Inspire Medical Systems, Inc. (INSP) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today. My name is Viviana Limon. I'm with the JPMorgan Healthcare Investment Banking Group. I'd like to introduce the next speaker to you today. It's Tim Herbert, CEO of Inspire Medical Systems.

Thank you very much. It's great to be here and to be the last presentation of the conference, and everybody has been so busy all week. So it's -- thank you all for joining us here today, and I think the webcast is live as well. So we'll just jump through a couple of slides, a little bit of a review, and then talk a little bit about where we're going. In the middle of 2019, we made a concerted effort to really do a lot of market research and understand what type of company we were going to be. And in July, we released a new website with a whole new brand, a new image. And here you see it. No mask. No hose. Just sleep. And really working us -- working Inspire as a consumer-based company. You can see the new logo in the right corner, really a comfortable sleeping patient. So pretty exciting to get that started. Quick review. We're an active implantable neurostimulation technology. It's closed-loop system. So we can sense respiration, and then we provide stimulation to the hypoglossal nerve every time a patient inhales during sleep. What sleep apnea is, is a physiologic collapse of the airway during sleep. We just want to maintain an open airway just as CPAP does. So CPAP will blow pressure to hold the airway open. We just stimulate a nerve and we'll show you a video of that in one second. Patient uses that remote control to turn the device on when they go to bed. The device is placed in a 2-hour outpatient procedure. We've been approved by the FDA since April of 2014. So we're in our fifth year of commercialization, and we'll talk about the reimbursement. The battery life on our device is 11 years. That's extensive, no recharging. And what's key is we only stim at night. We only stim when the patient inhales. And we have intimate connection with the nerve, so it's very low energy stimulation so we get the duty cycle. Let's talk about sleep apnea. The best way to do it is just show a video. Here, this individual is sleeping and we use propofol to control the level of sedation, and we can drop a nasal scope where we can visualize what the airway looks like. So if you look at the one video moving right there, you can see here's an obstructive event. You can see there is the base of the tongue falling back into the back of the airway and obstruct. Right above that, this is the soft palate. You can see that's fully obstructed. There's air bubbles there. There's no -- that patient is not breathing. They're being choked out. In moderate cases, that happens 15 times an hour. In severe cases, it happens more than 30 times an hour. Every other minute, these patients are physically choked and not breathing. With Inspire, we turn the device on and you can see a forward movement of the tongue during stimulation, creating volume behind the base of the tongue, but it also opens up the soft palate. So every time we breathe in, we provide stimulation to that nerve and we create that open airway. And then when you exhale, we turn stimulation off. So it's a preventative measure to make sure that the airway doesn't collapse at night. But then we start the evaluation of it, how do we know it works? Well, let's start on the left side. Here, you can see this patient, this is looking at airflow. This whole thing is an overnight sleep study, if anybody has ever had one where you go in and they put wires and electrodes all over your body, and they put you in a strange bed and say, go to sleep. And here, this patient you can see has had 1, 2, 3, 4 obstructive events. The patient is trying to breathe. This is the diaphragm contracting. So the patient, we know they're attempting to breathe. If that was flat, that would be called central sleep apnea. Here's the risk of sleep apnea. It's the continuous desaturation of the oxygen concentration in the blood. So you can see the patient's choked out and you can just see the O2 just collapse. The body goes into stress. Patient subconsciously wakes up, hyperventilates, falls back to sleep, and the same thing happens over repeatedly throughout the night. Then we're able to turn on Inspire. This is the stimulation artifact. We stabilize the airflow, but most importantly, we really stabilize the O2. And you can count the number of events per hour, and that is the AHI, the apnea-hypopnea index. Now we have 2,000 patients and studies over 5 years. This is just the last study that we have. We have long 5-year data, several randomized trials, comparison trials. The evidence is such that we really got all the coverage positive policies with the insurance companies in 2019. But this is a summary of our ADHERE registry. We use the term ADHERE because that's adherence. People use the therapy. If you think about CPAP, the challenge with CPAP, it's a very cost-effective therapy. It's a very effective therapy. The problem is people just can't use it because you have that interface on your face. You have that continuous pressure blown in. So compliance is about 50% with CPAP patients. So that's why we need to show adherence, and that's why we named the study ADHERE. 2,500 patients, we've already upped that. We're going to go to 5,000 patients in this registry. This is reporting on the first 500 patients AHI, apnea-hypopnea index. That's the number of those events per hour of sleep. And you can see above 30 is severe. So our population went from 34 down to less than 10. That's fantastic. You have to have your patients less than 10 to be effective. So we have the objective measures to show it's effective, but we also do the quality of life. And Epworth Sleepiness Scale is a qualified quality of life questionnaire that is 18 questions. And our patients are pretty severe at 12, and less than 11 is normalized. We get them down to 7. And that's very, very good. But when we talk about adherence, the patients use the therapy between 5 and 6 hours a night. That's tremendous. And then what we did is we took all these patients and 6 months later we asked them, what do you think? 94% of them said they'd do it all over again. That's when we knew we had a home run. So when we get that kind of patient satisfaction scores of people that are not sleeping and that was sleep apnea, they have all tried and can't use CPAP, and they're looking for an alternative, and we get that level of satisfaction is absolutely tremendous. CPAP has been around for many, many years. They have diagnosed many patients. So when we talk about our TAM, we always put it in terms of incidence. And the easiest way to get the incidence, let's just start with CPAP. 2 million people are prescribed a new CPAP unit every year in the United States. They're between 35% and 65% compliance. So if we take the most conservative approach, let's say, 65% are compliant, so we minimize the TAM. That means there's 700,000 people every year who've been diagnosed with moderate-to-severe sleep apnea but given a CPAP unit and can't use it and are looking for an alternative therapy. That video I showed you is a sleep endoscopy. We use that to screen out patients that aren't -- do not have the proper anatomy for Inspire, and that leaves 0.5 million new patients every year. Our average sales price is $23,825. So if you just get $20,000 times 0.5 million, $10 billion annual opportunity. Our problem is not finding patients. And I'm going to show you that with our direct-to-consumer approach. Our problem is building capacity to be able to serve this population. That's really what the focus is in 2020 and moving on. Let's talk about our commercial development. 2019 was all about locking in insurance companies and building covered lives. We ended the year with 45 positive coverage policies and 145 million covered lives. Really the only outstanding plans that you see out there is, Anthem is out there at about 40 -- I can't read that -- 40 million covered lives. Now you got CIGNA, Humana, a couple of the smaller plans. We pretty much are through. All the commercial payers have policies in place. They've reviewed the evidence. They're supportive of the therapy and that we're able to move on. Medicare was another great accomplishment in 2019 where we developed -- instead of a national coverage policy with CMS, we went locally, we went to the MACs, the regional Medicare Administrative Contractors. There's 7 of them in the United States. 6 of them in the fourth quarter actually wrote draft positive policies in what they call LCDs or local coverage determinations. We are through the public comment period. They are just in the process of revising those LCDs. And they're expected to issue those LCDs early in the 2020 year. We expect several of them here in the first quarter and several more in the second quarter. And then if you look at the states, that means there's only one more MAC outstanding and -- but we pretty much have them surrounded. So we're going to put the heavy pressure on them. We expect that they will also write policy. Hopefully, by this time next year, we'll have Medicare fully taken care of. We already have a contract with the government for all the VAs and all the military hospitals. So my goal is when I come back here next year, I don't want to talk about reimbursement anymore, and we can really focus on helping patients and developing the commercial aspects. We've been good at growing our revenue. Starting back in 2016, we got approval back in 2014, grew through '15. And you can see a very steady growth. We have guidance out there $78 million, $79 million here in the fourth quarter. We'll be releasing our earnings on February 25 at 5:00 Eastern Time as well as guidance going forward. We also are able to really leverage -- I'm sorry, I'm going to back up, leverage our gross margins and we're guiding about 82% to 83% gross margin on the product. As I mentioned, the ASP is $23,825. So really good commercial story, but now we can really focus on growing the business with -- without the governor of reimbursement, which is really exciting for us. Quarterly revenue, strong, repeated. We do see, as you kind of look at the Q4 to Q1, in the United States, we have these large high deductible insurance plans. So there's always a big push at the end of the fourth quarter to get a lot of implants done before their patients' high deductible plans reset. So we do see some seasonality going from Q4 to Q1. You can see, for the most part, it's kind of flat. That's pretty flat too, just resetting. I think the other side to it is, these physicians work so hard in December doing these implants that we fatigue all the physicians. And so January is always a slow month. The sales reps are all fatigued because they're trying to hit President's club and hit their quotas. We do our national sales meeting next week. And so January is always kind of a reset and then we ramp up good in Feb, March. So we'll see maybe a little bit of seasonality. But other than that, pretty good continuous growth. Here is the keep us up at night slide. We can grow as fast as we want as long as we stay in control. And what's so important to the company and every employee in Inspire is that we have to protect strong patient outcomes. We have evidence that is at the top of the list, 94% patient satisfaction score. That's the #1 objective of the company that we will maintain those outcomes. And the key is, with the TAM as large as it is, it's very appropriate. That's the one thing that will slow us down. And so we're not going to jeopardize that. We have our own, I'm not going to go through this, our own control system, closed-loop to be able to monitor therapy outcomes, as you can see in the upper corner. The incidence and prevalence pool is so large. That's not our gating factor. Our gating factor is continue to open more centers, train more physicians to be able to properly administer the therapy. So when we look at our commercialization strategy across the board, it's all about positive treatment of the patient's obstructive sleep apnea. At the end of the third quarter, we ended with 66 territory managers. But in July, when we redid the website and the branding, and then we saw all the progress we're making with reimbursement, we knew that it was time to redefine our sales organization. So in the middle of the year, we actually promoted one vice president to a senior vice president in the United States and created 4 area vice presidents. Those are all in place. We promoted 2 from within. We hired a VP from Medtronic. We hired a VP from Boston Scientific. Each of those vice presidents can manage 6 regional managers. So we have capacity for 24 regions. Today, we're sitting at 13. We're actively recruiting 3 more, and we'll continue to grow those regions. Each of those regional managers can manage 6 territory managers, so keep doing the math. Also we're taking 144 territory managers, of which we're at 66 at the end of the third quarter. So we're building our organization to scale. And we've been aggressive with it. Very consistent cadence, we are not going to go out and hire 50 sales reps at a time. We guide that we're going to hire 4 to 5 territory managers every quarter, consistent basis. That's all so we can control the training, and we can control how they manage their clinical sites. On the same token, we also have the business managers, have hired area business manager to be able to build new centers. So our key terms for next year are increased utilization as well as increased capacity by adding more centers. And then we're going to talk about conversion here on the next slide. We learned early on that this is really an important therapy and it really sets up well for direct-to-consumer approach. A lot of these patients get prescribed to CPAP. If they go back to their sleep doctor, the doctor just gives them another CPAP. So what happens is they end up staying at home and they're not being treated. We found that we can reach out to these patients. And we'll go -- we'll use Google, Facebook, we'll do local radio and we get a tremendous response. Here, you see through the first 9 months, we had over 3 million people come to our website to learn about Inspire. 400,000 got to the page on our website. This is find a physician in my area and 30,000 of them actually reached out to make an appointment. Put that in context, if we end the year somewhere around 3,000 implants, that's about 10% conversion from the number of people who make an appointment to those that get an implant. If you go all the way back, 1 in 1,000 people end up with an implant. 1 in 1,000 people come to our website. All we have to do is double that, get it 2 in 1,000. So we're really going to focus this year on conversion. We're going to test and approach a call center to kind of intercept those calls to see if we can help educate the patients a little bit and then get them going to the right doctor. But the other thing we did when we did our branding and our market research is it was time to test TV. And so in the third quarter we tested TV in 3 markets: Pittsburgh, Cleveland and Kansas City. We picked those centers because we have established clinical sites there. The reimbursement was favorable in those areas, and we wanted to see how it would work. The response was tremendous. So in the fourth quarter, we went to 6 markets. Now after the holidays, we just opened up 10 more centers and we've got feedback. We started running in New York right after the holidays. Just for fun, I'm going to run you 2 of the commercials right now. [Presentation]

My wife hated that ad. We had her run that initially and she says, you are not going to run that. And we tested it out with patients. It tested so high. So we ran it, and the response has really been tremendous. So we have another ad that we do with a family. [Presentation]

Little catchy. But as you can imagine, the response is tremendous. I mean just see the web activity. And so now the key is, we just need to kind of focus. This is one more commercial that is not ours. I stole it from a cell phone company. But it kind of described -- it's a silly commercial, but it describes what our problem is. And this is what we're looking to improve on in 2020. [Presentation]

All right. So Verizon owes me for the shout out. But it pictorially shows what we're trying to accomplish. We now have the patients coming to our centers. They want to be treated. We have removed the barriers of reimbursement for them, so they can have the therapy. Now our job is to grow capacity, but grow capacity at a rate that we can maintain those strong patient outcomes. So that's as simple as we can state our problem statement today. We are making heavy investments in our R&D activity. We will be launching Inspire app very soon so that patients will be engaged with their own therapy. That Inspire app will communicate with Inspire Cloud, which is already launched. People know ResMed. ResMed has their Inspire Cloud-based system. We're developing the same thing. The cloud is already available. Now we need to connect the patients with the physician. So the app will become available quickly. Then we're developing the remote control, which will have Bluetooth in it. And a remote control to take information from the implantable device as well as the information from the remote, communicate through the patient's cell phone and Inspire app to Inspire Cloud. Now the physician has a full patient management system that they can interact with the patients. More importantly, we get to see all patients globally. And we get to make sure that's our way to maintain strong patient outcomes because if one center is doing better than others, there's a teachable moment there. If one center is doing much better than all others, we want to know what they're doing right. So it really provides our closed-loop monitoring of our patient outcomes. This is just in conclusion. Our whole job is to maintain our strong patient outcomes. And we have a TAM that's so large we have the flexibility to grow at the rate that will make the therapy available to patients, but maintain those outcomes from the beginning; continue our education of physicians, both ENTs and sleep physicians; communicate and educate the referral physicians and sleep centers. We -- as we scale, we have to scale our training teams. We have to scale our support teams. We're making our investments in R&D. So we're really in a strong position. We're going to end the year in a very strong cash position. And it's a pretty exciting time to be at Inspire. So we -- a couple of other comments right here. You can kind of read through there. We do expand into international markets. We have a presence in Europe. Europe runs a little more than a double-digit percent of our overall revenue. We really don't invest in countries until we have reimbursement established. We've spoken over the past couple of quarters of our work in Japan. We have full regulatory approval in Japan. We have formally submitted the dossiers to get reimbursement in Japan. And we're just at the point of working with the MLHW, the Ministry of Labor, Health and Welfare on what the reimbursement level will be in Japan. We expect to have that in the near future. And at that point, we'll determine how aggressively we go into Japan, which is one of the largest medtech markets in the world, and we'll continue to slowly expand from there. We also previously talked about our work in pediatrics. We have been running a study with a pediatric population with Down syndrome. And we're currently in the third trial. The data looks very, very strong. These poor kids just can't wear a CPAP mask, and so most of them end up with a tracheotomy. And so when you talk about why we do what we do, this is an important population that we really want to take care of. I went to the FDA and met with the divisional director back in December and we think we are developing a way forward. And we want to make sure we get that on label in 2020 to help that adolescent population. So really important. With that said, I'm going to end right there. We're very happy for where we've been. We're happy for JPMorgan. This is -- I don't know -- it's got to be our sixth, seventh year being here, and it's always delightful. And thank you all for coming to the last presentation of the week, and we will have a Q&A session. If people have questions, would love to sit there and answer any questions that you'd have. Thank you very much.