iRhythm Holdings, Inc. Q2 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the iRhythm Technologies, Inc. Q2 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please refer to the Operator Instructions. I would now like to hand the conference over to your speaker today, Ms. Leigh Salvo. Please go ahead.

Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the second quarter ended June 30, 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 and processing clinical backlog, 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 margin, 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 Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q respectively with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 5, 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 Doug Devine, Interim CEO and Chief Financial Officer. Doug?

Thanks Leigh. Good afternoon, and thank you all for joining us. During our prepared remarks today, I'll start with a quick review of second quarter highlights and then update you on the progress we are making on our key operating priorities. Dan Wilson, EVP of Strategy and Corporate Development will cover reimbursement. And then I'd like to welcome Mark Day, our EVP of R&D to the call to share some of our current Zio platform advancements and initiatives. After that, I'll close with a more detailed review of Q2 results and our outlook for the remainder of the year. We'll then open up the call for your questions. Starting with Q2 highlights. Our results reflected continued demand for our Zio platform as well as solid execution on our operating goals by the entire iRhythm team, who are working tirelessly to meet the needs of our physicians and patients. During the second quarter, revenue was $81.3 million, representing a year-on-year increase in revenue of 59.8% and sequential growth of 9.4% over the first quarter. Zio AT had a record quarter reaching approximately 10% of overall company revenue for the first time. Registrations for our Zio Services exceeded our capacity particularly during the March, April and May timeframe, which resulted in processing times extending by approximately a week. This led to a higher than usual number of units awaiting clinical processing at quarter-end, which limited reported revenue growth in Q2 2021 and increased some of our costs. We expect to be back to normal turnaround time by the end of third quarter. We also made continued progress in identifying and planning for cost efficiencies that will be implemented in the medium-term. These were outlined in our last call and I will cover them more a little later. We ended the second quarter with $255.7 million in cash and short-term investments, which highlights the financial strength of the company. Investing for long-term growth remains top of mind, and importantly we have the financial resources to do so. Lastly, we had two new 510(k) clearances during the quarter for our next-generation hardware platform and our fourth generation deep learned AI algorithm. One for a new and improved design of our Zio monitor and the second for updating artificial intelligence capabilities; both are key building blocks for our scalability and operational efficiencies. The new Zio monitor is designed to significantly improve patient comfort while the advancements to our AI capabilities are expected to further improve rhythm and beat diagnostic accuracy. Notably our new AI algorithm release is already delivering benefits, including contributing to improvements in our unit processing times and our ability to return to more normalized report turnaround times by the end of Q3. We are pleased with these highlights and also encouraged by the progress we're making on focused areas we discussed last quarter. As a reminder, these include driving continued demand for our Zio service, leveraging our platform to expand both our market share and our addressable market, making adjustments to our business model that we believe will provide operating efficiencies that will deliver sustainable profitability and growth, and pursuing multiple paths toward reimbursement that are more in-line with the benefits and underlying value of our technology. During the second quarter, we continue to see opportunity in the United Kingdom, which again outpaced overall company growth. As you may recall last September, iRhythm was the recipient of NHS funding as the winner of its Artificial Intelligence in Health and Care award. That award was recently disclosed to be 4.8 million pounds or approximately $6.8 million and has enabled us to commence trials of our Zio service in selected sites across the UK. Combined with a strong recommendation last December, we have seen very strong revenue growth in the first half of this year as we brought new grant sites online. As we move into the execution phase and bring fewer new sites online, we expect revenue growth in the UK to be more measured for the remainder of 2021. Furthermore, we are in the process of building out our operational infrastructure within the UK that can support this future growth and take our learnings and successes from the UK to serve as a playbook for other countries in the future. We are also making progress on our new manufacturing facility, which will house all of our production capabilities starting in 2022 and enable increased scalability and enhanced operating efficiencies in the medium term. And on product development and innovation, as we've highlighted in the past, iRhythm has long-established its ongoing commitment to improving the patient and provider experience demonstrated by our significant investments in next-generation capabilities across our diagnostic platform. The two new 510(k) clearances we announced during the quarter are great examples of this work. Overall, we're very pleased with the financial and operating results in the second quarter and remain focused on continuing to make progress on our priorities over the remainder of 2021, including regarding our priorities on reimbursement, which Dan will discuss. Dan?

Thank you, Doug. As part of the reimbursement discussion, I'll cover where we are at with our efforts to establish national pricing with CMS, discuss our continued engagement with the MACs to establish more appropriate Medicare pricing, provide an update on commercial pricing and then, close with a summary of how we are collectively approaching reimbursement. Starting with CMS national pricing. As we shared in our press release last month, CMS published the calendar year 2022 Medicare physician fee schedule proposed rule in mid-July. In the proposed rule, CMS did not propose national rates for long-term ECG monitoring CPT codes. Instead, CMS proposed to continue with contractor pricing for calendar year 2022. The proposed rule is followed by an open comment period before CMS issues the final rule in the November-December timeframe. In the proposed rule, CMS noted that they continue to seek public comments and information to support future rulemaking to establish a uniform national payment for these codes by further understanding the practice expenses incurred in providing these services. During the open comment period, iRhythm intends to provide comments and will continue to work with CMS in support of its efforts to establish national pricing that fairly represents the costs incurred to provide these services, the unique benefits they provide and in consideration of continued access to these services for Medicare beneficiaries. On a related note, CMS commented separately in the proposed rule that more and more services under the Medicare physician fee schedule include innovative technologies such as software algorithms and artificial intelligence, recognizing that the current pricing methodology employed by CMS does not account for these technologies. We are encouraged that CMS is recognizing the difficulty in pricing vertically integrated AI-based business models like our own within existing pricing methodologies. We will use the open comment period and other channels to provide our perspectives and suggested paths forward. In summary, we will be using the open comment period between now and mid-September to provide comments to CMS's proposed rule and are joining other industry stakeholders to continue support of potential national pricing for calendar year 2022. However, we believe the more likely outcome is that we will remain with carrier pricing in 2022 while continuing to pursue national pricing in the following year's cycle for calendar year 2023. Now turning to our ongoing discussions with Novitas and the other regional MACs. Since our last earnings call in May, we met with several other MACs to garner their support for evaluating an alternative pricing model. We understand that the MACs are communicating and will likely work together to evaluate the pricing of the long-term ECG codes. We remain encouraged by the willingness of Novitas and the other MACs to explore this alternative pricing model, which we believe is a better representation of the true cost of delivering the service. We along with other industry participants will be submitting cost data under this alternative pricing model to an independent third party who will validate the data and submit to the MACs. We currently anticipate the alternative model information will be submitted to the MACs in the September or October timeframe. We cannot provide any assurances that Novitas or other MACs will update pricing based on this information nor the timing of any potential actions. As an update on our commercial payer discussions, nearly all of our commercial payers have re-contracted our Zio XT Service since the establishment of the Category one codes on January 1, 2021 with most cross-walking to pre-existing rates. Overall, commercial pricing in the second quarter of 2021 was consistent with commercial pricing in the first quarter of 2021 and was down low-single-digits on a percentage basis when compared to 2020 pricing. We currently do not expect commercial pricing to change materially in the second half of 2021. As we look to 2022, we believe that our commercial payers have more flexibility in pricing of services and will consider the overall clinical and economic value of Zio XT. Thus, we are focused on providing the evidence that demonstrates Zio XT's high diagnostic yield, the efficiencies the service brings to their patient populations and the improved clinical and economic outcomes. We have a strong health economics and outcomes resource team that is focused on producing these data. And our recent partnership with the National Association of Managed Care Physicians will add to the robust data that we continually share with commercial payers. As mentioned previously, however, we do believe that if we are unsuccessful in improving Medicare rates before calendar year 2022, it is prudent to expect that some of our commercial rates may begin to be negatively impacted next year. To close on reimbursement, we have multiple avenues available to potentially achieve higher Medicare reimbursement and we are actively pursuing all of them. We believe we have the right strategies in place to achieve this, but recognize that it may take some time. We are confident in the value of our technology platform and the clinical and economic benefit that it delivers to patients, physicians and to the healthcare system. And we are hopeful that the value of the Zio XT platform will ultimately be recognized under the existing Medicare reimbursement system. Regardless, we will continue to pursue other opportunities to monetize the value of our platform through new indications such as silent AF, new products such as Zio AT and the technology we are developing, geographic expansion as well as other alternative revenue models that will all incrementally reduce our exposure to Medicare fee-for-service over time. We look forward to sharing more details on each of these efforts as we make progress. I'll now turn the call over to Mark, who will discuss those recent FDA clearances, how they further bolster our competitive positioning and why we are even more excited about the future of our Zio Service. Mark?

Thanks, Dan. As Doug noted, in the second quarter, we received FDA clearance for two new technology platforms that represent iRhythm's future. The first clearance was for the Zio Monitor, our third generation biosensor while the second was for our next generation of deep learned algorithms. Together these clearances demonstrate our commitment to leading the category we first created over a decade ago. And I'd like to share more details about each. I'll start by describing the Zio Monitor, the first product clearance of this new hardware platform. The Zio monitor is a smaller, thinner and lighter version of the current Zio XT biosensor, a device that more than three million patients have relied on to record a comprehensive view of their heart's electrical activity over two weeks. While the Zio XT device still provides industry-leading performance, the new Zio monitor meaningfully improves on it in many important ways. This new form factor is nearly 60% lighter, 25% smaller and 30% thinner and also includes a new breathable and waterproof outer layer, all of which allows our customer adhesive to confidently and comfortably secure it to all patients. These refinements were designed with our patients in mind and with the understanding that more comfortable wear leads to improved compliance, which in turn leads to even more complete and accurate diagnostic data. Again, this is a biosensor platform that will become the cornerstone of our service and we intend to pursue additional product clearances on this platform in the future. Next, I'd like to describe the clearance we received for our second generation of deep-learned ECG detection algorithms, our fourth generation algorithm overall. Since 2018, iRhythm has been a leader in using FDA-cleared deep learned algorithms for classifying and characterizing diverse heart rhythms. With this latest clearance, we're now using AI to detect beats, beat types and heart rates. We've also further enhanced the deep-learned rhythm detection capability we previously introduced. This new clearance amounts to a significant improvement in our AI-based detection capabilities, enabled by the greater than 750 million hours of curated heartbeat data in our database, likely the world's largest repository of labeled ECG recordings. Our new deep-learned algorithm was recently deployed, and we're already seeing positive impacts on diagnostic accuracy and scalability of our service. We see this latest clearance as further differentiating us in the market, and a key step in developing new products and services fundamentally enabled by our AI expertise. We look forward to sharing more about this in the future. Finally, I'll quickly touch on the meaningful progress we have been making in our partnership with Verily. As a reminder, the context for this partnership is the understanding that silent atrial fibrillation is a key public health challenge, particularly in the United States and that detecting this type of asymptomatic atrial fibrillation likely benefits from a long monitoring duration. With that perspective, we're working to build the first offering of a medical-grade long-term continuous and non-invasive solution to detect and characterize atrial fibrillation. The solution we're developing utilizes our established platform in combination with our algorithm analytics, clinical backend and workflow tools. We're on track to submit to the FDA for 510(k) clearance by the end of this year. When we receive clearance, we'll enter a market evaluation phase to establish the efficacy of the solution through clinical evidence and to explore the optimal business model associated with this potential paradigm shift in monitoring. In many ways, we expect this process to be similar to when we first brought the Zio service to market a decade ago. That is, a thoughtful investment into clinical evidence that lays the foundation to change clinical practice. We look forward to sharing updates as we progress along this journey. In sum, these two new clearances and our ongoing product development efforts represent our commitment to driving innovation to extend our leadership position in the ambulatory monitoring industry. From our start, we have been an innovation-focused company, and we continue to see many opportunities to improve and expand our technology platform, while delivering important and valuable benefits to patients, providers, and the health care system. Now, I'll turn it back to Doug to cover our second quarter results and the second half outlook. Doug?

Thanks, Mark. As I noted earlier, total revenue in the second quarter was $81.3 million reflecting year-over-year growth of 59.8%, and a sequential increase of 9.4% over the first quarter. Gross margins were 68%, down 1.6% year-on-year and 0.4% quarter-on-quarter. Adjusted EBITDA, defined as EBITDA less stock-based compensation expense was negative $4.6 million, an increase of $4.1 million year-on-year and $0.6 million quarter-on-quarter. Cash and short-term investments were $255.7 million at quarter-end, down $6.6 million from Q1 2021. Taking a more detailed look at the second quarter financial results, revenue grew sequentially with quarter-on-quarter growth of 9.4%. Q2, 2021 revenue growth was a mix of volume growth, improvements in collections performance for some contracted and non-contracted payers, and some favorable pricing adjustments for Zio AT. Approximately $4.5 million of Q2 2021 revenue was due to improved collections from prior period revenue and higher adjudicated reimbursement from certain payers, and is not expected to reoccur in future periods. Zio XT in the US drove the majority of our volume growth in the second quarter, while Zio AT in the US and Zio XT in the UK outpaced overall company growth on a percentage basis. Zio AT volumes grew significantly quarter-over-quarter, crossing 10% of revenue for the first time. We saw strong Zio AT performance continue into July and anticipate it will be a growth driver for the remainder of the year. New account onboarding decreased slightly compared to the first quarter of 2021, with June onboarding down as we delayed account launches to focus on reducing our clinical backlog. Looking at new store, same-store mix, new store accounted for 25% of year-over-year growth, down from 28% in the first quarter of 2021, primarily due to a strong rebound in existing account volumes from the COVID-impacted Q2 2020. Home enrollment was approximately 20% in the second quarter of 2021, down slightly from the first quarter of 2021. Turning our attention to the rest of the P&L, gross margin for the second quarter was 68%, a 0.4% decrease compared to a gross margin of 68.4% in Q1 of 2021. The decrease was primarily due to higher overtime costs related to previously discussed capacity shortfalls, offset by volume benefits. Q2 2021 gross margin benefited from approximately $4.5 million of revenue not related to Q2 2021 volumes discussed above and would have been approximately two percentage points lower on a pro forma basis. Operating expenses for the second quarter of 2021 were $72.3 million, down 7.7% from Q1 of 2021 and up 30.1% year-over-year. The sequential decrease in operating expenses included a $2.5 million decrease in bad debt, due to improved collections, a $10.3 million decrease in stock-based compensation, offset by an increase in hiring and investments. Both bad debt and stock compensation included one-time adjustments and as such should not be considered representative of cost structure moving forward. Comparing year-on-year OpEx, Q2 2021 OpEx was up 30.1%, due primarily to hiring and legal spending, offset by a decrease in Verily milestone expenses. Quarterly adjusted EBITDA of negative $4.6 million in Q2 2021 was approximately flat compared to Q1 2021 adjusted EBITDA of negative $5.2 million. Cash and short-term investments decreased $6.6 million from the first quarter of 2021 to $255.7 million. Purchases of property and equipment of $5.9 million, repayment of long-term debt of $2.9 million, and EBITDA loss of negative $4.6 million consumed cash, offset by working capital improvements and proceeds from employee stock purchases. Cash stabilized as claims submissions began to normalize. Accounts receivable increased by $3.4 million from $60 million in Q1 2021 to $63.4 million in Q2 2021, still significantly elevated above the Q4 2020 balance of $29.9 million. Accounts receivable is expected to decline in the second half of 2021, as backlog claims processing becomes fully caught up. Finally, the net loss for the second quarter of 2021 was negative $17.4 million or a loss of $0.59 per share, compared with a net loss of $20.4 million or $0.75 per share for the same period of the prior year. We are currently holding approximately 10% of 2021 year-to-date Zio XT claims, down from approximately 70% as of Q1 2021 quarter-end. We have submitted all Novitas claims, and remaining held claims are for a limited number of commercial payers. As we discussed last quarter, we have initiated a process of evaluating our operating profile to identify opportunities to scale more efficiently, increase our revenue conversion per unit and reduce our cost to serve. Key strategies include reducing device manufacturing costs through design and automation, reducing clinical scan times through increased AI and workflow improvement, improving revenue cycle management through reduced contractual allowances, claims cost and bad debt, and finally examining various go-to-market options that would reduce sales and marketing costs per unit. Collectively, we identified opportunities where we believe we can drive double-digit percentage reductions to our cost to serve, with reductions fully implemented in the 2023-2024 timeframe. And as a result build a strong sustainable operating foundation that can profitably support a range of reimbursement levels. In the second half of 2021, higher costs associated with capacity limitations will exceed the impact of cost structure reductions. We look forward to sharing more details on our cost improvement initiatives as well as our market expansion opportunities later this year. Turning to guidance. For the full year 2021, we expect revenue to range from $320 million to $325 million, representing year-over-year growth of 21% to 23%. Revenue guidance for the year does not assume any changes to Medicare reimbursement. As previously mentioned, discussions with Novitas and the other MACs remain ongoing. We expect revenue in the third quarter 2021 to grow sequentially over the second quarter by approximately 3%. Registration volumes in the quarter are expected to be approximately sequentially flat, with revenue volume growth coming from reducing the clinical backlog of Zio reports offset by non-volume-related revenue drivers in Q2 2021 not reoccurring in Q3 2021. For the fourth quarter of 2021, we expect revenue to be approximately flat compared to Q3 2021, with growth in registration volumes offset by clinical backlog reductions in Q3 not reoccurring in Q4. Gross margin in the third quarter of 2021 is expected to decline approximately 3% compared to Q2 2021 due to the non-volume-related revenue drivers in Q2 not recurring in Q3 and higher costs associated with capacity limitations. Operating expenses are expected to increase by approximately $13 million in Q3 2021 compared to Q2 2021, due to bad debt and stock compensation not benefiting from the factors that impacted Q2 2021, growth in hiring and investment, increases in stock compensation due to hiring and retention, and increases in legal spending. Additionally, the next Verily milestone is forecasted to be achieved in the second half of 2021. If the milestone is reached in Q3 2021, this will add $3 million to Q3 2021 operating expenses. Additionally, we will continue to pay down debt per our amortization schedule and will continue to build out our new manufacturing facility in the second half of 2021. As you've heard, work is underway. We believe this quarter's results demonstrate the progress we are making. I would also note that the CEO search is actively underway with healthy interest. We look forward to providing additional updates as appropriate. The iRhythm team remains focused on and excited about the opportunities we have, and I have the greatest confidence in our future. And with that, we would like to open up the call for questions. Operator?

Your first question comes from Robbie Marcus from JPMorgan. Your line is open.

Hi, thanks for taking the question. You've got Sarin on for Robbie here. Just to start up a question on the reimbursement you mentioned. In an unfortunate scenario where Medicare rates don't move this year, can you quantify or kind of size impact we would see on commercial rates heading into next year?

Yes. This is Doug. I mean we would be speculating. As we have said before, if we don't have any favorable movement between the MACs and Medicare, as we head into the negotiations for 2022 contracts, that certainly puts risk into there. At the same time, we're in frequent communication with the commercial payers. We have a good story on the clinical benefits and the economic benefits that our product provides. So we are working to minimize any impacts there. But at the same time, it would be too much speculation to put a range on what type of impact we could potentially see.

I got it. And on the guidance you gave, was helpful commentary there. In terms of what the mix is looking like from new center versus existing center growth, you gave some commentary on the quarter. Any commentary you have for even what the outlook looks like for the back half of this year?

I believe what you're observing is that we experienced the lowest number of new store openings this quarter. I attribute this to our existing stores being significantly impacted in the second quarter of 2020, which was the most challenging period due to COVID. You're still seeing the effects of COVID in the third quarter of 2020. Therefore, the recovery of those existing stores is leading to a lower contribution of growth from new stores. However, we are very pleased with the number of new store openings, and we are confident that we will continue making the progress we desire in expanding our new store count.

Okay. Thank you.

Your next question comes from Margaret Kaczor from William Blair. Your line is open.

Hi everyone. This is Brandon in for Margaret. Thanks for taking the question. We're still finalizing our numbers in our model. However, it appears that the ECG market, particularly patch-based ECGs, is picking up pace, especially in light of the guidance you provided. I'm curious if you could share what you're observing in the field. It seems that the adoption of patch-based ECGs is progressing well, potentially even more quickly than before. Is that an accurate assessment? If so, what factors are contributing to this trend in the field?

Well, I think the biggest thing that I would say is that our new account openings and the interest in new accounts and signing on to our product remains very high by historical levels and we continue to work through that. I mean, we would say this is due to the clinical efficacy of our product and the economic benefits that our product provides. So I think it's just a continuation of the trends we've been seeing. As we mentioned in the call, we did see in March, April and May in particular, we saw significant strength in the existing accounts, increasing volumes. We interpret that to be that as COVID continues to impact people's behaviors, that was a low point in caseloads, and there was some acceleration of patients returning to see the doctors during that time period.

Okay. That's helpful. And it's maybe looking in a longer term and maybe towards TAM expansion. I think it's been something like 10 months now since we saw the presentation of MSTOPS, which was around overwhelmingly positive data. I can appreciate that maybe we'll wait to get more definitive updates on TAM expansion. But any updates that you could provide in terms of what's been going on behind the scenes, engaging with payers? I think Edna was the one specifically that MSTOPS was run with anything that they saw intriguing there, that maybe leaves you any more or less encouraged for that TAM expansion opportunity?

Yes. Thanks, Brandon for the question. I would say in the early days of our market development and selling targeted detection programs, we believe the value proposition is resonating with payers and integrated payer providers. So, we're very excited about the progress we've made in the last six months or maybe the 10 months since MSTOPS in our early go-to-market strategy. We have a great team behind this effort and are pushing it forward. We're certainly looking to build this out even more fully. And there are aspects of the service or capabilities that we're adding here to still leveraging our core Zio XT platform, but building around that. We look forward to sharing more details as we make progress there.

Got it. Great. Thanks.

Thanks, Brandon.

Your next question comes from Cecilia Furlong from Morgan Stanley. Your line is open.

Hey good afternoon. Thanks for taking the questions. This is Calvin on for Cecilia. Just one on reimbursement and one on data. The first one is just understanding, you believe next July, when PRO tool comes out, that would be the more major catalyst versus this November, December. My understanding though was the lack of update in July didn't necessarily preclude, I guess, a development in the final rule. So, I'm just curious, have you seen to-date any public comments of significance either from societies like ACC HRS or other participants? I think last year, during the commentary, we saw comments from either societies, but also from some of your competitors as well. So just curious, anything to-date worth calling out or expect to see perhaps that could make a real impact into the final rule?

Yes, Calvin. It's Dan. I can address that. So I would say as it relates to the proposed rule, we were encouraged and do view the proposed rule this year as positive progress. CMS continues to seek information and is looking for ways to appropriately price the service. It is clear there are challenges in how best to price vertically integrated AI-based business models like our own. But CMS is actively seeking ways to address this, both specifically with our own code, as well as seeking comments from stakeholders around AI-based services. So, we intend to use the open comment period between now and mid-September to provide our perspectives and also work with other industry stakeholders to provide comments that we hope are helpful to CMS. So, we will continue to seek national pricing for calendar year 2022 and that remains a possibility, which is encouraging. But we do believe the more likely outcome, as we said in our prepared remarks, is that we will remain contractor pricing for 2022 and reenter the cycle next year.

Understood. And just one quick one on MSTOPS. I think we were expecting to see some cost-effectiveness data, either in midyear, this year or in the back half. Just wanted to check in on that. Are we still expecting to see that in the near term? And can you maybe just comment on the confidence and how good the data sense is going to be? Thanks.

Yes, sure. This is Dan. I'll take that one again. So for MSTOPS, the data that was released today and last year. We believe the publication around the clinical outcomes data is coming shortly. I don't have any specific timing or details to point you to, but do believe that's in the near-term. For the economic data piece, that remains in the works, but delayed a bit from our original thinking that it would be mid this year. I don't have updated timing to give you today, but other than to say that remains in the works. But I would also say that we do believe that having this data and the economic data in particular, peer-reviewed and published will be a big boost to our efforts. We also have our own economic models and can work with payers and integrated payer providers to review their specific data and have a discussion around the economic benefits of a targeted detection program. And that is an element of our go-to-market strategy today.

Got it. Thanks so much.

Your next question comes from Bill Plovanic from Canaccord. Your line is open.

Thanks. Good evening. I'm going to focus on the model. You are successfully driving revenue, and I'm curious if you can break down the significant increase in the Zio AT business, which I assume has a notable price premium. What does the underlying unit growth look like in terms of patients year-over-year? I'm not sure if you've shared that, and I apologize if you have.

We haven't disclosed that specific number. However, we have indicated how to adjust for the quarter concerning our volume that relates to Medicare pricing. This gives you an idea of the magnitude of revenue growth compared to volume growth. Additionally, Zio AT has seen significant growth, and you are right that Zio AT, especially with the decrease in Zio XT pricing, is now more than twice the price of Zio XT.

Okay. And forgive me if you answered this question. But the uptake at the AT, I mean are you seeing some of the physicians transfer over to that product just because of the pricing on the XT?

No, I wouldn't say we have any indication that the physicians are directly affected by the Medicare reimbursement level. When I examine the situation, I would point out a few factors. First, we are very pleased with the volume growth and increased adoption we are seeing for Zio AT. We also want to emphasize that we are still significantly below 10% penetration in the MCT market compared to our higher penetration rate with Zio XT. Therefore, there is considerable potential for Zio AT to continue growing at a strong pace. Additionally, as we have the product longer, our sales force is becoming more skilled and efficient at selling it. We have been successful in establishing new accounts, primarily those that currently use Zio XT, but a much larger portion of the growth for AT is coming from new store volumes rather than from XT.

Great. Thanks for taking my questions.

Your next question comes from David Rescott from Truist. Your line is open.

Hi guys. It's Sam on for David. Thanks for taking our questions. Just the first one going to reimbursement again. With MACs pricing in 2022, how do we think about the potential change we can see there? Is it possible that MACs could increase payment at a significant rate or are we more likely to see more of a smaller sequential step up?

Yes, hey Sam, it's Dan. I can take that one and Doug can add his observations as well. So, I would make a couple of comments. Obviously, we're going to stop short of providing guidance on what a potential outcome is. But we'll reiterate a couple of points. One, we remain very encouraged by the willingness of Novitas and the other MACs to explore an alternative pricing model which again we believe is a better representation of the true cost of delivering the service. And as mentioned previously, the reason at the better representation of the true cost of delivering the services includes historical R&D costs as an example. And remember that the challenge we are facing is that we are a vertically integrated service provider. And there are no commercial invoices that CMS can point to and say that this is a commercially validated price of the supply or equipment that is used in this service such as our wearable biosensor and software tools. If there were, one could argue that the historical cost to develop the hardware-software, the cost to produce, the cost to sell and market the product, as well as the overhead would all be captured in that commercial price of the hardware software. So, we believe this alternative model solves for a lot of those challenges. And Novitas and the other MACs will not providing any commitments or willing to review the data. So, we're optimistic that this is a viable strategy to more appropriate pricing. Obviously, with caveats, we cannot provide any assurances that Novitas or the other MACs will ultimately update pricing based on this information nor the timing. But our focus is on presenting them with this information and continuing the discussions with them. And again, we remain encouraged that they remain at the table with us to discuss.

Great, that's helpful. And I'll just ask one more on reimbursement and provide what I would add. But if we think about, is there may be a level on MAC reimbursement say maybe like a $200 or $250 reimbursement for MACs where you feel like commercial payers may be less likely to shift their rates significantly going forward? And just any color you can provide about that differential would be really helpful. Thank you.

Yes. So, this is Doug. I mean obviously, the higher the level of MAC pricing is, the less impact we would expect there to be or less risk we would expect there to be to commercial payers. But I think we need to be careful to not speculate here. And then, I mean the other thing I would say is that while we're still in carrier pricing, the commercial players are very aware that this is a process that's still underway on the Medicare side. So, I do think that national pricing, when we achieve it, that is likely to be more impactful and taken into a stronger account by the commercial payers than a MAC price, which is going to be seen as an intermediate step in a longer process. And that is very much what we have been seeing with the MAC pricing development this year.

Your next question comes from Suraj Kalia from Oppenheimer & Co. Your line is open.

Good afternoon everyone. Doug, can you hear me alright?

I can hear you, Suraj.

Perfect. So Doug, forgive me if you mentioned this already as I'm jumping in between calls. What was the contractual allowance in the quarter? I'll also ask my other question. You mentioned that gross margins seemed lower; I think I caught the reason for that. If you could expand on your comment about revenue cycle management improvement, I would appreciate it. Could you provide some additional insights on how OpEx could be reduced and margins improved? Any information would be greatly appreciated. Thank you.

No problem. Contractual allowances account for the difference between the contractual price we agreed upon with commercial payers and the actual payments we receive. During the quarter, we performed well in improving collections from past contractual allowances with both contracted and non-contracted payers, leading to some one-time favorable adjustments to revenue. Essentially, contractual allowances represent the expected amount we anticipate commercial payers will hold back each quarter, followed by a true-up based on what we've collected, which in this case was significantly more than expected over previous periods, resulting in a favorable adjustment. In the revenue cycle, there are three components. One is the contractual allowances, and improving these will drive top-line growth. The second is bad debt from patient non-payments, which we classify as an operational expense. The third component involves the costs associated with processing claims. We have the opportunity to reduce those claims and associated costs, particularly since initial claims have a percentage that will be denied. Our claims team works on these denials, and if we can decrease the initial denial rate, it will enhance our claim collection performance. Additionally, most of my costs in the revenue cycle come from addressing denied claims. Lowering denials by 25% or 40% would significantly reduce our costs per claim as we manage those denials.

And just forgive me, the contractual allowance was 10% before this quarter. Did it go up or remain the same?

We haven't disclosed the exact percentage of contractual allowances in the commercial market. It has historically been in the low teens.

There's no further question at this time, you may continue.

Okay. I would like to thank everyone for joining. We're very happy with the quarter we've had and look forward to sharing more information as we go forward. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect.