IPO Preview: iRhythm Technologies

| About: iRhythm Technologies (IRTC)

Summary

Digital healthcare company based in San Francisco, that provides ambulatory electrocardiogram (ECG), a device for detecting and monitoring cardiac arrhythmias in patients.

iRhythm Technologies is expected to IPO on Thursday, Oct. 20 and plans to offer 5.35 million shares at an expected price range of $13 to $15.

We are keen on this upcoming IPO, given the company’s high revenue growth, increasing gross margins as well as large market opportunity.

At its current valuation, IRTC appears to be fairly priced and offers a buying opportunity for investors.

Overview

iRhythm Technologies (NASDAQ:IRTC) filed for its IPO on 9/23 and is expected to IPO on Thursday (10/20). For our premium readers, we first previewed the deal here.

The company plans to raise $66.2 million, or approximately $76.7 million if the underwriters exercise their over-allotment option in full. iRhythm Technologies will offer 5.35 million shares with an overallotment option of an additional 802,500 shares, at an expected price range of $13 to $15. Assuming IPTC prices at the mid-point of its price range, IRTC will have a market capitalization of $293.74 million.

Additionally, certain of the company's existing investors have indicated an interest in purchasing an aggregate of up to $15 million in shares at the IPO price.

iRhythm Technologies intends to use the net proceeds of this IPO to expand its operations and sales force, including overseas, increase R&D activities, conduct additional clinical trials, and provide for working capital and general corporate purposes.

Underwriters for the deal include: J.P. Morgan Securities and Morgan Stanley, BTIG LLC, and Canaccord Genuity

Business Summary: Commercial-stage Digital Healthcare Provider

iRhythm Technologies is a digital healthcare provider with the objective of being a world leader in the management of cardiac arrhythmia information. Its flagship solution is the ZIO Service, which offers a new approach to ambulatory electrocardiogram (ECG) monitoring.

Patients wear a noninvasive, water-resistant heart monitor for up to 14 days, and data from the heart monitor is then analyzed through the company's proprietary algorithms to offer a concise report to the patient's physician, which enables them to diagnose arrhythmias more efficiently than conventional methods.

The company has raised $119.7 million in seven rounds of financing with its most recent round of financing taking place on May 22, 2014, where the company raised $17 million. Notable investors include: California HealthCare Foundation, New Leaf Venture Partners, Stanford University, and others.

(IRTC S-1/A Form, SEC Filing)

Market Overview

The company estimates the size of the U.S. ambulatory cardiac monitoring market to be approximately $1.4 billion and views itself as well positioned to increase its market share. Since the company received clearance by the U.S. Food and Drug Administration in 2009, it has served over 500,000 patients.

iRhythm Technologies generates revenue from the sale of its ZIO Service in the US. Approximately, 62% of revenue for the year ended December 31, 2015 was from third party payors and institutions. These third party payors and institutions include: Medicare, Medicaid, and the Veterans Administration.

Executive Management Highlights

President and CEO Kevin King has served in his position since July 2012. Mr. King has nearly three decades of experience in the healthcare and IT industries. He held numerous leadership roles at Affymetrix, Inc., including Chief Executive Officer. Prior to Affymetrix, he was President and Chief Executive Officer of Thomson Healthcare, and senior executive at GE Healthcare. Mr. King holds a B.A. in Economics and Biology from the University of Massachusetts and holds an M.B.A. from New Hampshire College.

CFO Matthew Garrett has served the company since January 2013. Prior to joining the company, Mr. Garrett served as Chief Financial Officer of Navigenics, Inc., Director of Business Development at Corventis Inc., and Vice President of Finance, Chief Accounting Officer and Treasurer for Cogentus Pharmaceuticals Inc. Mr. Garrett holds a B.A. in Finance from the University of Iowa, Iowa City and an M.B.A. from the Kelley School of Business, Indiana University Bloomington.

Financial Highlights

Revenue increased from $21.7 million in 2014 to $36.1 million in 2015, a 66.35% increase. For the six months ended June 30, 2016, revenue was $28.6 million compared to revenue of $15.9 for the six months ended June 30, 2015, a 79.8% increase. Net loss incurred was $22.8 million and $10.6 million for the year ended December 31, 2015, and six months ended June 30, 2016. As of June 30, 2016, the company had an accumulated deficit of $116.8 million.

Gross margin has also increased. The company recorded gross margins of 66% and 57% for the last six months ended June 30, 2016, and the last six months ended June 30, 2015, respectively. This increase was driven largely by the company's efforts to lower manufacturing costs, and reduce labor costs through algorithm improvements.

(IRTC S-1/A Form, SEC Filing)

Relative Valuation with Comparable Peer: BioTelemetry

iRhythm Technologies' ambulatory cardiac monitoring services competes against Medtronic (NYSE:MDT), LifeWatch, and BioTelemetry (NASDAQ:BEAT). Of these three primary competitors, BioTelemetry appears most well suited for a comparison given it is publicly traded and has a similar market cap size as iRhythm Technologies. BioTelemetry was founded in 2013 and offers cardiac monitoring services, cardiac monitoring device manufacturing, and centralized cardiac core laboratory services.

At an estimated market capitalization value of $293.74 million, iRhythm Technologies will trade at approximately 6.02x sales, using last twelve-month sales ending June 30, 2016. This is above BEAT, which trades at 2.64x sales. However, iRhythm Technologies is growing revenue at a significantly higher pace. IRTC recorded revenue growth of 79.8% company to 17.56% for BEAT. Given IRTC is growing dramatically faster than BEAT it seems justified that it commands a higher price/sales ratio of 6.02x, compared to 2.64x for BEAT.

Conclusion: Consider An IPO Allocation

IRTC is growing revenue and gross margins at an impressive pace. It trades at a higher price/sales than its primary competitor, BioTelemetry; however, this difference seems justified given the significantly higher revenue growth rate.

At its current valuation, IRTC appears to be fairly priced and offers a buying opportunity for investors.

We recommend growth investors consider a modest allocation in this upcoming IPO.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IRTC over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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