IRTC - iRhythm: Revolutionizing Arrhythmia Detection With AI And Machine Learning

2023-05-26 03:58:32 ET

Summary

• iRhythm Technologies, Inc. is a key player in the US ambulatory cardiac monitoring market for arrhythmias.
• The company's Zio monitors utilize advanced AI and machine learning algorithms for the accurate detection of arrhythmias.
• IRTC further expanded its product line with the Zio AT, which maintains the patch form factor but includes Bluetooth technology for mobile cardiac telemetry.
• I view the stock as a long-term buy and have a price target of $170 on the stock.

Investment Thesis

iRhythm Technologies, Inc. ( IRTC ) holds a prominent position in the US ambulatory cardiac monitoring market for arrhythmias. The company's flagship product, the Zio monitors, utilizes advanced AI and machine learning algorithms for accurate arrhythmia detection. IRTC initially gained recognition by introducing the Zio XT patch monitor, which effectively reduced the size of the traditional Holter monitor while allowing for extended wear time. Subsequently, IRTC launched the Zio AT, which maintains the same form factor but incorporates Bluetooth technology for mobile cardiac telemetry. These patch-style monitors and their innovative technology aim to diagnose multiple types of arrhythmias more efficiently than conventional methods, minimizing the need for inconclusive tests. Considering the compelling long-term outlook and multiple avenues for revenue and profitability expansion once the short-term obstacles are overcome, I remain bullish on iRhythm.

Company Overview

IRTC develops the Zio monitors, which use AI and machine learning algorithms for arrhythmia detection. IRTC carved out a leading niche for itself initially with its Zio XT patch monitor, which essentially miniaturized the Holter monitor and enabled extended wear time. Since then, IRTC launched the Zio AT, which is the same form factor but is a Bluetooth-enabled MCT offering. The patch form factor and technology are designed to diagnose several arrhythmias more efficiently than traditional technologies and also to avoid multiple indeterminate tests. Zio monitors have demonstrated leading patient compliance and diagnostic yield metrics.

Strong Q1 2023 Results

iRhythm had a strong start to the year with better-than-expected results in the first quarter. Both the company's XT and AT products performed well, leading to higher sales of $111.4 million, surpassing consensus forecasts by $4.4 million. The company experienced robust patient registrations and achieved a record number of new XT accounts. The underlying business showed healthy momentum, and device return rates improved. As a result, iRhythm updated its full-year guidance to $485-490 million, exceeding the Street's estimate of $481 million, reflecting the strong performance in the quarter and positive momentum in the second quarter. This performance is promising for iRhythm, especially considering their upcoming product launches, such as the Zio Monitor this year, Zio MCT next year, and expansion into international markets.

Differentiated Position in an Expanding Market

IRTC is shifting its focus from being a product-oriented company to a platform-oriented company, leveraging its AI capabilities. By positioning itself as a platform, IRTC aims to gather and organize extensive information that cardiologists receive, empowering them to be more effective in their work. The FDA has also been expanding its capabilities to evaluate algorithms like the ones developed by IRTC. Currently, IRTC's offerings include patch monitors called Zio XT and Zio AT, which have proven to have high patient compliance and yield accurate diagnostic results. The company's AI and deep learning capabilities enable it to handle large volumes of patient data, assisting physicians in improving their workflow efficiency. I remain optimistic about the potential growth of IRTC stock, as I believe there is room for further expansion in the core ambulatory cardiac monitoring market. Additionally, there is significant potential for IRTC to enter adjacent markets, providing additional value and opportunities.

Furthermore, the growing popularity of consumer wearables like Apple Watch (AAPL) and Fitbit is contributing to the expansion of the ACM market. IRTC acknowledges these consumer devices as "pre-diagnostics" since they are not currently considered clinical grade and would require review by clinicians. Presently, these devices are enhancing the ACM market by prompting individuals with previously undiagnosed conditions to seek medical attention due to irregular heartbeats detected by the wearables. In many cases, these patients are then prescribed an ACM monitor for clinical confirmation. Both Apple Watch and Fitbit have received FDA approval for their photoplethysmography ((PPG)) sensor technology and AFib detection algorithms. However, it is worth noting that these approvals specify that the devices are not intended for clinical use or as replacements for traditional AFib diagnosis and treatment methods.

Valuation

My December 2023 price target of $170 values shares at 9x 2024E sales, a step below where other high-growth SMid-cap peers trade today on 2023 numbers. I feel this is justified by iRhythm's long-term growth rate and significant market opportunity offset by near-term challenges.

Risks to Rating

While IRTC secured national coverage from CMS for FY2023, there may be future reimbursement cuts. Additionally, Zio is currently priced at a significant premium in the commercial setting relative to CMS rates, and while the company only expects a low-single-digit commercial pricing decline, there is a risk that price erosion may be greater for commercial volumes. Future competition from alternative form factor devices. While I do not see significant risk currently from consumer wearables (e.g. Apple Watch, Fitbit, etc.), as they are not diagnostic-grade, I do not believe that the longer-term risk that these devices eventually become competitive within the ACM market is immaterial.

Conclusion

IRTC is a dominant player in the US market for ambulatory cardiac monitoring for arrhythmias, which is valued at approximately $2 billion. I view the stock as a long-term buy and have a price target of $170 on the stock.

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