BEAT vs. IRTC: Which is the Best Small-Cap Medical Device Stock?

Today, I’m going to break down two of the leading small-cap medical device stocks in the mobile cardiac telemetry (MCT) market. This technology is helping improve the odds for over five million Americans that suffer from irregular heart rhythms. Globally, the market is valued at roughly $22 billion. And rapid adoption of wearable heart monitors is driving up shares of companies that help people answer that all-important question: Is your heart going strong?

Before I get to the companies, a little about the cardiac monitoring market.

Globally, cardiac monitoring is a roughly $22 billion market, growing at around 5% annually. In the U.S., the cardiac monitoring market is worth around $1.4 billion annually, with roughly 4.6 million annual diagnostic tests. Home and ambulatory (outpatient) monitoring appear to be growing the fastest. There are also pockets of growth in hospitals and research services (like drug trials).

As with most medical devices, getting physicians on board is one of the biggest obstacles to companies in this market (after devices have gained FDA approval). Physicians need to have confidence in the technology so they can properly tailor the monitoring device to the patient’s specific needs.

For instance, a traditional Holter device is typically used to monitor heart irregularities during a short window of just one to two days. But newer devices can continuously monitor a patient’s heart for up to a month. That longer window of monitoring time dramatically increases the chances of capturing an abnormal event.

MCT monitoring isn’t an emerging technology given that it’s become the standard of care in many instances. But it’s not a mature market either. It remains fragmented, with many market participants, ranging from big to small. It’s a competitive space, but there’s room for multiple winners.

On one end of the monitoring device spectrum are consumer-oriented screening devices, including the Apple Watch, which have heart rate sensors and will alert the wearer if an irregular heart rhythm is identified. On the other end are wearable devices that must be prescribed by a doctor.

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Regardless of the equipment used, the big-picture goal is to first figure out if a person is experiencing irregular heart rhythms. Then use the data to diagnose why, and determine appropriate treatment options.

Two of the most intriguing small-cap medical device stocks in the market are BioTelemetry (BEAT) and iRhythm (IRTC). Let’s break down each company and see which comes out on top.

Small-Cap Medical Device Stock #1: BioTelemetry (BEAT)

BioTelemetry (BEAT) provides digital population health management (PHM) services within the healthcare system. Its Healthcare segment, which includes diagnosis and monitoring of cardiac arrhythmias, is its biggest business (85% of revenue). The Research segment (12% of revenue) provides services for drug and medical device trials. And the Technology segment (3% of revenue) makes and sells medical devices. The company is also expanding into the diabetes management market with a newly introduced remote blood glucose monitoring (BCM) solution. It has a market cap of $1.5 billion.

BioTelemetry monitors over one million patients a year, processes over four billion heartbeats daily and supports over 30,000 physicians and sites. This all means quicker diagnosis for patients, a better quality of life, and lower costs to the healthcare system.

It also means a relatively stable business. Quarterly revenue has been rising, both sequentially and year-over-year, since the third quarter of 2015. Over the last two years, revenue has grown by 17% and 38%, respectively. Last year (2017) was a record, with $287 million in revenue and EPS of $0.89 (up 5%).

One of the revenue growth drivers was the 2017 acquisition of BioTelemetry’s largest competitor, Switzerland-based LifeWatch. The strategic rationale for the acquisition – besides to knock out a major competitor – was to help BioTelemetry grow into a connected health powerhouse.

Since acquiring LifeWatch almost exactly a year ago, BioTelemetry has rolled out two new monitors in a convenient patch form-factor; the next-generation MCT and an extended wear Holter. These ePatch devices have been eagerly anticipated by investors as they reduce the competitive risks given that others, namely iRhythm (IRTC), have enjoyed strong demand for their ePatch monitors.

One of the other interesting selling points for the stock is that BioTelemetry’s arrhythmia monitoring technology powers the Apple Heart Study (AHS), which is likely to be the largest heart study ever. Apple Watch is not a diagnostic tool, but is instead used as an early screening device to uncover abnormalities in a general population. If an abnormality is found, the patient is then prescribed an electrocardiogram (ECG) patch from BioTelemetry.

It’s reasonable to expect BioTelemetry to grow revenue by 34% (to $385 million) and EPS by 37% (to $1.33) in 2018, with a good portion of that growth due to the LifeWatch acquisition. In 2019, the normalized organic revenue and EPS growth rates should both be around 10%.

The stock was doing well until mid-September of last year. Then a couple of big selloffs drove shares into the mid-20s. After a modest rebound in early 2018 BEAT stabilized in the 30-to-36 range. Then a pop back to the stock’s 52-week high followed a better-than-expected Q1 2018 earnings report in late April, and BEAT has been chugging higher since. We don’t have an official Q2 earnings release date just yet, but investors should expect that event in the first 10 days of August.

This chart shows why BioTelemetry (BEAT) is one of the two best small-cap medical device stocks out there.Small-Cap Medical Device Stock #2: iRhythm (IRTC)

iRhythm (IRTC) is a digital healthcare company that has developed a platform for diagnosing cardiac arrhythmias through use of a wearable ePatch and through cloud-based data analytics and machine-learning capabilities. The company’s stated goal is to be the leading provider of first-line ambulatory electrocardiogram (ECG) monitoring for patients at risk for arrhythmias. The company has a market cap of $2 billion.

To reach that goal the company created the ZIO by iRhythm service, which was cleared by the FDA in June 2017. Management says ZIO can diagnose many arrhythmias more quickly and efficiently than traditional technologies. The solution includes a wearable biosensor that’s relatively small and unobtrusive that beams data to a service center where it’s processed into reports that can inform treatment options, if necessary. ZIO can be worn for up to two weeks. The company’s mSToPS clinical study is large (over 5,000 patients) and has shown ZIO to be especially effective at identifying silent AFib in high risk, undiagnosed patients.

ZIO is relatively new to the market but has been growing quickly. And iRhythm has been supporting that growth through a rapidly expanding sale force. In 2016 it had just 66 sales people. In 2017, that number jumped to 86 and should be up near 112 by the end of 2018. Revenue has been ramping quickly as well, jumping by 78% in 2016 and 54% in 2017 (to $99 million). iRhythm is not yet profitable; EPS loss last year was -$1.30. That said, some analysts see the company turning a profit at some point next year as operating leverage kicks in and gross profit margins expand toward the 75% to 80% target (gross profit margin recently surpassed 70%).

Looking forward, iRhythm should continue to be a rapid grower, delivering annual sales growth of around 36% in both 2018 and 2019. Earnings will likely dip this year, then improve to a loss of around -$1.12 in 2019. The stock has been a strong performer with most dips to its 50-day line being bought. A recent rally from 60 to 90 followed the company’s Q1 earnings report in early May.

Which is the Better Small-Cap Medical Device Stock?

Truth be told I think there is room for both BioTelemetry and iRhythm in the same portfolio. The market for ambulatory electrocardiogram monitoring in the U.S. is large and growing. And with both Medtronic (MDT) and Boston Scientific (BSX) holding off on pushes into the extended wear market, there is room for both BioTelemetry and iRhythm to extend their leads.

These two companies also have very different characteristics, even though both have market caps in the $1.5 billion-to-$2 billion range. BioTelemetry is roughly three times larger, with 2018 estimated revenue of $385 million versus $134 million for iRhythm. BioTelemetry is also profitable, whereas iRhythm is not. BioTelemetry has greater market share in cardiac monitoring but is also exposed to other markets, whereas iRhythm is a pure-play ECG monitoring stock. iRhythm has a much higher organic growth rate, estimated at over 30% in 2019, whereas BioTelemetry will probably grow revenue closer to 10%.

Investors can slice and dice these two stocks to try to figure out which one is better. But I’m not sure that effort is worth it. What appears clear is that the patch form-factor represents the next wave of growth in the market, and with both companies now having patches it’s difficult to determine which, if either, will ultimately trounce the other. Why try to choose one winner, when there can be two!

My advice is that if you’re interested in the heart monitoring market, split your investment capital between both stocks and change your allocation over time, if and when it appears that one company is making big strides at the expense of the other.

I talked about both of these small-cap medical device stocks at last year’s Cabot Wealth Summit. This year, I’ll be talking about more high-potential small-cap stocks that are benefitting from their exposure to mega-trends. You should attend! This year’s annual Wealth Summit will run from August 15-17, and be held in the historic town of Salem, Massachusetts. It’s a blast every year, and a chance to commiserate with individual investors like yourself.

To get more details, click here.

Tyler Laundon

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Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!

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