Disclosure
We are short shares of iRhythm Technologies, Inc. Please click here to read full disclosures.
Kerrisdale Capital will hold a conference call on Wednesday, March 13 at 11:00am ET to discuss the iRhythm Technologies, Inc. report. To participate in the conference call, dial 866-834-3313 (United States) or 409-981-0700 (international) and reference the Kerrisdale Capital call or conference ID 7690368.
We are short shares of iRhythm Technologies, a $2.3bn medical device company trading at over 15x sales despite facing multiple factors that will dramatically cut its revenue growth in the coming years. iRhythm’s Zio, developed over a decade ago and accounting for nearly all the company’s $150m in sales, is a one-lead heart rate monitor in patch form. This “extended Holter monitor” is worn by patients for up to 14 days, during which the device continuously records heart rhythm data. Each application of a Zio patch costs payors about two to four times what it would cost to use legacy monitoring modalities, but iRhythm claims that the Zio reduces costs for the healthcare system through increased effectiveness and better patient compliance.
A closer look at the circumstances surrounding the reimbursement treatment of the Zio Patch reveals that at the core of iRhythm’s revenue base is an exceedingly generous, but increasingly fragile, reimbursement regime. The Zio patch’s success in achieving unit-level revenues greater than any other cardiac monitoring method is a function of iRhythm’s subtle and skillful maneuvering around the arcane technicalities at the center of the American Medical Association’s reimbursement coding process. This has allowed iRhythm to essentially “name its own price” in the Medicare negotiation process, leading to unduly favorable reimbursement from commercial payors as well.
But the price gouging will inevitably be short-lived. The rapid increase in Zio patch utilization has now put a bullseye on its back, increasing the odds that both Medicare and commercial payors will both cut back on reimbursement levels and throttle utilization. In addition, the Zio patch is currently reimbursed under a temporary CPT tracking code that we expect will be transitioned into a permanent code for calendar year 2021. In the process, we anticipate reimbursement levels for the Zio patch will fall by over a third, and potentially more than 50%.
Reimbursement cuts are not iRhythm’s only problem. Until recently, the Zio patch was the only product available in a category that it was responsible for creating. But the simplicity of the Zio and its commercial success have attracted competition, and new entrants have both superior devices and more diversified device portfolios. Up to now, iRhythm has successfully used favorable clinical studies and enterprise integration capabilities to win business. But competitors are now promoting the superiority of their own devices, backed by more recently published data that reflects much less favorably on iRhythm. They’re also offering more flexible solutions that appeal to a broader array of customers, such as larger enterprises. As a result, iRhythm will find it increasingly difficult to win business with large hospital systems and physician groups. In addition to market share losses, the specter of price competition from these peers looms large.
iRhythm has recently tried to diversify by extending its Zio patch into the real-time cardiac monitoring space with its Zio AT device. But the attempt appears to be too little, too late. Extensive discussions with industry participants and new disclosures in the company’s filings indicate that, contrary to iRhythm’s attestations in its most recent earnings call, iRhythm has pulled back on the AT. In fact, the product can no longer even be found on the company’s website. That leaves iRhythm as a one-hit wonder with a shrinking reimbursement revenue pool and a slew of superior competition. As the only single product company in the cardiac monitoring space, iRhythm has already missed the beat. The results could be fatal.
