Truist Securities analyst Richard Newitter reiterated a Buy rating on IRhythm Technologies, Inc. (NASDAQ:IRTC), lowering the price target to $138 from $155.

In the recently reported Q2, IRTC's surprise margin performance was driven by better-than-expected opex, as duplicative costs from the company's Global Business Services Center were reduced, and other cost efficiencies were realized. 

This was despite additional costs incurred to deal with the DOJ and Warning Letter issues, both contemplated in updated adj. EBITDA margin guidance of 0.0-0.5% (from (0.5) - 0.5%, prior), Newitter adds.

As the company continues to scale and launch new products, and as the DOJ and Warning Letter costs come out of the P&L, the analyst forecasts substantial room for IRTC to generate operating leverage, with adjusted EBITDA margin increasing to 5%+ in 2024 (from 0.2% in 2023).

This apart, based on multiple meetings with the FDA, management feels comfortable saying that they think Zio AT will be able to stay on the market as the company makes changes to address FDA concerns about the product.

The analyst notes that IRTC's Zio (portfolio of ambulatory cardiac monitoring services) received a high medical needs designation from the Japanese Ministry of Health and Welfare, which enables priority review for marketing authorization in the country. 

Management suggested this could set the company up to see potential commercialization in 2025. 

The Japanese market is the second largest potential market in the world, with ~1.5M tests performed annually and Holter is the current standard of care in the country. 

With priority review, Zio could achieve premium reimbursement, and, importantly, the high medical needs designation is specific to Zio, which should help to provide differentiation in the market. 

Price Action: IRTC shares are trading lower by 2.2% to $112.72 on the last check Monday.