Kerrisdale on iRhythm Technologies

iRhythm faces reimbursement cuts of 30-60% in the near future.

iRhythm faces formidable competition that it has (over)confidently dismissed.

The TAM for the Zio is much smaller than iRhythm suggests, and the effort to expand its product offering through the Zio AT has been a failure.

We are short shares of iRhythm Technologies (IRTC), 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%. …

https://seekingalpha.com/article/4248365-irhythm-technologies-inc-growth-reversal-will-leave-investors-heartbroken