Itamar Medical Ltd. (ITMR) CEO Gilad Glick on Q3 2020 Results - Earnings Call Transcript
Itamar Medical Ltd. (NASDAQ:ITMR) Q3 2020 Results Earnings Conference Call November 17, 2020 8:00 AM ET
Company Participants
Leigh Salvo - Investor Relations
Gilad Glick - Chief Executive Officer
Shy Basson - Chief Financial Officer and Chief Operating Officer
Conference Call Participants
Matthew O’Brien - Piper Sandler
Josh Jennings - Cowen
Richard Newitter - SVB Leerink
Jeffrey Cohen - Ladenburg Thalmann
Ben Haynor - Alliance Global
Ram Selvaraju - H.C. Wainwright
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 Itamar Medical Ltd. Earnings Conference Call. At this time, all participant are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Leigh Salvo, Investor Relations. Please go ahead.
Leigh Salvo
Thank you and thank you all for participating in today’s call. Joining me are Gilad Glick, Chief Executive Officer and Shy Basson, Chief Financial Officer. Earlier today, Itamar Medical released financial results for the quarter ended September 30, 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 and 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 and 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.
In addition, during this call, statements may include in addition to financial results prepared in accordance with the International Financial Reporting Standards, or IFRS as issued by the International Accounting Standards Board, or IASB of some 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 provided in earnings press release are useful to investors understanding and assessment of the company’s performance. Management uses both IFRS and non-IFRS measures in operating and evaluating the company’s business and 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. For further details and 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.
Gilad Glick
Thanks, Leigh. In this challenging environment our team is healthy to diagnose and treat sleep apnea safely and efficiently all over the world. We are honoured to have received the 2020 med-tech award and to be recognized by the National Sleep Foundation for achievements in the field of sleep medicine and technology.
I'm thankful for our team’s relentless efforts to care for our customers, their patient and one another. I'm pleased to say that this quarter we delivered revenue growth of 36%. Total revenue for the third quarter of 2020 was $11 million, an increase from $8.1 million reported for the same period in 2019.
Despite higher revenues from the WatchPAT ONE line, we were able to maintain a non-IFRS gross margins of approximately 70%. Growth in the quarter was driven by our US core sleep business across the vast majority of our 32 sales territories and verticals from both existing and many new customers, as the American Academy of Sleep Medicine sustain its COVID-19 mitigation strategy guidance, recommending the deferral of in-lab PSG test, and special precautions for the use of usable home sleep apnea test services, unless using fully disposable HSAT devices.
As a result of the general limitation posed by the pandemic, and these specific recommendations, the shift in our revenue persisted through the third quarter, with multi use WatchPAT probes reaching pre-COVID levels and WatchPAT ONE and WatchPAT Direct orders growing. We continue to meet this demand for WatchPAT ONE with our increased production output.
Regarding recent trends outside the US, volumes in Europe have returned to pre-COVID-19 level and physicians in the United Kingdom, Italy and Germany have started to adopt our WatchPAT ONE offerings. In Japan, our Japanese distribution partner continues to see healthy demand for our solution.
At this time, I would now like to turn to key long-term growth drivers, core sleep, cardiology and international expansion. Within core sleep, we continue to believe that the shift to home based care has accelerated our plans of reaching many of the 80% undiagnosed patients estimated to have sleep apnea in the US and other parts of the world. Roughly 46% of the 500 sleep medicine practice members responding to a recent American Academy of Sleep Medicine survey are concerned about remaining financially solvent through the end of the year, due to the impact of the Coronavirus on their in-lab operations, which have not fully reopened at this time, which helped drive strong demand for HSAT’s devices and HSAT programs like WatchPAT Direct.
WatchPAT ONE are fully disposable HSAT, remains the largest growth driver as the aggressive COVID-19 infection risks for 414 customers actively using the product by the end of Q3 up from 291 in the end of Q2. Of these customers, 234 or 57% are now are new to Itamar. We are also learning that the benefit of WatchPAT ONE instant availability of test results to providers is a significant benefit. Early indications are that it is creating new value, such as reduction in time to therapy, which in turn may increase the chance of patient getting on compliant therapy and higher conversion rates to therapy in the direct to consumer segment.
Within the US market, we have continued our investment in increasing our penetration. We ended the third quarter with 32 territories, and recently announced the appointment of Shane Brown, as President in the US. Shane brings cardiology market experience and AFib [ph] experience to his new role at Itamar where he is overseeing our commercial strategy and execution in the US.
Turning to our next growth driver, cardiology, we continue to be excited about the unmet clinical needs in this market and the return of volumes to pre-COVID level, with visibility into growth. We remain focused on our direct sales force opportunities. And we are pleased with the collaboration with BetterKnight, our turnkey solution partner who provides remote therapy setups.
Additionally, we're very focused on generating both clinical as well as economic evidence for solutions in this market. We recently agreed to fund a randomized control trial in Australia to generate additional evidence on the impact of OSA therapy on atrial fibrillation.
Earlier today, we're also delighted to announce the preliminary results from two large claims database studies that demonstrated the significant health economic benefits of effective sleep apnea management for patients with chronic cardiovascular disease. An analysis of both Medicare and commercial claims revealed that patients who are diagnosed and complied with treatment for sleep apnea generated material saving to the healthcare system within the first year of treatment compared to those who are not effectively treated.
More specifically, cardiovascular patients with sleep apnea, who complied with HIPAA [ph] treatment generated saving of approximately $5,000 per patient after 12 months compared to those who did not comply. We are encouraged by these initial results, given the importance of payors' current initiative to find effective new ways to create savings. We look forward to completing these studies shortly and submit for peer reviewed publication.
Finally, regarding our last growth driver international expansion, we continue to make progress outside the US. We recently announced the WatchPAT 300 has been granted PMDA approval for the use in the Japanese market, and that the German Sleep Society updated its clinical guidelines for sleep related breathing disorders, recognizing peripheral arterial tonometry or PAT technology as an equivalent alternative to air-flow based HSAT systems. Additionally, we are continuing to pursue opportunities in other markets, such as the Scandinavian countries, Australia, France, and the United Arab Emirates.
In summary, we had a strong third quarter. The long-term horizon for home-based care in general and home sleep testing in particular, looks more promising than ever. As we entered the fourth quarter we are well-positioned for continued growth and business momentum.
As disclosed on October 13, 2020, for the full year 2020, we are expecting revenue of $39.5 million to $40.5 million, reflecting growth of 26% to 29% over the full year 2019. Driven by our commitment to medical innovation, and the wide-open opportunity, we have to disrupt the status quo, we are accelerating our unique advantages, advancing society by helping the estimated 80% of those with undiagnosed and untreated sleep apnea, and creating long-term value for all of our investors.
And with that, I'd like to turn it over to Shy Basson, our CFO for more detailed review of our third quarter 2020 financial results. Shy?
Shy Basson
Thank you, Gilad. Revenue for the three months ended September 30, 2020 was $11 million, a 36% increase from $8.1 billion in the same period of the prior year. Growth was again driven by an increase in WatchPAT sales in the US. WatchPAT revenue for the third quarter of 2020 were $10.5 million, an increase of 39% compared to the third quarter of 2019.
US WatchPAT revenue was $8.9 million, compared to $5.8 million in the same quarter in 2019, reflecting a 55% increase, driven primarily by WatchPAT ONE, as well as WatchPAT Direct sales.
Sales from disposable and renewable products comprised approximately 73% of WatchPAT revenue in the US in the third quarter of 2020 compared to approximately 71% in the same quarter in 2019.
Turning our attention to the rest of the P&L. IFRS gross margin for the third quarter of 2020 was 68% compared to 77% in the corresponding prior year quarter. Non-IFRS gross profit margin for the third quarter of 2020 decreased to 70% compared to 79% in the same quarter in 2019. Gross margin decline was mainly driven by the increase in WatchPAT ONE sales.
Total operating expenses for the third quarter of 2020 were $10 million, a 39% increase from $7.2 million in the third quarter of 2019. This increase was primarily attributed by 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 product development, including our digital health platform, and general and administrative expenses, mainly associated with the increase in legal expenses.
IFRS operating loss for the third quarter was $2.5 million, compared to a loss of $1 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 third quarter of 2020 was $1.9 million, compared to $0.5 million in the same quarter of the prior year.
I would like to note that the IFRS and the non-IFRS operating loss includes the impact of extraordinary legal expenses totaling to approximately 600,000, including expenses incurred in connections with a commercial dispute and defense of our IP. We expect these legal expenses associated with the dispute to persist over the next several quarters in the range of approximately $300,000 per quarter.
Excluding the impact of these extraordinary legal expenses, in the third quarter non-IFRS operating loss would have been $1.3 million. IFRS net loss for the quarter was $2.8 million, compared to a loss of $1.1 million in the same period of the prior year. Non-IFRS net loss for the third quarter of 2020 was $2.1 million, compared to a loss of $0.6 in the same quarter of the prior year. We ended the third quarter of 2020 with $41 million in cash and cash equivalents.
Turning to our outlook for 2020 as Gilad mentioned, as previously disclosed we expect revenues of $39.5 million to $40.5 million, representing 26% to 29% over full year 2019 revenue of $31.3 million and growth of 31% to 34%, excluding one time $1 million sale in 2019 to Kaiser Permanente.
We 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
Good day. Gilad, Shy, thanks for taking the questions. I guess for starters, the US WatchPAT numbers are obviously extremely strong. The number of new customer adds was much, much higher than I was expecting, I think 123 in the quarter alone, so I'm curious about managing that level of growth on the customer side. How do you get them in, how do you ramp them up and get them to be as productive as possible, just again given how quickly they're growing?
Gilad Glick
Hey, Matt, first thank you very much for calling. This is Gilad and I really appreciate you joining us here. Right, we are in a – we are in a you know fortunate period in which the - what I call the more the product market fit is really favorable to Itamar Medical and WatchPAT ONE device. We see it, as we also disclosed in our press release that the growth is coming from the vast majority of the territories, I mean, all the reps are performing and then the focus they have has been since the beginning of the pandemic onset is to process those new customers in.
Luckily, to us, the hawk [ph] on the customer side, there is also you know, more flexibility when it comes to historical processes. We commented on this. So things takes less time and are easier a little bit from historical perspective. But so far between the ramp in production that now is fully capable to meet demand, and the increase in the amount of reps we did last year that comes to a fruition this year, we are handling it and we have no capacity issue in on-boarding, supporting or from a technological backbone perspective we're ready to go and increase even, you know, significantly more.
Matthew O’Brien
Okay, that's helpful. And then I guess, what I'm really trying to get after is when I look at the Q4 guidance, it's not a huge increase versus what you saw in Q3, obviously, Q3 was great. So with all this on-boarding, I'm just wondering about, you know, is there a level of conservativism on the on the Q4 side of things? And how are you driving the deep penetration among all these new accounts versus just adding accounts? And should those accounts really kick in into ’21? And I know, you don't want to talk too much about ‘21. But the streets modelling [ph] is a pretty meaningful growth next year, I just - any kind of commentary about where the streets at in ‘21 versus your expectations might be a little bit helpful for this call?
Gilad Glick
Yeah, well, with all, you know, of course, I have to be cognizant of the comments. First you’re right, when a company gives guidance, in particular, the way we give guidance in historically, we err [ph] on the high probability side of things. And then the guidance we gave is a high probability guidance. We may find ourselves if all story lined [ph] and things continue the way they are with no – if things that work the other direction, which what sometimes happens, we might find ourselves, you know, and delivering more than the guidance, but that will not be a conservative or I would say high probability, as I like to call it estimate for the street, that’s first answer.
Second answer for the guidance, or to the thinking about 2021. Look, the way you know, if you look at - if you take just historically, we've been around for a long time in this business. If you just take Q4 and double it by four quarters, if you like thinking about run rate in a way of thinking, you're already at street estimate or even somewhat more than that.
And then of course, we're interested to invest in more field force and programs and new product launches. We're very active as management. So when we would be ready with our playing, of course, we’ll give guidance for the entire year. But there is great outlook into what our business can do in that particular environment. And I repeat, the product market fit is almost optimal from that perspective.
Matthew O’Brien
Okay. That's really helpful. And then if I could sneak in one more quick one. I don’t want to pick on too much in the quarter and I get that WatchPAT ONE has lower gross margins, it's - the gross margin profile is a little bit lower than I was expecting. So you've got the investments and everything on the manufacturing side. How should we think about that metric in Q4, and then even going forward? Is it going to be a little bit slower to ramp back to kind of where it was that we had thought?
Shy Basson
Hey, Matt. This is Shy again, commenting what Gilad just said. Thank you for calling in. Yes. So with respect to Q3, if you look at gross margin, we had more sales in WatchPAT ONE than we anticipated and then drove the gross margin a bit down. On the other hand, we had also inventory, I would say, a more expensive inventory in WatchPAT ONE which we have to expand and they took the gross margin down.
But I can say that the goal has not changed. And we believe that in the next few quarters, each quarter we will see a decrease between one to two points on the gross margin. And the end goal is to bring Itamar Medical back to the 76%, 77% gross margin. It will take few quarters as we said previously. This is still on track. I suspect that we will see a kind of improvement in Q4 than Q1, Q2 and the second half of 2021 back to the gross margins that we're all used to.
We are on target from a roadmap perspective, with respect of decreasing the production cost of WatchPAT ONE. And it's taking every month as much as we proceed.
Matthew O’Brien
Great. Thank you.
Gilad Glick
Thanks, Matt.
Operator
Thank you. Our next question comes from the line of Josh Jennings with Cowen. Your line is now open.
Josh Jennings
Hi, Gilad. Hi, Shy. Thank you. I was hoping to follow up on Matt's questions about 2020 guidance and just thinking about the fourth quarter COVID surges in the US and in Europe and other parts of the world. Our check suggests that a lot of sleep specialists and sleep centers have moved effectively to being able to prescribe home sleep test even in the midst of a pandemic and use telehealth.
But can you just talk about are you seeing any impact in October into November here from regional surges? And how you’ve incorporated in these surges into your outlook for 2020, which – and the implied guidance for the fourth quarter?
Gilad Glick
Yes, so we can definitely say that the strength of the business and the product market fit continues well into the fourth quarter. We had our strongest October ever, as just past this month, again, with the continuation of all the territories performing with a significant growth. We definitely see the sentiment in the sleep, core sleep market, that home sleep testing is the way to go.
A lot of worry, we disclosed what is already public, the American Academy of Sleep Medicine survey, showing that almost half of the sleep practices are worried about the financial solvency of the sleep labs, even by the end of this year, that it's not too far away. So definitely remote care, which is a mega trend in the entire industry. And then on top of it, the particularity of the sleep market that requires a non-hospital based procedure home sleep test, and we see it in our results, and it's not weakening, it's actually getting stronger.
We’re very pleased to see that the on-boarding of new customers is staying stable at large base, and a lot of our business is coming from new customers. We said actually on our press release. And it's really nice to see that our regular customer business came to pre-COVID level and all the new customers we gained are operating continuously, they keep ordering products and using them.
Now we have the WatchPAT ONE which received utilization in real time, we see their taste [ph] We see that the way they use the product on a daily basis. And we see no slowdown. So that's very encouraging.
Josh Jennings
Thanks for those details. And you did call out this American Academy of Sleep Medicine survey about the concerns of big number of Sleep Medicine practice, sleep labs, that about their solvency. Just thinking about that, and how you highlighted it and thinking about comments we've received over the last number of months from our consultants around the recovery of a PSG volumes in lab sleep testing volumes. You know, I think many of our thinking that maybe PSGs go from 70% pre-pandemic to kind of a 50% of the overall US sleep tests.
Are you - is your team getting more optimistic that that number could be lower than 50%? And I would say it's a crystal ball question, but what are you hearing from your customers? And what is this stat of this survey from American Sleep Medicine, American Academy of Sleep Medicine suggests in terms of where PSG volumes could recover in a post-pandemic world?
Gilad Glick
Right. So there's two aspects of this - of the way I’ll answer. I think our work plan, our work assumption is that in 2021 we will see roughly 50% of the volume on average coming from HST and 50% from PSG. That's how we think about work plan expectations and how we're going to increase our sales force accordingly. That's it, I think, a reasonable approach.
And the way we think about it, why we think PSG portion will increase versus today is because historically there is both financial, as well as historical motivation for sleep doctors and you know how slow physicians are to change the way they have bias towards PSG. They believe in PSG and they make money off PSG.
And we think if the opportunity will be there, let's say a vaccine will be effective in a certain portion of the population, we have to assume that they will tend to go back to that practices, but not in all cases. And therefore, we take the 50%.
However, that says, if the vaccine will not be effective, or will not be distributed, broadly enough in 2021, and infection concerns will persist, and the American Academy will keep their current COVID-19 litigation strategy in place, the 50% is very conservative number.
Josh Jennings
Great. No, thanks for that. Then lastly, just on the direct to consumer channel, any updated thoughts there or about new partnerships, or just the path forward in the direct to consumer channel? Thanks for taking the questions, guys.
Gilad Glick
Thank you, Josh, very much for calling in. Yes, I'll take this. So as we disclosed the deal we had, the exclusive deal we had with SoClean, or the brand called Lunella under-delivered and we discontinued the exclusivity in the mutual agreement. So we - luckily for us, from financial and sales perspective, we caught up for those expectation in Q3. And we see no difference in Q4 as our guidance project. So that was a learning opportunity for us, we learned a lot from this.
On the other hand, there are other direct to consumer players we work with. One of them is, for example, a company called Lofta out of Southern California that we work very close. They're doing a good job. We are of course, not rushing to any exclusivity arrangement. At that point in time, we want to learn more. I still believe that the direct to consumer is a go to market opportunity that is under utilized.
But we have to be cognizant, and I would say prudent on our approach this time and specifically with creating expectations. We need to learn a bit more on how direct to consumer cash based business work in a world that there is a good paid by peers alternative from a financial perspective today to the patient.
Josh Jennings
Great. Thanks, again.
Gilad Glick
Thanks, Josh.
Operator
Thank you. Our next question comes from the line of Richard Newitter with SVB Leerink. Your line is now open.
Richard Newitter
Hi, Gilad and Shy. Thanks for taking the questions. I wanted to pass through here. The first just on the - on your rep hiring plans for the rest of the year, and as they think into 2021, I think you said 32 territories – I think you have 32 territories, and, you know, you do have a unique opportunity here, as you've mentioned to kind of get some land grab, I appreciate that the world will shift back at some point to you know, 50% [Technical Difficulty] ESG. But I'm curious, how far can you push the throttle gear and maybe if you can give us what your targets are for that by year end, and into 2021, and try to capitalize on this opportunity, which does seem pretty unique and maybe with a vaccine and a little bit more ephemeral [ph] if you will? So we'd love to hear your perspective on kind of that land grab situation and what the spending assumptions are for territory company?
Gilad Glick
Right. Rich, again, thank you very much for calling. We truly appreciate it. To address your questions. So, you know, there is couple levels we think about it. And the way I think about market coverage with reps, given you know that, you know, in my prior role I worked for a much larger business at Biosense Webster and Windproof [ph] a few hundred reps.
It really depends on the call point extent that you're looking at. So if you think about the core sleep as our core point, we can still go up maybe twice the level of our sales force today before what I call fully covered the space. But it's not the way we think about it, right? We think that the real solution to get to the 80% undiagnosed, the 56 to 60 million patient in the US is through the cardiology call point and there are 35,000 cardiologists in the US, which we think are great opportunity for us to get to those patients.
So on a grand picture perspective, on a big picture, we benchmark against the Holter monitoring tech companies, right in terms of sales force. So if you think about the algorithm, or developed telemetry of the world, again, without being specific, it's in the range of 150 to 200 reps, that could be maxed out on 35,000 cardiology call point. That's the - what I call the equivalent of thumb to how many reps we can go towards right? Not to say that we're going to do it tomorrow morning.
So for 2021, we're thinking in our simple mind, at the minimum to add 10 reps to the US 10 territories, which will bring us from 32 to 42. We think that's a reasonable amount of growth that is manageable effectively, because also you want to make sure when you hire reps, there are being on-boarded, trained in the COVID environment coach to success, the territory is being supported in a good way. So that's our appetite. At that point in time, of course, our historical numbers are being maintained.
We believe that a good sales rep in that environment in the first year can bring you know, $300, $350,000, after two years, it's north of $0.5 million and in the third year, it's a $1 million. We've seen it now persistently over a few years, definitely in that market environment that could be on the safe side of things. But that's kind of what we see in general. I would say unless things change that looks like a reasonable plan for us at that point in time.
Richard Newitter
Okay, that's helpful. Thank you for that, and the productivity ramp there, too. I guess, if that's – those are levels that it takes over time, to get to the, you know, it seems – can you give us a sense of the timing of direct buyers, as we think of 2021, I appreciate 2021 guidance. But with that kind of productivity ramp, should we be thinking of the potential incremental contribution really more in the back half of next year? Or are you going to try to get to those additional 10 reps heading into 2021? And have them all hired and ready to go by year end? Any color there?
And then if you count, that's my last follow up on the international. Can you give us any further color on the trajectory there, what kind of contribution incrementally do you expect in 2021, and stock levels? And what the plan is for your international ramp? Thanks.
Shy Basson
Hey, Richard. This is Shy. I will take the first question, Gilad, will take the second part of the question. So with respect to our plans hire in the US, we have started in Q4 to hire those 10 territories, we want them to be ready for 2021. We - so I would assume this under plan assumptions by the end of Q1 of 2021 most of them should be on board. And their effectiveness, as you mentioned will be probably in the second year, second half of 2021.
If you look at our historical revenue trajectory, you will always see this Q1 and Q2 are always less strongest in Q3 and Q4. The second part of the year is our strongest part of year. And this is typically from our expansion strategy. We start hiring on Q4 ending them on Q1 with the on-boarding and training. They are starting to pick the field and we see the fruits coming into fruition starting in Q3 and definitely Q4. International expansion?
Gilad Glick
Right, on the international expansion side, we keep investing in the existing markets that we see strong growth, that the UK, the Netherlands, some of the Scandinavians definitely, and in to some extent, Germany. We're working very hard to open the French market, which we're right now not participating in. The Australian market that there is no HST reimbursement, in some of the Nordics as well.
We're bullish on outside US. I know that, you know, for us as a non-US based company, it's easier sometimes to import [ph] in those markets. So we believe that our growth will be supported by the European and - by European market.
Shy Basson
One thing just to be sure, this is Shy, again, to international, again, Q3 was very strong from a euro perspective. We went to it, you know, almost pre-COVID or pre-COVID levels. We had a very big dip in Europe in Q2 due to COVID-19. And we were very delighted and encouraged to see that the level went back to Q3 to pre-COVID levels. And as Gilad mentioned, also in October, the trend continues.
So from that perspective, I think we are over the dip that we've seen in Q2, yet to be seen whether there will be unfortunately second or third wave. That's why we're conservative also on our Q4 numbers.
Richard Newitter
Thank you very much.
Gilad Glick
Thank you, Rich.
Operator
Thank you. Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann, Your line is now open.
Jeffrey Cohen
How are you?
Gilad Glick
Hey, Jeff. Thank you for calling. Happy to have you on the call.
Jeffrey Cohen
So I'm trying to get a sense of in the US, did you talk about the WatchPAT ONE versus WatchPAT 300 and the penetration that the one has in the North America market thus far this year? And how the trend is moved around 2020?
Shy Basson
Yeah, so I think – Jeffrey, this is Shy. How are you? And thank you for taking the call. We said that from WatchPAT 300 perspective, we went back to the pre-COVID-19 levels. As you could remember, in Q2, we had a dip in the multi use. And this was compensated by WatchPAT ONE. In Q3, the multi use, the WatchPAT 300 went back to the pre-COVID-19 levels that we've seen.
On WatchPAT ONE, we are continuing to see the growth. And the growth is coming from two angles, existing customers that are adopting WatchPAT ONE. But more encouraging is the new business that Gilad spoke about and the numbers of new customers that we've disclosed in our press release that we're seeing. So a lot of the business is coming from new business as well.
Jeffrey Cohen
Got it. And no issues on the component supplier production side of things?
Gilad Glick
Not at all. We've ramped up production capacity and production output now, to the level that we anticipated. We rebuild our safety stock levels, you will see it in the internal balance sheet as well. But we came back to our policy of having at least, you know, almost a quarter of inventory on hand, outside Israel, which saved us in the first quarter when you know COVID-19 hit the Chinese operation. And now we're back to the safety stock level. So not issue whatsoever.
Jeffrey Cohen
Got it. And can you give us a better sense in the US as far as sleep centers and sleep centers which have been opened from what you can tell over the past couple quarters? And then give us a little flavor in the cardiology front? As far as what you can tell over the past quarter, what percent of your business you've been driven from the cardiology sector versus the sleep center? Thank you.
Gilad Glick
So first, thank you, Jeff, very much for calling. I would say - I'll start with the cardiology front. So we had a really slow down in the second quarter for our cardiology business, mainly because, a, cardiologist were too busy trying to understand what happened with their business and their offices closed. We see a complete return to pre-COVID-19 levels on the cardiology business.
Now, of course given the LeapFrog which we did on our core sleep business, the proportion of cardiology are not yet to pre-COVID-19, but the growth and delivers are to pre-COVID. So we're confident that definitely the right place to set to go to.
I'm also very encouraged that the data we published this morning, the claims data analysis showing that for cardiovascular patients, if treated effectively for sleep apnea, payers will see in reality, again, based on claims data is $5,000 saving overall costs compared to overall costs. It will get even more attention on that cardiology side in addition to the clinical benefits, we already demonstrated in the past. So that's I would say the second part of your question.
With regards to the sleep labs. I think everybody's kind of waiting. The COVID-19 mitigation strategies published by the ACM are very clear. PSG procedures should be cancelled or postponed until there is control over the pandemic. And everybody is building, as I think noted on this call by some of your peers, building home sleep testing capabilities and remote consultation capabilities. And we feel that with WatchPAT ONE and the benefits we have, we're situated very strongly to take advantage of that trend.
If I had to give it a color, maybe that will help a little bit. The way a lot of the sleep doctor thought prior to the pandemic is that HST, home sleep testing is a screener, you know, they do HST but then in the end, they will get the patient to PSG which is the real deal, right? That's kind of the mindset. So it was not really important if the HST was a little bit better or a little bit less featured, which didn't benefit us because we're at the higher end of the feature set on the HST side.
Now, that's the only way to diagnose most of the patients. So suddenly, our clinical advantage, the feature set adventures we have is important. And people enrolling to our webinars in hundreds, we have almost every month said, you know, long three hours webinars, educating on the PAT [ph] signal and the WatchPAT device. And we - they're packed. And that's very encouraging.
Jeffrey Cohen
Got it. Thank you for the insight.
Gilad Glick
Thank you, Jeff.
Operator
Thank you. Our next question comes from the line of Ben Haynor with Alliance Global. Your line is now open.
Ben Haynor
Good day, gentlemen. Thanks for taking the questions. First off, for me just thinking about the WatchPAT ONE accounts. And you know, maybe kind of a cohort analysis, can you give us any sense of how the first 50 accounts track versus the second 50, third 50, et cetera? Are they kind of tracking this each cohort tracking similarly in time, so you have a pretty good sense of how things are going to go in the future? Or is it fairly variable?
Gilad Glick
Ben, again, thank you for calling, highly appreciated. As you know, we're thinking about it slightly differently in our business. And the most important because we you know, the way - let's be rephrasing, our largest customers, and we referenced it in our, some of the commentary, like the VA and Kaiser that are by far our largest customers have adopted WatchPAT ONE significantly, are using it sustainably and keep growing penetration and utilization month after month after month. And that’s very large impact of our business.
And when I say for exempted the VA, there is tens of locations. So our penetration rates keep from location to location to location, same with Kaiser, for example, location to location, and we see that growth keep growing. So they are early adopters. They keep penetrating into it, and they're by far our largest users.
You know, hospitals, like the Mayo Clinic Systems have adopted WatchPAT ONE. We keep seeing growth into the account as more departments are ordering this kind of a solution. So that's, again, it's a large and growing opportunity that keep going. And then there is the smaller accounts the way we think about it, and they are ordering. We’ve seen utilization being sustained. And if I had to give last color that I am comfortable sharing, is that we see WatchPAT ONE utilization in customers that historically have been ours, as well as customer that we gain during the pandemic sustainably at the same level. And that's very encouraging.
Ben Haynor
Okay, great. That's very helpful color there. And then I apologize if I missed this earlier, but did you give kind of the current production levels on WatchPAT ONE and where you see them kind of by the end of the year? Is that still on the same trajectory?
Gilad Glick
Yeah, we I think - that the important commentary we made is that our production capacity can meet to date and future demand. Moreover, we pushed a little bit production output to re-build safety stock outside Israel of about a quarter and as I mentioned, you can see it on our balance sheet. So we're you know, supplies is a non-issue anymore.
Ben Haynor
Okay, great. And then lastly, for me on the claims database study and the preliminary results there, obviously, those are very encouraging. What else is there to be done to complete the study? And what publications do you intend to submit it to? And then I guess it's kind of multiple part of question. But, you know, really, when it comes down to it, who is the audience for these studies? Is it the clinicians, is it insurers, is it the author's mothers? Who is the real audience here?
Gilad Glick
Definitely the author's mothers? No, I'm joking. So, good sequence of questions. So number one, so the studies, we commissioned Baker Tilly to run the studies on our behalf, of course, to be independent. They're the one that did the study. They're contacted the database, bought them did the analysis, and completed the initial results. So the next step is to complete the analysis. So do a thorough analysis by Baker Tilly, not only the initial result, but the secondary and tertiary objectives as well.
The next test and that we - and that we hope will be finished within few weeks. The next step is to engage peer reviewed journals and submit the papers for peer reviewed journal publications, that typically take few months. It's very important than to do that to have credibility for the studies. We believe they can be published in a peer to what they call clinical journals. We're not sure exactly. And I don't want to give particular names, but really with a high impact grade that will be seen.
And the target audience are the payers. We believe that today, the clinicians already understand the clinical value of treating cardiovascular patient for sleep apnea from an outcome perspective. It's well-established and well-published and in the guidelines, but we lacking the motivation on the payer side to incentivize that process to take place to the extent it needs. And if we bring to the table $5,000 of savings within the year, it's really meaningful, its material, and we believe the payers will pay attention.
Ben Haynor
Makes a lot of sense. Excellent. Well, thanks for the color. And thanks for taking the questions, gentlemen.
Gilad Glick
Thank you, Ben.
Operator
Thank you. Our next question comes from the line of Ram Selvaraju with H.C. Wainwright. Your line is now open.
Ram Selvaraju
Thanks very much for taking my questions. Just wanted to get an additional color on the gross margin evolution that you expect to see over the course of the coming quarter. My understanding is that while WatchPAT ONE had increased in percentage of the sales, you may continue to see some downward pressure on gross margins. But I just wanted to get a sense of whether you think you've approached a steady-state there. And whether you anticipate seeing gross margin improvement over the course of the coming quarters, or if you expect it to potentially decline a little bit further?
Shy Basson
Hey, Ram. This is Shy. First of all, thank you for taking the call and investing the time, we highly appreciate it. You're right, as more we are selling - increasing our WatchPAT ONE sales, the way to WatchPAT ONE is heavy on our gross margin. On the other hand, we have a very clear roadmap to decrease the WatchPAT ONE production costs. It's a lot of engineering changes that we're doing within the product and they taking day by day as we speak.
Our expectation and as I have said it earlier, that we will reduce gross margin by one or two points every quarter as we move forward. And we have to - we have our plans to go back to our 75%, 76% gross margin historically shown in the second part of 2021. We have not seen any improvement in Q3. It came mainly because WatchPAT ONE sales were greater or larger than we anticipated from the get go and second we had inventory this was relatively produced in a high cost.
But as we move forward, we do see a path and a roadmap to decrease gross margin by one or two points every quarter until we reach the gross margin levels that we were used to pre-COVID-19 75%, 76% in north.
Ram Selvaraju
Okay, very helpful. Secondly, I wanted to know if you could provide us with an update on the status of the COVID-19 CPAP trial that you I believe we're running through the Mount Sinai health system, and when we might expect data from that?
Gilad Glick
Thank you, Ram. Yes, I'll take this one. So as you know, given the control New York have gained over the pandemic. Again, in the last few months, recruitment was very slow. And we have no updated estimates on when recruiting can be completed right now. I will only say that I wish you know that recruitment will keep being slow, if that means that there is no second large wave in New York. If, and hopefully not, but if there will be a second wave recruitment will pick up and then we can provide a more meaningful update.
Ram Selvaraju
Okay, great. Thanks. And then last point from me. In the prepared remarks, I noticed a comment regarding this IP dispute. Can you just give us some additional background on what this is? If it has been resolved, if it's in the process of being resolved? And if it hasn't been resolved, with what timeline you expect it to be resolved? Thank you.
Gilad Glick
Yeah. Thank you, Ram. Yeah, while in general, our policies is that we typically don't discuss IP and legal strategies. We, you know, in the past, we have successfully defended our IP, and we'll continue to do so. In a substantial manner, I can tell you that the - we took a company called Ectosense to court on both trademark, as well as misrepresentation grounds. Nothing that is impacting our business today. It is very small, Belgium-based competitor, have not impact our business at all.
But we have to, you know, housekeeping wise to make sure that if people infringe on our rights we’re held them accountable. And that's what we do. We have no insight of how long that will take. As Shy mentioned, we believe that several quarters, but in other way, it's a smaller part of our - where we engage right now.
Ram Selvaraju
Thank you very much.
Operator
Thank you. There are no further questions at this time. I would now like to turn the call back over to Gilad Glick for closing remarks.
Gilad Glick
Well, I want to thank everybody for calling today and wish everybody healthy, safe and good day.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
