Heart-Monitor Stock Faces Medicare Reckoning After 235% Rally

(Bloomberg) -- IRhythm Technologies Inc., which has drawn the wrath of short sellers as shares have more than tripled this year, could receive key reimbursement decisions in coming weeks that will shape its sales.

Regional contractors that work with the U.S. government to decide how much IRhythm will be reimbursed for use of its products are expected to weigh in, after the Centers for Medicare & Medicaid Services updated its coding at the start of this month. The Medicare administrative contractors, or MACs, may cut reimbursement levels related to the company’s Zio heartbeat-monitoring patch, which would deal a blow to the stock’s boosters.

The San Francisco-based device maker has become a battleground for bulls and bears as shares have surged more than 1,200% since going public in 2016. IRhythm has been targeted by money managers including Kerrisdale Capital Management LLC and Lakewood Capital Management LP in recent years over the reimbursement hurdles and competitive threats it faces.

The new, permanent coding from CMS punts the reimbursement terms to the MACs while the federal agency better assesses the rates IRhythm should be paid. While the medical utility of IRhythm’s Zio to detect irregular heart rhythms isn’t a focal point, short sellers have highlighted the notable discrepancy among rates that different MACs pay.

Kerrisdale said in a March 2019 short report that Noridian Healthcare Solutions LLC was reimbursing Zio for about $33 in Idaho, compared to Novitas Solutions Inc.’s reimbursement of $267 to $365 in states like Mississippi and New Jersey. Kerrisdale’s Sahm Adrangi said in an email that the firm is still short IRhythm while Lakewood did not respond to an email requesting comment.

“Novitas does pay a strikingly high rate compared to the other MACs,” James Muller, founder of Muller Consulting & Data Analytics LLC, said by telephone. Muller wrote a letter to CMS in October that helped drive the agency to change the coding for products including IRhythm’s Zio XT.

Muller said his analysis suggests the appropriate pricing would be “in the ballpark of $65 for the shorter service to $85 to $95 for the 15 day service.” For investors there is a “genuine risk here” because it is “entirely possible” the MACs may reconsider their policies and lower the payment for these services, he continued.

Shares of IRhythm have surged 235% this year compared to a 45% rise for the Russell 2000 Health Care Index. Meanwhile, about 13% of available shares are sold short, according to data compiled by financial analytics firm S3 Partners, representing more than $850 million in bets against the company. That’s more than double the $285 million seen at a 2020 low in March.

IRhythm said in an emailed statement that it is working with MACs, like Novitas, to establish pricing for the new code. The company said it is “encouraged that both extensive clinical research and the new, permanent Category 1 CPT codes reinforce the value of the long-term continuous cardiac monitoring the Zio service provides.”

CEO change

Even while skeptics saw recent news of Chief Executive Officer Kevin King’s retirement in January as another sign that reimbursement updates could foil sales goals, Wall Street bulls have doubled down.

The addition of former Medtronic Inc. executive Mike Coyle as CEO “signals confidence in the long-term potential of the company, and perhaps even near-term comfort around reimbursement rates heading into 2021,” wrote Truist analyst Kaila Krum.

Eight analysts including Krum have a buy or equivalent recommendation on iRhythm, compared with three hold-equivalent ratings, data compiled by Bloomberg data.

Oppenheimer’s Suraj Kalia, who rates iRhythm at market perform, saw King’s departure as “a total surprise” and wrote in a Dec. 14 note that “the timing is somewhat perplexing.” The shift in leadership “will cause ripple effects downstream” at the company with the fallout from potential reimbursement changes tough to grasp, Kalia wrote.

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