to produce benchmark top line growth.

We are also taking this opportunity to raise sales force productivity levels from $2.5 million on average for a season representative to $3 million.

Raising this measure, again, is due in large part to the productivity levels we are achieving with reps that have been on board for 3 or 4 years, plus the added opportunity we are seeing with AT launch and the impact of sales support infrastructure. Gross margins for the year is expected to range from 76% to 77%, continuing our trends of both price and cost improvements.

While the launch of AT could create some volatility on gross margins during the year, early indications are that AT will have less of a drag on gross margins than previously forecasted. We expect operating expenses, inclusive of Verily development expenses, to range from $265 million to $275 million, including $52.5 million to $57.5 million for R&D and $212.5 million to $217.5 million for SG&A.

For Verily development expenses, we anticipate total expenses of $15 million, including $10 million in milestone payments, $4 million in internal development costs, plus $1 million for G&A.

For our organic business, excluding Verily expenses, total operating expenses are expected to fall between $250 million and $260 million, with $38.5 million to $43.5 million for research and development and $211.5 million to $216.5 million for SG&A.

Beginning this year, we would also like to offer some additional guidance relative to our organic business as we trend towards achieving cash flow breakeven and positive EBITDA. In order to achieve these milestones, we intend to show productivity gains in operating expenses, much like we have done in sales and gross margin. For the full year 2020, we expect costs associated with interest, amortization, depreciation and stock compensation to be in the range of $37.5 million to $42.5 million.

While the company does not provide quarterly revenue guidance, we would like to take this opportunity to highlight a couple of quarterly assumptions that management believes will help investors with quarterly expectations.

First, we expect Q1 ’20 revenue growth to be lower than our historical trends, in large part due to the Q3 ’19 revision, which pushed approximately $1.1 million of revenue back into Q1 of 2019, thus increasing the comparable year-over-year figure.

And secondly, we remind investors of our summer seasonality as onboarding large integrated health systems which make up a good portion of our new store sales, tends to slow in summer months.

For 2020 operating expenses, we anticipate a meaningful reduction in expenditure growth, exclusive of Verily development program and anticipate a material reduction in OpEx growth rates during the year that will provide additional confidence in our ability to scale. Taking the midpoint of guidance, OpEx as a percentage of revenue will be reduced significantly, and overall growth is expected to slow to just over 20%. And for the first time publicly stated, management now anticipates the company to achieve cash flow breakeven no later than the first half of 2021.

Before closing, we would also like to take this opportunity to address any concerns that investors may have regarding the coronavirus. As it currently stands, management sees no material impact in the near term to our business as it relates to both the revenue and supply chains. iRhythm’s revenue is predominantly U.S. -based, and the company has made significant investments in the robustness of our supply chain over the past couple of years. To be specific, iRhythm supply chain exposure to Asia is limited to circuit board components and exposure is significantly mitigated by our reuse of our circuit boards for multiple turns.

Further, we have worked with our suppliers to build up significant raw material buffers in our supply chain, which gives us confidence in the near term that no material impact should come from the virus. We will continue to monitor the situation and update investors if there’s any changes to this outlook.

We’d now like to open the call up for questions. And joining me today are — for Q&A, is Kevin King, President and CEO; and Dan Wilson, Executive Vice President of Strategy and Corporate Development. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division – MD [2]

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Just a few questions for me. I guess, Kevin, first off, I appreciate your updated thoughts on the RVU process. It sounds like things are going kind of in line with expectations. At this point, is the best way to think about this as the full disclosure of all of your values is probably going to come in July and no sooner?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [3]

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Is there a full disclosure from us coming in July, David? I’m sorry, I missed — I didn’t quite hear.

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David Ryan Lewis, Morgan Stanley, Research Division – MD [4]

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From many — from anyone. You obviously talked about a notification, the AMA will be sent to CMS and probably already has. But from your perspective, the earliest notification that we’re going to get around the RVU value is likely to come from CMS in July?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [5]

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Yes. I believe that to be the most likely case.

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David Ryan Lewis, Morgan Stanley, Research Division – MD [6]

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Okay. Very helpful. And then, Matt or maybe, Kevin, a couple of questions here. First off, for the fourth quarter, I appreciate the update on the contractual reserve of $1 million. But can you just give us a sense of the dynamic of delayed returns that were disclosed in late December? Any sense of the magnitude of those delayed returns had on fourth quarter and ergo would have on the first quarter. Do you have any sense of the quantification of that?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [7]

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Sure. So on the December 23 call, the update call that we had, we noted that we were running about a day behind, which we estimated to be about $1 million in total. We received in the final few days of the month a good portion of those devices, but not all of them. Many of them carried over to January. And we now believe that we’ve received all of the ones that we should be expecting. So think of it as kind of a 2/3, 1/3, 70-30 type of things. 70% in December, 30% in January, thereabouts.

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David Ryan Lewis, Morgan Stanley, Research Division – MD [8]

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Okay. So investors are trying to get a good sense of your underlying growth rate in the fourth quarter apples-to-apples. If we added back the contractual reserve or maybe $0.5 million benefit you had expected, perhaps the right way to think about the fourth quarter growth rate is something like 45% to 47% relative to the 40% that was reported. Is that a decent way of thinking about it?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [9]

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Yes. I think so. I’ve got Dan and Matt shaking their head there, doing math quickly. Yes, I think that’s a…

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [10]

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Yes, the HCR would braze you to 44%. And if you go 2/3, 1/3, which is roughly what we perceive it to be, there’s another couple of percentage points in there. So yes, that’s right, 45%, 46%, 47%, somewhere right in there.

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David Ryan Lewis, Morgan Stanley, Research Division – MD [11]

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Perfect. All right. And lastly, Kevin, maybe for you. I know we’re probably not going to get an absolute quantification of the AT impact for 2020. But you started to share some slides and case studies around the impact AT could have or XT could have — or AT — XT — sorry, could have an XT pull-through. How should we think about the impact of AT on 2020 from a growth perspective?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [12]

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Absolutely. It’s — this is a really tough balancing act for us, David. We want to be as transparent with investors in the markets as possible. And at the same time, this is a really highly competitive market space. So we’re cautious about tipping our hand. I think you’ve heard from our qualitative comments that we’re incredibly pleased with where we are with AT, and it is absolutely contributing to our growth. What’s most important, I think, for everyone to understand is that AT is enabling us to be a more complete solution, and that’s — as evidenced by the ZIO XT pull-through and wins that we’ve had than it is on an individual AT device level.

Customers greatly value having a single platform, even though the percentage of patients that actually get AT prescriptions is relatively small compared to XT. But I think you should think about it as a platform play more than you should individually. We’re going to do our best to provide more detail as we go forward, but it’s still rather early days for us.

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Operator [13]

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And our next question comes from Robbie Marcus with JPMorgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division – Analyst [14]

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Great. And congrats on another good quarter. Kevin, I just wanted to firm up your comments a little bit here. You said no change from your thoughts before on the ultimate outcome of reimbursement. I just want to make sure we should be thinking about no change as before it was flat to up in terms of how you were thinking about the potential outcomes for reimbursement?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [15]

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No — yes, I’m talking about no change in our degree of confidence and no change relative to the comments we started talking about back in, I don’t know, ’17 or so relative. The likelihood of this going up is as much as it is going down, and we’re confident that it is going to probably stay pretty much the same. There’s no change to that at all. We’re not able to comment about that RUC process. But going into and coming out of the RUC process, we had absolutely no change and we’re quite pleased. And then fully anticipate that the AMA put forth the materials that we had sent to them. And that’s made its way over to CMS. And there were still some final meetings going on. But we should be hearing back as — and based on the prior question, in July time frame.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division – Analyst [16]

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Great. And maybe just one follow-up. Just to further discuss the AT here. When you walk into accounts, is this a product you lead with? Or is it mostly coming in established XT accounts? And then if it is new accounts, what’s driving them so much to adopt it? Is it they can finally adopt a full work stream of products, is it the workflow benefits, is it the better device, what is it? And then I’ll leave it there.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [17]

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Sure. So when we think about our marketplace today, the market for ambulatory monitoring is largely fully penetrated. And what we’re competing against with is changing what we refer to as status quo. And the status quo, unfortunately, is one where physicians and their staffs are just overloaded, have a high degree of job dissatisfaction, have too much information coming at them every day. And unless you give them a solution that requires less inputs and less effort, you don’t stand a chance of adopting it. And so to answer your question here — the part of your question that you stated there was, was it around workflow, it’s absolutely around workflow and it’s absolutely around being clinically superior. If you don’t have a better mousetrap, so to speak, compared to anything else, why would I change? And if I’m already overloaded, why would I take on doing more work? So you have to have a combination of those.

Now playing into that workflow theme is, do I have to interface to multiple systems for order entry and results reporting? Do I have to train my staff on multiple devices, et cetera, et cetera? And that’s where the single platform for ZIO allows clinicians to adopt in a more streamlined fashion.

We don’t necessarily lead with AT. AT is a — the high acuity patients is a relatively small percentage. And really not likely to cause people to shift from status quo, it’s really XT in combination with AT in the full line. Is that helpful, Robbie?

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division – Analyst [18]

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That was great.

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Operator [19]

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And our next question comes from Jason Mills with Canaccord.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division – MD of Research & Analyst [20]

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Can you hear me okay?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [21]

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Yes, we can.

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [22]

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Yes.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division – MD of Research & Analyst [23]

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So I wanted to talk a little bit more about the AT, XT pull-through. And Matt, it wasn’t lost on me, your voice inflection was fairly — seemed fairly bullish as you were talking about the EHR integration. You’re talking about that within the context of your targeting of IDNs. I’m wondering, if we could bring it back to what investors care about, which is obviously the growth guidance you’ve given for 2020. And what you sort of factored in for the XT pull-through, specifically vis-à-vis AT and IDNs? And what upside exists relative to — I’m sure you’ve given us more conservative estimates than various other models you have — you’ve built out with respect to this specific issue. I’m wondering, if you’d be able — be willing to give us a little bit more color in your thinking on this front?

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [24]

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I can try at a high level, Jason. I think that what everybody needs to be — as Kevin just alluded to, and I’ll allude to here is, we’re still really early days, right? We’re really early days. I mean, we didn’t actually start the AT launch until October. And thus, when you’re trying to identify these sort of trends that we’re happy to call out where we can, you have to understand that we’re coming off of a baseline in which a majority of those AT units, pre and post the overall launch, are coming from existing accounts. So I think we’ve been pretty bullish and optimistic on XT pull-through, and that’s on accounts that we already had up and running, right?

So as we move forward into 2020, and we actually start to bring on new integrated systems, you can imagine that there is a potential for higher XT pull-through in those. And I’ll just simply state that at this point, it’s still early days, but that — as Kevin alluded to, as we get that sort of granular data, we’ll try our best to provide more data. Does that help a little bit?

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Jason Richard Mills, Canaccord Genuity Corp., Research Division – MD of Research & Analyst [25]

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Yes, it does. So it raises the question, which is sort of an obvious one that you — I mean, could — on one hand, you have the law of larger numbers as you’re trying to set this guidance. On the other hand, you’ve talked about the percentage of first-line monitoring that goes on in these IDNs relative to the overall market. And you just mentioned the level of penetration or lack thereof, you are at this point in time. So those 2 things are somewhat at odds. But nonetheless, it seems like the conclusion that one could draw is that your guidance leaves room for upside, specifically if you have more success in IDNs this year than maybe your guidance implies.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [26]

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Look, I — if I let — if we’re talking about whether our guidance is good guidance or not, first, let’s take a look at 2019, right? We started the year with 37% to 40% growth. And over the course of the year, many of the investments that we made and plans that we had did better than expected, and we turned out with 46% growth. Similar to those years, we have a lot to accomplish this year, and we have a lot to digest as we have in the past. I said in my opening comments, we’ve added 2 new areas. We’ve added 7 new regions. We’ve added 30 new salespeople. We are launching a brand-new information systems, ZioSuite, and we’re launching ZIO AT. We have a lot of work to do, such that the guidance we’re giving you right now is our very best view of where the year will be.

As we progress, it could get better. But right now, I want to give you the best estimate that we have, knowing all that we have ahead of us to still achieve relative to the people, the products that I just described in the market segments that we’re now going after.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division – MD of Research & Analyst [27]

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That’s helpful, Kevin. And it’s not less — I mean, the midpoint of your guidance is about where consensus was coming in. So it’s not a criticism, it’s just a discussion. Last question…

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [28]

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Yes. No, no. I’m not — we’re not taking…

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [29]

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We wouldn’t expect you to ask any other — anything less, Jason.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division – MD of Research & Analyst [30]

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Thanks, Matt. The last question about silent AF. Clearly, there’s data out there, and there’s data to come. How do you think the data that we will see later this year, will, if at all, impact your business? Or will that require perhaps data from GUARD-AF? What — how should we think about what is coming later this year? And how that may impact the market? Or the way that your customers look at using ZIO XT?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [31]

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Sure, no worries. I think these large market opportunities unfold over time as opposed to make a big splash, right? We’re talking largely about changing the value proposition for health plans and their members, their beneficiaries, being patients, or if they’re not sick, they’re members. And we have to provide to them compelling evidence to begin a screening protocol or a testing protocol that screens for something that is asymptomatic. So clinical evidence is clearly important. That said, I think that the economic, the utilization of services is as important, and we intend to build relationships with our health plans. So we have contracts with, to try to do more mSToPS-like studies within health plans to unfold this market over time. I think it’s too early for us to begin projecting revenue or adoption. It’s a very big opportunity, it’s a complex one. The fact that we’ve got 3 major studies and a major partner, and we’ve got some good results under our belt says, we’ve got a lead here. But I’d say it’s not going to be a big bang. I’m absolutely convinced of that, as much as we would like it to be, of course, yes.

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Operator [32]

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And our next question comes from Margaret Kaczor with William Blair.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division – Research Analyst [33]

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First one for me is actually following up a little bit on Jason’s question. And it regards kind of the high risk population. And so it’s multifaceted so maybe write it down. But one, do you think you need larger trials like GUARD-AF to build some of that business there? And as you look at it, what do you think will move faster in the transition? Is it health systems and changing guidelines? Is it payers changing what they pay for more individual clinician base? And then do you need some kind of other product or price point to add, to try to better address this population, especially given some of those early partnership comments you guys have made?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [34]

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Sure. I don’t — I believe the larger studies will ultimately help. But I think the power of mSToPS and the design of it is so compelling that its results can stand on its own relative to the utilization of resources. I think relative to where do you begin or which market segment, I don’t think it is health systems. I think it is health plans for the reasons that these patients have no symptoms and are less likely to be in front of their doctor, rather, the health plan that’s at risk, right? They have contracts with the employers or they have contracts with the government to provide a service at a fixed cost, want to uncover these patients that are at risk because the cost of diagnosing and monitoring them is less than the cost of the incidence of that outcomes like stroke. So the value proposition, in my view or in our view, is targeted largely at health plans, not so much health providers.

And then the third question was, do we have the right product? I think ZIO XT is a phenomenally good platform. And what we’re trying to build with Verily is an even better platform. But there’s nothing inadequate about ZIO XT in terms of its detection rates, right? We found a threefold increase in AFib in the population that was monitored with XT compared to non-monitored. So I think that outcome is good. We hope to improve upon that by having longer and higher detection rates, but it shouldn’t preclude us from starting.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division – Research Analyst [35]

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Got it. No, that’s helpful. And then just to go back to AT, I know it’s been kind of limited launch and kind of early launch in terms of trying to launch it within the existing accounts. But what have you seen so far in respect to rep productivity as a result of AT, both from a revenue perspective as well as from a sales cycle perspective?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [36]

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Well, Margaret, I think, it’s important to think about AT in the context of a complete platform sold to an account, not as a separate product line, right? This is not 1 device and then another product line. This is all 1 part of an integrated system or solution that we’re offering to our customers. The total market for MCT or AT is only 1/10th the size of XT. And so we shouldn’t see a disproportionate amount of AT coming out of sales reps.

Also, the coverage policies for MCT are quite in homogeneous across the country. Of the 37 or so Blue Cross and Blue Shield plans, the vast majority of them have negative coverage policies for MCT. And in some states where there is a very high rate of Blue Cross and Blue Shield patients, you see very little market adoption of MCT. So it’s a small heterogeneous market. That said, it’s a very important segment and that — this is a high acuity group of patients. So we’re — I tend to think less of it as a product line and more of as a component of our overall platform that’s helping us.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division – Research Analyst [37]

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And I think the question really relates to — and I think this is what I’m hearing from, is that a rep that has both XT and AT in their bag, whether it’s driven by AT or not, by having AT in their bag, they — you’ve seen them be more productive than that rep that only has XT in the bag, for whatever reason.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [38]

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Yes. I think at the account level, we see higher growth rates within those accounts that do a wider range of patients. I think that’s directionally correct. I won’t quantify it, but I think it’s directionally correct.

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [39]

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That’s right.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [40]

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Yes.

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [41]

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That’s right.

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Operator [42]

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And our next question comes Kaila Krum with SunTrust.

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Kaila Paige Krum, SunTrust Robinson Humphrey, Inc., Research Division – Research Analyst [43]

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So I think you’re giving some new commentary and timing on positive cash flow into 2021. So can you just speak to your visibility and confidence in those metrics? Again, just given those comments kind of step into 2021. So do you need to hit a certain revenue level? Are you assuming reimbursement for XT is stable? Just want to make sure I’m clear on some of those assumptions there.

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [44]

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Sure. I’ll do what I can. First of all, we are assuming — this obviously assumes no material change in pricing. So that is first and foremost. Secondly, we’ve not really put — and I’m hesitant to put a particular revenue point of crossing that chasm, if you will, for any number of reasons. I think that puts us in a bind in terms of our ability to guide moving forward. And b, it remains very fluid. Again, if we’re seeing tremendous uptick in certain markets and we want to continue to invest, we clearly want to give ourselves the degrees of freedom to do so. What I would share with you guys is that, if you look at the midpoints of the ranges, you’re starting to see some material decrease in the OpEx growth. And as I called out on the prepared remarks, a significant decrease in overall operating growth. What I think is most important to think about is, if we’re only calling again for the midpoint of the range of $255 million on OpEx, that’s $45 million of incremental spend. A good portion of that spend is related to sales support, and the additional sales reps that we’re going to hire and a little bit related to stock comp. You take those out and you see that they’re not a significant amount of growth elsewhere. So I guess, I would just caution folks that we’re going to try, much like with the AT, to be a little bit more open as we move into the year as it relates to these expenditures. But when you carve out those one — areas that continue to invest as it relates to the development of the organization, you really see a scenario where we’re cutting back significantly on that kind of core organic growth. Does that help?

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [45]

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Organic OpEx growth.

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Matthew C. Garrett, iRhythm Technologies, Inc. – CFO [46]

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Organic OpEx growth, excuse me.

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Kaila Paige Krum, SunTrust Robinson Humphrey, Inc., Research Division – Research Analyst [47]

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Well, I guess, that leads into the second question on top line growth. So I mean, how do you think about the long-term growth of your business? Obviously, over 30% growth in 2020 is great. And I realize you don’t want to comment on 2021. But you have AT ramping up, new partnerships coming online. Just any sort of directional thoughts on that long-term durable growth of the business would be helpful.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [48]

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Yes. Look, I would say our sentiment to our view is the same as it has been in the past. We think the market opportunity is large. We believe we have the right strategy. We believe the competitive dynamics fall in our favor, and that there’s increasing value within and among our brand. So from that standpoint, we remain as bullish as ever. That said, I’m going to stop short of guiding a number beyond 2020, but there doesn’t seem to be anything in our way. That said, as I said earlier, in this year, we have a lot to digest and that we’ve put in new areas, new regions, we have new sales reps. We still have sales reps that we hired last year that are new to the company. We have new products. There’s a lot of execution that still is required. But the good news is that’s all within our control, right? And we’ve got very talented teams and deep competencies in our business that gives us confidence. Not a cakewalk, a lot of hard work. But the things that we have to do to continue to grow as we have been, totally within our control.

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Operator [49]

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Our next question comes from Suraj Kalia with Oppenheimer.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [50]

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Congrats on a nice quarter. So Kevin, one question for you and one maybe for Matt. Kevin, a lot of — you guys have consistently expressed your view that Medicare rates will remain stable or at least through this RUC process. We haven’t talked about the commercial side of the equation, which is about 70% of your business. Would I be fair in saying that if Medicare remains, let’s say, status quo, you all do not expect to see any shift short term or long term on the commercial side? And the reason I ask is, our checks suggest commercial on average is slightly higher than Medicare. Any color there would be great.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [51]

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Sure. So of the couple of hundred commercial contracts that we have, they have staggered rates of renewal, some of which or many of which are auto renewed, some of which and many of which are multi-year. So the sort of feathering in and feathering out of changes in price never occurs as a fund or clap, if you will, but rather it changes over time. We’ve now seen over the last year, 1.5 years now that we’re nearly fully contracted, less change in pricing because our contract levels are stable. I think the drivers of modifying or increasing our pricing amongst commercial carriers is often associated with evidence. So if we can drive a new indication or we can drive a broader value to payers, we stand the likelihood of getting paid more. Not necessarily — I don’t see much pressure on the downside from — we’ve never had decreases in commercial contract rates. But we certainly have had increases in our commercial rates as our clinical evidence has increased over time.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [52]

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Got it. And finally, Kevin, ZIO AT, to the extent you all can, how is ZIO AT — are you all using 1 product for, let’s say, up to 30 days? Is it 2 products? And also just the logistics for billing for ZIO AT. Any color there would be great. Congrats again.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [53]

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No worries. So ZIO AT uses the same wearable platform that we have for ZIO XT. So it’s a single wearable sensor. It is most often prescribed for 14 days. Multiple patches can be used to get as many days as you like, up to 28 days, I guess, if it’s 14 x 2. The evidence that we have says that our diagnostic quality, the quality of our signal, the quality of our algorithms, is that we’re achieving far greater diagnostic yields and a faster time to diagnose with a single device than it is a second — a full 30 days. And also in our research, even though that the CPT coding language says up to 30 days, the average wear time for most MCT monitors is about 11.5 days. And the RVU calculation for MCT was based on less than 12 days of wear. So a lot of code, say, up to a certain period of time, but that does — that’s not a requirement, nor is our technology limited to a certain period of time. It’s just what’s optimal for the patient and optimal for physicians to get the diagnostic results that they need. Your second question was about contracting?

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [54]

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No. I was just trying to understand, and I think so you answered it, Kevin, if you’re going to use only 1 form factor for ZIO AT, 1 product, then the billing, I think, it becomes obvious. So that itself answered my question.

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Operator [55]

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And I’m not showing any further questions at this time. I would now like to turn the call back to Kevin King for closing remarks.

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Kevin M. King, iRhythm Technologies, Inc. – President, CEO & Director [56]

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Great. Thank you, operator. Thank you, everyone, for joining our fourth quarter 2019 earnings call and full year earnings call. We appreciate your support and your interest in iRhythm, and look forward to updating you as we move forward in the year. All the best.

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Operator [57]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, you may now disconnect. Everyone, have a good day.