Itamar Medical Ltd. (ITMR) CEO Gilad Glick on Q4 2020 Results - Earnings Call Transcript

Itamar Medical Ltd. (NASDAQ:ITMR) Q4 2020 Earnings Conference Call March 2, 2021 8:00 AM ET

Company Participants

Leigh Salvo - Investor Relations

Gilad Glick - Chief Executive Officer

Shy Basson - Chief Financial Officer

Conference Call Participants

Matthew O’Brien - Piper Sandler

Josh Jennings - Cowen

Richard Newitter - SVB Leerink

Jeffrey Cohen - Ladenburg Thalmann

Ram Selvaraju - H.C. Wainwright

Ben Haynor - Alliance Global

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Itamar Medical Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Leigh Salvo, Investor Relations. Thank you. Please go ahead, ma'am.

Leigh Salvo

Thank you. And thank you all for participating in today’s call. Earlier today, Itamar Medical released financial results for the quarter and full year ended December 31st, 2020. A copy of the press release is available on the company’s website.

Before we begin, I would like to remind everyone that during this conference call, Itamar will make certain statements that are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operations, and are based on management’s current estimates and projections of future results or trends.

Because such statements deal with future events, they are subject to various risks, uncertainties, assumption, and actual results, expressed or implied by such forward-looking statements, could differ materially from Itamar’s current expectations.

Factors that could cause or contribute to such differences include risks, uncertainties, and assumptions discussed from time-to-time by Itamar in reports filed with, or furnished to the SEC, including the latest Annual Report on Form 20-F.

Except as otherwise required by law, Itamar undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

During this call, statements may include in addition to financial results prepared in accordance with the IFRS and issued by the IASB also measures as defined by non-IFRS financial measures for operating loss and net loss, which are adjusted from results based on IFRS to exclude; one, share-based payments; two, depreciation and amortization of property and equipment and intangible assets; three, change in provisions for doubtful and bad debt; four, expenses relating to reduction in manpower; and five, gain from reevaluation of derivatives.

Management believes that the non-IFRS financial measures are provided in our earnings press release are useful to investors understanding and assessment of the company’s performance.

Management uses both IFRS and non-IFRS measures when operating and evaluating the company’s business internally and therefore decided to make these non-IFRS adjustments available to investors.

The presentation of this non-IFRS financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with IFRS. Further details, a reconciliation of operating loss and net loss on an IFRS basis to a non-IFRS basis is provided in our earnings press release issued earlier today.

And with that, I’ll turn the call over to Gilad Glick, CEO.

Gilad Glick

Thank you, Leigh. Good afternoon everyone. Thank you all for joining us for our fourth quarter and full year 2020 conference call. I'm joined on the call today by Shy Basson, our CFO.

2020 was truly a transformational year for Itamar and while undoubtedly, a year of pandemic-related challenges, our team worked relentlessly to deliver our WatchPAT devices and digital health platform to physicians and patients to aid in the diagnosis and management of respiratory sleep disorder. I'm confident that these broad-based accomplishment paves the way to our continued growth in 2021 and beyond.

We noted on our last earnings call, the trends we saw early in the fourth quarter. We were pleased to see they continued throughout the remainder of the year. Total revenue for the fourth quarter was $12.8 million, reflecting year-over-year growth of 31% and sequential growth of 16%. For the full year, revenue was $41 million, reflecting growth of approximately 31% over the full year 2019.

Our U.S. core sleep business was once again, the primary growth driver in the fourth quarter, as the shift to home based care continued to drive adoption and the American Academy of sleep medicine sustained its COVID-19 mitigation strategy guidance recommending the deferral of in lab PSG test and special precautions for the use of reusable HSAT services, our less using fully disposable devices. To-date, those recommendations remain in place.

Fourth quarter sales of our multi use WatchPAT probes surpassed pre-COVID levels and WatchPAT ONE, our fully disposable HSAT reached a record high contributing more than 40% to our U.S. revenue. Orders for our WatchPAT Direct services also continued to demonstrate meaningful growth above the trends we saw prior to COVID-19.

Our non-IFRS gross margins was approximately 71%, a slight sequential improvement and encouraging trend in light of the higher revenue contribution from WatchPAT ONE, which carries a lower margin. We plan to continue to drive further gross margin improvement through the implementation of cost reduction in design and production, as well as optimizing efficiencies in our supply chain.

We are also beginning to see a return to normal operations brought about by the efficient rollout of the COVID-19 vaccine in Israel. Our goal is to approach, pre-COVID non-IFRS gross margins of approximately 75% by year end 2021.

We have continued to make notable progress on each of our long-term growth drivers, which include core sleep, cardiology and international expansion. Recent highlights include; in core sleep WatchPAT ONE was once again our most significant growth driver with 628 customers actively using the product by the end of the fourth quarter. WatchPAT ONE customers at the end of the third quarter was – were 463 not 414, as was incorrectly stated in our prior call.

We saw for the third quarter in a row, an average of more than 40 new customers on boarded each month, a tremendous accomplishment in light of the pandemic mid-quarter spike. And importantly, more than half these customers were new to Itamar, not just due to our WatchPAT ONE technology.

It is important to note, however, that while we see continued strength from WatchPAT ONE in the first quarter of this year, we do anticipate the historic seasonality of a lower Q1 following the spike that occurs prior to year end as deductibles are met. As such, we do not expect WatchPAT ONE sales in the first quarter to reach the same level we saw in the December quarter.

WatchPAT Direct, which includes an in addition to the HSAT logistics services on behalf of our customers continue to see increased demand from clinics that worked at reduced capacity during the pandemic and yet want to ease the patient backlog, including providing those services to our largest customers.

We are also encouraged by the increasing support from the insurance carrier community for HSAT, utilizing PAT technology, such as WatchPAT. Recently this included positive coverage decisions from Health Care Services Corporation and the Blue Cross Blue Shield of Louisiana that collectively added 16 million new covered lives. Decisions, such as these further open the door for WatchPAT to be considered when diagnosing adolescent and adult patients who have symptoms suggestive of obstructive sleep apnea.

Well, undoubtedly, COVID-19 provided an opportunity for home-based healthcare options and providers were able to adapt their business quickly to continue serving patients, we believe that physicians and patients alike are recognizing additional longer term benefits of home-based testing as compared to in-lab, in general and the use of WatchPAT ONE in particular, such as infection control is a few that drives higher acceptance, similar comprehensiveness to in-lab testing and added efficiencies, such as the availability of test results the following day.

As a result, we believe physicians maybe less likely to return to business as usual for sleep apnea diagnostics once pandemic has passed. Supporting that belief, I'm delighted to share some early results of market survey currently underway by an independent third party regarding sleep testing market dynamics during 2020, and the providers sentiment for future use of HSATs and PSG.

Preliminary results show a significant majority of providers expect their HSAT usage will grow and PSG usage to decline. We are looking forward to publishing the full results in coming weeks.

We continue to invest in increasing our US penetration and expanding into new territories, ending the year with 33 territories and verticals compared to 27 at the end of the prior year. Strong demand has enabled us to accelerate our plans to continue to selectively add highly qualified sales representatives throughout 2021, and we have set a goal for our commercial team to add approximately 10 direct sales reps during the year, mostly splitting successful large territory, such as Dallas and Atlanta, as well as reaching into several additional smaller regions within Nebraska, Louisiana, and California that were previously uncovered, bringing our target number of territory and verticals to 43.

Turning to cardiology, our second growth driver. We were delighted to see positive momentum that reached pre-COVID testing levels. A study published in December 2020 edition. Nature and Science of Sleep validated the use of WatchPAT against gold standard in-lab PSG in the diagnosis of sleep apnea in patients with atrial fibrillation or AF. The study concluded that WatchPAT can diagnose sleep apnea events in patients with AF and without nocturnal active AF episodes with accuracy similar to what was previously reported for general population, and with significant correlation to PSG testing outcomes.

With recent access to PSG Limited, the availability of HSAT has proven to be a safe and convenient alternative. Encouragingly, many international professional societies, including the ESC and AHA recommended screening and management of patient with AF for sleep apnea.

The results of this study further validate the benefit of WatchPAT as an alternative home-based sleep test in meaningfully increasing diagnosis and improving the management of patients at risk for cardiovascular disease.

Lastly, on the international expansion front, we saw strength emerging in Europe, which reached a new high of $1.2 million in revenue contribution in the fourth quarter as physicians had started to adopt WatchPAT ONE.

We also continue to see increasing opportunity, emerging in Scandinavian countries, Australia, France and the United Arab Emirates. In addition, our distribution partner in Japan has continued to see increasing demand for our WatchPAT solution.

Continued innovation as well as expansion through inorganic growth, are critical components of our growth strategy. In January, we acquired the assets of Spry Health, a San Francisco based developer of an FDA cleared risk-based medical grade remote patient monitoring device or RPM solution called the Loop for approximately $2 million. This Loop System is based on an extensive set of sensing technologies and algorithms that provide continuous vital signs data to flag signs of patient exacerbation using biomarkers such as SpO2, respiratory rate and heart rate.

With this acquisition, we now have an opportunity to combine our WatchPAT technology in Spry’s Loop technology to bring to market the first device for continuous RPM of sleep apnea. The capability to monitor the longer term accumulated disease burden of sleep apnea, with or without therapy through a home health monitoring solution complements the initial diagnostic step enabled by our WatchPAT device.

In addition, it has the potential to pave the way for an end-to-end digital care pathway that can further extend Itamar presence in also diagnostics and chronic disease management, particularly as it contributes to the added burden on cardiovascular disease.

We've already completed the integration of Spry’s team followed the Asset acquisition and development is well underway with an initial market launch targeted for next year. We look forward to providing development updates as they emerge throughout the year.

In December, CMS published its 2021 Physician Fee Schedule, representing the third year of his four-year proposed plan to reevaluate reimbursement in home sleep apnea diagnostic codes. The final change became effective on January 1, 2021.

Encouragingly, for the first time in the last three years of adjustments, the CPT code relative value Unit, or RVUs for WatchPAT increased, while those associated with competitive HSTs were significantly reduced. As a result, the gap has widened even further between reimbursement for our device, which is now approximately $170 compared to competitive HSAT devices of approximately $103.

We were very pleased with the outcome of our recent public offering that resulted in gross proceeds to Itamar of approximately $50 million. This offering represented a total of 3.5 million American depository shares, which included the full exercise of the underwriters’ option to purchase additional shares. Approximately 2.2 million ADS’ were sold by Itamar and approximately 1.3 million ADS’ were sold by one of our earlier shareholders Viola Growth.

With the additional proceeds, we are now better positioned to grow organically, pursue inorganic growth opportunities and benefit from improved liquidity in the U.S. market. We also added many new investors, including ResMed, a global leader in digital health, including software solutions that supports professionals and caregivers in out-of-hospital settings and cloud connected medical devices for the treatment of sleep apnea, COPD, asthma, and other respiratory condition.

As we look out towards 2021 and beyond, we remain focused on the same priorities that have driven our success thus far. This includes, first, continued initiatives, expected to drive market share, both in the U.S. and globally by driving further productivity of our direct sales force, successful onboarding of new customers and developing of new market in Europe and Asia.

We also plan to drive new features and capabilities of our existing WatchPAT product family. And now, including advancing the Loop technology, we acquired from Spry towards commercialization. And lastly, we expect to continue to identify and pursue additional inorganic growth opportunities.

Before I turn the call over to Shy, I wanted to publicly welcome Scott Serota to our board. His vast experience includes nearly two decades, serving as President and CEO of the Blue Cross Blue Shield Association, the largest health insurance provider in the U.S. We are all delighted that he has joined Itamar at this stage of our growth and to have the opportunity to work alongside someone with his extensive background at the forefront of the healthcare insurance landscape.

And with that, I'd like to turn the call over to Shy Basson, our CFO for a more detailed review of our fourth quarter 2020 financial results and guidance for 2021. Shy?

Shy Basson

Thank you, Gilad. Revenue for the three months ended December 31, 2020 was $12.8 million, a 31% increase from $9.8 million in the same period over the prior year. Growth was again driven by an increase in WatchPAT sales in the U.S. and Europe. WatchPAT revenues for the fourth quarter of 2020 were $12.2 million, an increase of 34%, compared to the fourth quarter of 2019.

U.S. WatchPAT revenue was $10.2 million compared to $7.3 million in the same quarter in 2019, reflecting a 39% increase, driven primary by WatchPAT ONE, as well as WatchPAT direct sales.

Sales from disposables and renewable products including WatchPAT One comprise approximately 80% of WatchPAT revenue in the US in the fourth quarter of 2020, compared to approximately 50% in the same quarter in 2019.

In the fourth quarter of 2019, the company made a one-time $1 million sale to Kaiser Permanente, excluding this amount, total revenue grew 46% year-over-year, WatchPAT revenue grew 51% year-over-year and US WatchPAT revenue grew 61% year-over-year.

Turning our attention to the rest of the P&L IFRS gross margin for the fourth quarter of 2020 was 69%, compared to 78% in the corresponding prior year quarter. Non-IFRS gross profit margin for the fourth quarter of 2020 decreased to 71%, compared to 79% in the same quarter in 2019. Gross margin decline was mainly driven by the increase in WatchPAT One sales.

IFRS operating loss for the fourth quarter was $2.7 million compared to $0.9 million in the same quarter of the prior year. The increase in operating loss was mainly due to the increase in operating expenses, partially offset by the increase in revenues. Non-IFRS operating loss for the fourth quarter of 2020 was $1.8 million compared to $0.2 million in the same quarter of the prior year.

The increase in operating expenses are primarily attributed to the following factors. Selling and marketing expenses associated with the expansion of the US sales team into new geographical territories and verticals, as well as additional sales commission resulting from the increase in revenues.

R&D expenses associated with an increase in personnel to support for development, including our digital health platform. And general and administrative expenses, mainly associated with an increase in legal expenses.

Net loss for the quarter was $2.9 million compared to $1 million in the same period of the prior year. Non-IFRS net loss for the fourth quarter of 2020 was $2.1 million compared to $0.3 million in the same quarter of the prior year.

As of December 31st, 2020, we had cash and cash equivalents in short term bank deposits of $39.7 million. In February, 2021, we completed a public offering generating net proceeds to the company of $46.2 million.

Turning to our outlook for 2021, we expect full year revenue to be in the range of $52 million to $53 million, representing growth of 27% to 29% over 2020 revenue. Following our acquisition of the assets of Spry Medical, we expect to incur an additional $3 million in operating expenses in 2021 associated with research and development for these technology development that Gilad noted earlier.

As we look to the rest of the year, we are cautiously optimistic with our expectations, recognizing that vaccinations in COVID resurgence can alter the timeline to normalize healthcare operating environment. Despite these potential as Gilad highlighted earlier, commercial execution, further improving operating efficiencies and identifying opportunities for inorganic growth remain our top priorities in 2021.

With that, we will now open the line up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Matthew O’Brien with Piper Sandler. Your line is now open.

Matthew O’Brien

Thanks. Good day, and thanks for taking the questions. Gilad or Shy just for starters, on the pricing side of things, last year you had a I think a pretty meaningful tailwind from the move from just traditional WatchPAT to WatchPAT ONE. I'm assuming that's not going to repeat this year, so you've got a little bit of a headwind just from a cost perspective on the pricing side, is that a fair assessment

Gilad Glick

Shy, you want to take this question.

Shy Basson

Yep. Hey, Matthew. Just trying to understand the question, you're saying from a pricing perspective?

Matthew O’Brien

Yes. I’m sorry. Shy, I'll just be a little bit more direct with it, because you're traditional WatchPAT is $70 per test and WatchPAT ONE is $90 per test. That was a pretty big tailwind last year as I think a lot of people were shifting over to the ONE. So what I'm really trying to get at it, when I look at the guidance for this year. It seems like the volume increases that you're expecting are significant – a meaningful acceleration versus what you saw in 2020. Is that fair when you adjust for the pricing tailwind that you got last year?

Shy Basson

Yes. So we took combination of the two. First of all, we have seen in Q4, WatchPAT 300 is coming back to the pre-COVID levels. That's one aspect. Second, bear in mind that we've started to incur meaningful sales of WatchPAT ONE as of Q2 of 2020. Q1, we have started to sell a WatchPAT ONE then came the pandemic. So -- and we've started to seeing accelerated sales in WatchPAT ONE.

So basically if you take 2020, we sold the three quarters out of four of WatchPAT ONE, meaningful sales, I mean, other than a ONE sells to direct-to-consumer in Q1 which did not repeat itself. So we do see a tailwind and an increase in sales of WatchPAT ONE as we move forward into 2021.

Matthew O’Brien

Okay. And then I guess asks another way and I'm using all kinds of assumptions here, but when I look at what you did in the U.S. on the WatchPAT side of things in 2020, it looks like it's about $80,000 per account you're generating. If I just take that 80 times the 628 customers you’ve ended last year without getting close to $50 million just WatchPAT revenue in the U.S..

So is that math way off, you're trying to be conservative with guidance given COVID or is there something that you're kind of trying to say, like hey, we're going to expect some people to move back to traditional WatchPAT versus the ONE throughout the course of the year so we're kind of accounting for that?

Shy Basson

Yes. So, the 620 customers that you're seeing the $80,000 per account average, that's the average. We have customers that are significant customers, greater than 80,000. But there are a lot of customers that are small customers. So I can say that the 80,000 is a right number.

Nevertheless, and I think we've stated it, the pandemic is still here and the revenue guidance that we gave, we feel that it's on the conservative side. And that's where we feel, it's the right approach to do that. So I think the math of multiplying 60 to 8 new customers by 80,000 is not the right math to do it, just to get, 50 million out of which one, revenue.

Matthew O’Brien

Okay, thanks. And then, just quickly on Spry. Can you help to frame-up how meaningful, that business can be for you in 2022 to 2023? It's just a new area that I don't think a lot of folks are really familiar with, I'm certainly not.

So I just love to hear a little bit more about that market. And then, how you build it? Because I know you've talked about, several $100 million worth of market opportunity there. But how do you build that that type of business over the next several years? Thanks.

Gilad Glick

Yeah. I'll take these questions. So, can you hear me well? This is Gilad.

Matthew O’Brien

That’s fine. Yes, go ahead, yes.

Gilad Glick

Perfect. So, the way we think about it, Spry brings to the market, two opportunities. And I'll tell you how it keeps me thinking about it. The main opportunity is to come and provide clinicians, health providers, systems and payers, with the ability to have continuous remote patient monitoring for sleep apnea.

This is capabilities that does not – is not existing today, in almost anyway shape or form to those stakeholders. And financially, sales wise, the way we think about it is how many of the already diagnosed patients with WatchPAT ONE or with WatchPAT, I would say not even WatchPAT ONE, only WatchPAT.

We can also educate and promote the remote patient monitoring to the providers. So if you think about it, the way we think about it. In 2022, we think it will be very small number, may be single-digit percent penetration to our overall WatchPAT test numbers in the US, right, because we don't expect it out of the US. At the same time, we have it in the US.

So, it will be immaterial to our sales numbers in 2022. However, in 2023 with education, and penetration, and examples of how it works and KOLs and promotion, and all the medical device elements we can apply, we think that penetration number will grow. So not only WatchPAT number of WatchPAT test will grow from 2022 to 2023, the penetration of RPM within this number will grow from maybe a single-digit to a team number, that's again, wild assumption.

And that, that will become cure and despite at the time because per patient, of course, at the RPM we should get way more dollars than we get for a single-night test with WatchPAT. So, again numbers we are thinking about if we're getting for WatchPAT an average of, I don't know, let's take an average number of $70 or $75, with RPM per patient it should be more like $200 to $300. So, in that perspective, we grow in three different levels with the RPM between 22 and 23.

Matthew O’Brien

Got it. Thank you.

Operator

Thank you. Our next question comes from a line of Josh Jennings with Cowen. Your line is now open.

Josh Jennings

Hi, good morning, Gilad and Shy. Thanks for taking the questions.

Gilad Glick

Hey, Josh.

Josh Jennings

I wanted to just check in on -- Hi. I wanted to check in on the 620-plus accounts. I just want to make sure I'm clear. Are those all core sleep channel customers that you're referencing? Do they include cardiology accounts? I'm assuming that they're just core sleep.

Gilad Glick

Yes. So the 628 customers, we define is actively using WatchPAT ONE. So that's how we measured it. So how many customers we were able to onboard with WatchPAT ONE.

We didn't disclose the exact breakdown of how the mix is, but I think it's very safe to assume that vast majority of those customers are core sleep customers, specifically those, and we said there is a big portion of them, almost more than half, that never been Itamar customers before, are predominantly core sleep customers.

But, WatchPAT ONE is being used with all categories. Dentists are using WatchPAT ONE and cardiologists are using WatchPAT ONE, either direct or through our work for direct.

Our large, large customers, the Kaiser and the VA's of the world using heavily WatchPAT ONE. So it's really a mix, but it's predominantly appealing to core sleep customers that had have subsided activity in their sleep practices on the lab side and looking for alternatives.

Josh Jennings

Okay. Thanks for that help. And the reason I asked was just, I mean, it seems as if the cardiology opportunity in that channel, Itamar has been pursuing it, but with the demand that just opened up during the pandemic in the core sleep channel in cardiology is still in the very, very early innings.

Is there any way you can just help us understand, where you believe adoption in the cardiology channel is for the WatchPAT, either 300 or WatchPAT ONE is in the runway here in front of you guys in 2021 and 2022, strictly in the cardiology channel.

Gilad Glick

Yes. So, as previously noted, prior to COVID-19, cardiology was the fastest growing segment in our business. And it was and it’s still, what we believe, the most important long-term strategy for Itamar Medical.

That said, came COVID-19 in the early of second quarter in the kind of late March, early April timeframe 2020, and the cardiology business slowed down significantly. For us, given the fact that the cardiology offices, not the hospital where the procedure are made, but the out clinic, have visited much less frequently and we've seen a slowdown in our business.

And the good part is that, in Q4 as we noted, the cardiology business came to a pre-COVID level, and the growth trend re-emerged. So we now focus and we keep pursuing it, it's a very important part of 2021 business in terms of growth and strategy. However, in 2020, it was merely kind of flattish, if you consider Q1 was good, but then Q2, Q3 were down and Q4 was up again.

Josh Jennings

Appreciate that detail. And just to follow-up -- sorry, just two quick ones. Just WatchPAT Direct, you're calling out stronger contributions there. I mean, how do you -- how should investors see what the potential penetration of WatchPAT Direct into your accounts. I mean, should we be thinking that WatchPAT Direct could be the account for 50% of revenues over the next three to five years and what would that do to the margin profile trademark?

Gilad Glick

Shy, do you want to take this one.

Shy Basson

Yeah. So, I think I’ll start with the margin profile, so WatchPAT Direct is keeping our high margins that we have seen in the past and currently and approximately generate 75% of our margins including all. We are operating the entire logistics out of our Atlanta offices. It became material last year WatchPAT Direct and definitely due to COVID-19, we're seeing more and more clinics including the Kaiser of the wards and the VA of the ward, utilizing WatchPAT Direct services or places that either are not accepting any patient or to ease the queue in circumstances where there are long lines for each party.

Having said that, I -- assuming 50% of our U.S. revenue will be composed by WatchPAT Direct, but I think to a breathable assumption. I think it will continue to become material, but not to the level of 50% in the next two years, maybe slighter amounts more in the range of 20% to 30%. Unfortunately, but it's definitely one of the fastest growing channels that we've faced in 2020 and also as we've entered into 2021, we see the same trend in January and February.

Josh Jennings

Excellent. Thanks, gentlemen.

Gilad Glick

Thank you, Josh.

Leigh Salvo

Thank you, Josh.

Operator

Thank you. Our next question comes from a line of Richard Newitter with SVB Leerink. Your line is now open.

Richard Newitter

Hi, good morning. Thanks for taking the question.

Gilad Glick

Hi, Rich.

Richard Newitter

Couple more on the Spry health assets and then as a follow up. Just on Spry, what are some of the other types of technologies with similar characteristics and what criteria did you use to choose this one versus any of those others? What -- how exactly the economics is going to work on this, if you could just elaborate on that? And then I have a couple follow ups. Thanks.

Gilad Glick

Yeah. Great question. So, when we looked at -- we're looking for long time on how we can think about remote patient monitoring. And because we think that’s the future. The future of how to monitor sleep apnea patient on therapy, and those that do not want to have therapy, we don't think that a window of one night or even two nights is sufficient to understand the accumulative burden damage that sleep apnea cause patient in particular their cardiovascular condition. So, we're looking for long time.

Another thing that was clear to us over time is that, if we -- with our technology, our expertise, which is measuring blood volume changes and oximetry and many other parameters from the finger. That's not something we can put on a patient 24 hours for many days. It's inconvenient and patient needs their fingers to perform essential function during the day, and we cannot imagine somebody walking with each one of those Itamar probes on the finger for a week or a month or four months, right. That's difficult. So, we look for alternative organs places in the body, that we can place and measure parts, our signals and all the other things we know how to measure.

And the wrist is pretty attractive. It has advantages and disadvantages, but we know them very, very well, and we look for technology that can derive those indicators from the wrist. We could do it ourselves, but it will take us a long time, few years maybe and we need to bypass existing patents of course. So, we look for an acquisition of such an asset.

There are multiple targets. There used to be multiple targets in the marketplace. And if I have to quickly summarize, a lot of targets have heart rate, FDA clearance for heart rate measurement, much smaller group of -- we could identify only four have the FDA clearance to measure oximetry from the wrist in a timeframe that is appropriate for sleep apnea. And what price one to four. And again, as far as we could find only one company had in addition, respiratory rate derived from the risk that’s only Spry.

So, practically was the only ready now target for us from FDA clearance ready perspective. There was one or two other targets that had the oximetry and heart rate, but for various reasons, we concluded the deal with Spry. So that answered the first part of the question.

Second part of the question is about economics and where payment will come from. So, lucky for the industry I think and for us in particular in early 2020, CMS revised the remote patient monitoring codes, what we call, 99453, 99454, 457, and 458. They raised them up to be more adequate to what physicians are trying to do with chronic diseases, and the description of those codes fit our design, and what we measure is talking about remote monitoring of physiological parameters like pulse oximetry and respiratory rate, which we do.

So, our intent is to target at least in Phase 1, target our -- educate our providers to use those appropriate codes to monitor chronic disease like sleep apnea, but maybe over time we'll do something more specific, but at least for the next -- at least 12 to 24 months, that's the source of funding for RPN.

Richard Newitter

Okay, very helpful. But there's an avenue for you to actually collect additional revenue streams going forward and that's what you were alluding to in the kind of the 2023 and beyond per patient costs?

Gilad Glick

Well, let me make sure I understand the question. So, in those codes that I mentioned before 453 through 458, a physician or provider can bill roughly $150 per month for an RPM for chronic disease, right. It's very difficult in the industry and that's what I was Spry was charging commercially before we acquire them anywhere between $50 and $60 per month, which is one-third to 25% to a third of what the payers paid to providers. So, this is available today. That's something ready now, right.

If a provider does chronic disease management with RPM, sleep apnea being one of them or COPD being one of them, they are practically allowed to use those codes and get billed, given that they’re meeting all other criteria for reporting and timing and I don't want to go into all the technical detail. So that's available today. We think that eventually with the data we can generate about how much saving that kind of monitoring provides, we might be able to do a less generic coding system. So practically apply for a dedicated CPT code in the mid to long-term future, but that never takes short time as you know.

Richard Newitter

Okay. Thank you.

Gilad Glick

Is that clear?

Richard Newitter

Yeah. That's very helpful. Thank you, Gilad. And then, just on some of the reimbursement updates that you've had over the last few months and including the addition of Scott Serota to your board here, he had some health Economic Studies, things that you press release and referenced in your script as well for the cardiovascular population. What's going on here? Is this a bigger part of your payer strategy? What is that? And should we be expecting any major changes on the near horizon? Thanks.

Gilad Glick

A very good question. So I'll start by saying that our overarching strategy is to get to the 80% undiagnosed patients, right those that – those 54 million available patients in the U.S. of which 80% ever been diagnosed. That's our overarch – we need to get to them and we need to help diagnose them and we need to help get them on therapy.

Now, we think that the most practical way to think about it, at least in two to five years horizon is through the cardiovascular value proposition, because the data is very appealing and strong, because the – as we just published the health economic benefit to the payers are significant and our publication say $4,000 to $5,000 in year one, after all expenses are being accounted for.

And I can tell you -- and if you look in a more granular way on the individual sub diseases like heart failure and AFib, the numbers are even bigger. So that's the second most important and we believe that there is enough friction points in the system today that if we somehow work with the payers and we can think about many ways to do that, we can remove those friction points and accelerate penetration to this patient population.

So few of the things we did. We've added Scott Serota for a board. Scott Serota was the CEO and President of Blue Cross Blue Shield Association in the U.S. for many years, so he can guide us about how to think strategically about payers. It's something we don't have expertise until now with. We've conducted those two health Economic Studies and PIs, that we commissioned have submitted them to peer review publication. When they will come out, I'm sure they will make an impact.

And we keep perfecting our operational care continue right how do you move the patient from A to Z efficiently. We do that today, but we think that and we think even bigger picture, even more efficiency including an RPM solution is required. So we put in all the pieces of the puzzle to get to the 80% and through the cardiovascular value proposition.

Richard Newitter

Thank you, Gilad.

Gilad Glick

Thank you very much, Rich.

Operator

Thank you. Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open.

Jeffrey Cohen

Hi, Gilard and Shy, how are you?

Gilad Glick

Hey, Jeff. Thanks for calling.

Shy Basson

Thank you.

Jeffrey Cohen

I wanted to follow up on Spry and some of the questioning previously and some of Richard's questions. So if you could hypothesize with us out two or three years the solution that's Spry offers would represent 1% of the population out there being studied. It seems like – a fair amount in cardiology as well as sleep would want to know information more than from one night on the RPM side. So could you walk us through how you're thinking about the integration of Spry and how that looks practically speaking, at least domestically?

Gilad Glick

Yes. So, great question. The first the – to the answer for your first question I think, that the way we model ourselves over that we studied very carefully both because we – I was personally part of but I look around at what happened to AFib diagnosis and what happened in glucose testing and later monitoring.

Those two spaces moved over – short 10 years from, let's talk, AFib for example. You know, 10 years ago, you will go to the doctor's office, connected to an ECG machine, and they will test if you have AFib. That 10 minutes you stayed in the office, obviously that was insufficient because it will hit-or-miss with Paroxysmal patients. Later on, the industry moved to 24 hours Holter monitoring, in which you had EKG connected to the patient and observation of the ECG behavior was for one day.

Later on it moved to seven days and later on to even more, but in the last few years – you know, I – with zzzPAT, but also Medtronic with the link implantable loop monitors, they move to burden quantification is how much percentage of the day or the 24 hours the patient spend in active AFib versus non. And we see the same with glucose monitoring.

So we – what we're trying to do in the grand scheme is move the AFib space from – sorry, the sleep apnea space from what happened that night, which we know is very variable and incidental to how that burden looks on the week or a months or a six month period and how does it look on therapy, different types of therapies like CPAP versus a dental appliance versus an implant in neuromodulator, right? Those are kind of the question nobody has answers for.

So in our view, most patients should undergo monitoring once they own therapy. It's almost required in our thinking just like AFib patients are going on a kind of monitoring once they're being diagnosed or they are on anticoagulation therapy. So this is kind of, I would go for a 60%, 70% penetration at the end game. Now, of course, the way there might take two or three or five or – as happen with AFib seven or eight years.

With regards to the US, once we will get the FDA indication for monitoring of sleep apnea, which is we believe will happen in 2022, we will obviously launch the product is commercial today so it's really the indication for sleep apnea that we need. And by the way, in the meantime, the product is indicated for vital signs monitoring and exacerbation of COPD reporting, so who knows we might do something, in the meantime, in that space.

Jeffrey Cohen

Okay. That's super helpful. Okay. And then as follow-up. Could you talk a little bit about the supply chain and manufacturing throughput now, particularly on the ONE, I know, you made some modifications and had some issues last year as you were driving volumes?

Gilad Glick

Yes. No – we – thank you for this question then. We reach now a point that that manufacturing capacity and supply chain on the supply-side is not a limiting factor as far as we can tell. We have now, you know, we build up capacity to grow into the next two or three years. And that's including opening up a new facility of 15,000 square feet in another location in Israel, brand new just opened up, took us a year to build. So we don't see any really capacity constraint. What we're focusing on however is to optimize the supply chain and manufacturing of WatchPAT ONE versus what we had to do in 2020.

In order to improve our gross margins, we think we have a very detailed plan to get there by the end of the year, but in a gradual fashion, so we can see the benefits even earlier. And that's including, not working in two shifts, day and night shift, but only one shift, with the Israeli population, increasingly being vaccinated, and I can tell you that, at Itamar, it's a extremely high percentage now for our employees are vaccinated, second time with the Pfizer vaccination.

We think that we can -- being even more efficient with the capsules, that we had to do very, very carefully until now, to ensure a continuation of operations. So all those factors will plug-in, mostly in improving margins, less necessary in capacity, because it's really -- I don't want to say unlimited, but it's not limiting us in the foreseeable future.

Jeffrey Cohen

Okay. Perfect. That does it for me. Thanks for taking the questions.

Gilad Glick

Thank you, Jeff.

Operator

Thank you. Our next question comes from a line of Ram Selvaraju with H.C. Wainwright. Your line is now open.

Ram Selvaraju

Hi. Thanks very much for taking my questions, and congrats on all the progress here.

Gilad Glick

Thanks.

Ram Selvaraju

I wanted to ask, if you could comment on, what you project to be the number of centers using WatchPAT ONE, by the end of 2021? And if you also anticipate the number of patients per center, and this was a statistic that you provided in the press release today, is likely to go up significantly as you go through the course of 2021, and you go about the business of adding new centers?

Shy Basson

Hey, Ram. This is Shy. So, as we've said, by the end of 2020, we had 628 centers using WatchPAT ONE and the run rate was approximately 40 new centers a week. And I must say that, as we enter 2021, although, we are not disclosing the end number of centers that will have in December 2021.

But I do think that in some kind -- the cadence will be eased, and then we will start seeing maybe less of the cadences that we have seen in Q3 and Q4, just because we have added so many of them in 2020 of the current area. So, this is with respect to a number of centers.

With respect to number of patients that we are serving in those centers, as I’ve said in my earlier answers, those centers include very large centers and very small ones. So there is a mix of all of them. There is a one-click physician centers that is part of the 628, and there are large facilities, very large that we've accumulated. So it's a combination of all of them.

Ram Selvaraju

Okay. So just to clarify. Overall, the trend with respect to average number of patients per center should stay the same or should it go up?

Shy Basson

It should slightly increase.

Ram Selvaraju

Okay. That's helpful. With respect to Japan, can you delineate what the specific dollar contribution from Japan was to the revenue number that you reported for full year 2020?

Shy Basson

Of course, we will display a full breakdown as part of our investor presentation that will be uploaded to our website later today, but in specific Japan contributed approximately $4 million -- $3.8 million to our 2020 revenue. I just remind you that Japan is growing in single-digits. That's, although it's not the primary reason, it's not the entire story, but that's also why we're being conservative in our guidance. We do believe that in 2021, it will continue to grow in single-digits. Just because we have to solve the reimbursement issue that we have there and it's in process.

And just to remind, if you have an AHI below 40 then in order to get a sleep up, you'll have to be gone through a PSG. And we are in the process of lowering the bar from AHI 40 to 25, specifically for AFib patients. We do believe that we will obtain lowering the bar by 2022, and therefore, we do believe that the single-digit growth will be accelerated once these AHI criteria will be lowered as of 2020.

Ram Selvaraju

So, based on this it is reasonable to state that for 2021, the likelihood is that the percentage contribution from Japan to the revenue base is going to be lower than the percentage contribution from Japan to the revenue base was in 2020. Because Japan revenue is going to grow at a slower rate than your overall revenue base, is that a fair statement for 2021?

Shy Basson

That's a correct statement, that's a correct statement, Ram.

Ram Selvaraju

Okay. Can you provide us with any more timing granularity on when in 2022, the first Spry derived wearable device would be launched. Is it going to be early, in the middle or towards the end of the year?

Shy Basson

I can give you specific as far as I can control the FDA. So, jokes aside. It will not happen in Q1 for sure. I don't believe that will be a miracle. And it really if it's late Q2 or Q3 or Q4, really depends on two elements is, how fast we're going to complete what we believe will be required. It's an acute clinical study, it's not a complicated clinical study, it doesn't have follow-up because it's a comparison between two devices over a few nights. So that's one element. And of course that always has some risk in it. But more importantly is how the FDA will respond to add a submission, that for the first time, I think, as far as we know, have a monitoring element of sleep apnea.

It shouldn't be a low risk, because we're not asking to allow us continuous diagnoses of patients, we asking to allow us to continuously reporting burden of sleep apnea. So, it should be an easier burden. That's why my confidence is high, but with FDA, it's -- everything can happen between Q2 and Q4, 2022.

Ram Selvaraju

Okay. That's very, very helpful. Thank you for that. Just two other very quick things. Firstly, I'm assuming, but correct me if I'm wrong, that because you are still in growth mode, and because you mentioned earlier that you expect to pursue both organic as well as inorganic growth opportunities, it's plausible that over the course of 2021, you're still going to be primarily prioritizing growth in topline as opposed to achievement of cash flow breakeven.

And then the nuance I wanted to clarify there is also on the level of the inorganic growth opportunities that you mentioned earlier. Can you clarify, in what vein, these are likely to be.

In other words, are they going to look more like Spry, are they are they going to look dramatically different from Spry. And are you going to prioritize things that are bigger or things that are relatively small and incremental going forward. Thank you.

Gilad Glick

I will take the second question and then Shy can comment on the first part. And the second question is, we looking -- well, of course, we cannot say anything specific about our targets but those are identified targets and they're grouped into two groups.

One group is like Spry more offerings, product, either devices or digital product that can monetize more parts of the entire care continuum. So, if until now, we just monetize the sleep test, pick a number $80.

And now Spry potentially will monetize in the end of the care continuum, additional $200 to $300 per patient. Where else in the care continuum, we can monetize and in our assessment there is anywhere between $2,500 to $3,500 per patient in year one we can monetize on. So, that's one way to think about it.

And the other way to think about is how we can get more patients to our funnel faster. And that’s including a lot of things that can happen. But how do we generate more patients to enter the funnel. That's the second element of what we're looking at. So, more patients through the funnel and more dollars per patient in the funnel.

Ram Selvaraju

And actually just to clarify there, I presume that you are seeing opportunities where on a long-term basis, the reimbursement picture, is if anything, likely to be even more positive than the situation you currently have with WatchPAT ONE in terms of defensibility of pricing. Would that be accurate?

Gilad Glick

Yes, we were -- so on a tactical level, we were encouraged to see that in 2021 fee schedule, CMS have increased WatchPAT RVUs. We assume in recognition of the fact that we continuously innovate and issuing new capabilities technologically and providing more data to the doctors and charging for it, because nobody works for free. So, we think that that's very encouraging trend.

We think that other things will happen in the reimbursement area. We talked about, we think – we think it's not unlikely that eventually CMS will eliminate G-codes that should – that should change the – I think the dynamics from economic perspective in the marketplace. We look forward for that to happen. It makes sense. It's logical. It's almost inevitable in our opinion. Definitely, the RPM element of reimbursement, but who knows maybe we have a total bundle solutions and managed care solution. I think a lot of things can happen.

Shy Basson

So, the first question Ram, your assumption is correct, 2021 we are focused on growth. We want to increase our market share as we did in 2020. We want to increase our revenues you've seen the revenue guidance. Having said that, we want to improve our gross margins, we said it on screen, did you want to return by the end – towards the end of 2021 to the 75%, it will use to previously. We will invest in order to achieve the growth and to build a company for a future capturing market share.

An example is this supply example. In 2021, supply will contribute, approximately 3 million to our R&D expenses and revenue will just follow only in 2022. So just, this is an example, a concrete example for investment in 2021 to secure future growth. So indeed, it's not going to be a cash flow breakeven in 2021, and we will focus on growth, maintaining our high gross margin and proving them as the year goes by.

Ram Selvaraju

Thank you very much.

Operator

Thank you. Our next question comes from a line of Ben Haynor with Alliance Global. Your line is now open.

Ben Haynor

Good day, gentlemen. Thanks for taking the questions.

Gilad Glick

Thank you, Ben. Thanks for calling in.

Shy Basson

Hey, Ben. How are you?

Ben Haynor

Doing great. I'll just – I'll just throw one at you and take the rest of them offline. Just – with regards to the inorganic growth, you mentioned that the monitoring, you think is going to be a big part of the future. It seems like you're moving more towards digital health and you mentioned – I think $2,500 bucks that you think is available annually on these patients.

Should I read that or should we read that as more on the diagnostics and monitoring side and not on the therapeutic side, or are you including therapeutics as well? And then – is your focus with the inorganic growth likely to be more on the – the diagnostics and monitoring side other than therapeutics. That's how I'm right reading it, but maybe I'm misinterpreting that any color that would be helpful?

Gilad Glick

Yeah. I know it's a complex question, of course, I always it's very difficult to use averages. But, I think there is a good portion of it in – in diagnostics and monitoring. There is a good portion of it in giving guidance to the patient about what's right in the many choices they have those days. Some part of it is in therapeutics, but I don't think Itamar in the next year or two, we play in the mainstream therapeutics, I don't see ourselves, becoming a separate company or buying a separate company. I don't think that's the right move for Itamar. But there is other innovative opportunities that we're looking at in different particular patient population that today have no solution. We're looking at all kinds of what I call overlap syndrome, in which one disease influence another disease and solutions are particular, so you have a lot of opportunities.

Again, if you look at the diabetes space, how do companies that create business model around managing the patient, they don't always have the therapeutic solution, they don't provide insulin pumps, they don't sell insulin by itself, but they do manage the patient and they reach tremendous amount of revenues and valuation, and we model ourselves around those companies.

Ben Haynor

Well, that's definitely helpful. I'll leave it there and take the rest offline. Thanks a lot, gentlemen and congrats on the progress.

Shy Basson

Thank you, Ben. Thanks for calling.

Operator

Thank you. There are no further questions. I would now like to turn the call back to Gilad Glick for closing remarks.

Gilad Glick

Yeah. Thank you, operator. Thank you everybody for calling in today. I wish everybody a healthy, successful and safe day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.