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

Okay. So good morning, everybody. We're set to kick off the medical device portion of Day 3 of the Bank of America Virtual Health Care Conference. For today's fireside chat, we're really happy to have the management team from Inspire Medical Systems. Of course, we have Tim Herbert on the line, the President and CEO; and Rick Buchholz, the Chief Financial Officer of Inspire. So Tim and Rick, thanks very much for being here this morning. We really appreciate it.

Thank you very much, and good morning to you.

So we'll just kind of kick off, Tim and Rick, with just a general question. Just kind of curious, if you wouldn't mind just giving us your sense for sort of the current state of affairs right now in terms of what you're seeing out there relative to some of the comments you made on the Q1 call. Just are things sort of progressing as you expected, seeing a little bit of incremental demand pickup? Just kind of curious for the latest sort of field checks or data points that you have.

Perfect. Yes. So we saw a little bit -- during the earnings call, we talked a little bit about procedures starting in Germany, and Europe is a little bit ahead of the United States in managing the pandemic. But we knew that there was interest in the United States to get started again, and we highlighted that there was a couple of states ready to schedule cases. And as this is -- just one week later and things are changing so quickly. And I believe we've done Inspire implants in over 13 states now. And I think we have implants scheduled in more than half of the United States. And this also includes scheduling the sleep endoscopy procedures as well. So that really helps the progression of new patients coming into the pipeline, which is also just as important as getting the patients who had to have their procedures suspended and rescheduled. So we're seeing a very good interest pretty much across the United States. We do have cases in New York. We've seen cases in California. It started in the Southeast with Georgia, Florida and into Texas. So it pretty much is moving across the United States with excitement to get procedures back online, and patients are -- really want to have their procedure.

Wow, that's a great update. It's a little better than I would have hoped for, especially your comment on you're seeing not just rescheduled procedures, but some kind of new procedures. Just curious as to what sort of anecdotes you might be getting from your reps and sales organization on that front in terms of kind of the attitude of the patient. Are these folks that are -- trying to kind of get in before a second wave? Or you just think that patients are perhaps more comfortable going into these types of facilities than we may have realized? It was a very positive update.

Well, we've always describe it as this. There was always some questions whether Inspire is actually an elective procedure. And as an example, one of the last implants that we've performed was in Long Island Jewish Hospital in New York City, where the surgeon said, this is for obstructive sleep apnea. This is Inspire, this is not elective, and they did that 2 procedures. And that center, by the way, is already -- is back up and running again. These patients who have sleep apnea, they've been diagnosed maybe a year or 2 years ago. They know the consequences in the quality of life of sleep apnea. They're not happy with their quality of life. They've tried CPAP. And they maybe have felt the benefit of CPAP, but they just can't have sustained benefit from it. So they're looking for an alternative therapy. They've gone through the diagnosis. They've gone through the sleep endoscopy. They've gone to their insurance companies to get an approval. They're excited to get the therapy. And then pandemic hits and they're postponed. So yes, these people are motivated to get a therapy and get on top of their obstructive sleep apnea and get their own lives going just as we're trying to get the whole world going. So there are some patients who I've heard -- just a few comments come back that patients are a little scared right now. It's a little early, and that's okay. The people -- we have to respect people of all different thoughts on where they are as far as readiness for a procedure. And that's okay. We'll just move them back in the queue a little bit to give them a little bit more time. But for the most part, we've seen patients really excited that everything that they've put in so far to get their therapy. And not so much about worrying about a second wave. I think we probably will have a second wave. We all have to plan for that. But I think as far as the health care system, I think we're in a better position should or when that second wave hits primarily in the area of personal protection equipment or PPE that we will have stockpiles, and so the great risk of running out of supplies won't necessarily be there. So we should be able to continue procedures and not just go into another postpone all cases again. But we'll prepare for all scenarios. But I think we'll be able to continue forward and that we're pretty optimistic that the rate will continue, and we'll continue to open up more of our centers. And one last comment, going back to what you just mentioned. We are relatively young as a company. We are in 327 centers, as we mentioned at the end of the first quarter. While we're growing significantly, that is still a relatively small number. And it's a fraternal organization. And so the ENTs will communicate with each other, they will share their learnings. So doing sleep endoscopy procedures, what protocols do they change post-COVID that they weren't doing beforehand, and they will share those learnings and implement those practices into your own centers. And hence, we're able to see centers start more broadly, not just with implants, but also with the sleep endoscopy or the final diagnostic before an implant.

Very interesting. And then I was struck by your comment that some of these procedures might not be considered elective. Is that -- I'm just curious, is that because these things have been in the works for so long and the patients are just absolutely ready? Or is it because potentially, people understand the downstream effects of sleep apnea and what that can do from a kind of a stress cardiovascular perspective? I just thought that was an interesting comment and wanted to follow up.

Exactly. And that was the justification from several surgeons in several hospitals, that there is long-term consequences of untreated obstructive sleep apnea. There is a quality of life with the patient involved. And there's a motivation of the patient to resolve their sleep apnea, and that's where they're able to push through many of those cases. I think also, that gives a little bit of a prioritization as well. And we all know that there's a backlog of multiple procedures to be scheduled, and we need to find ways to be able to work through the -- all those postponed cases, not just Inspire's, but every other billable procedure that hospitals will need to kind of get scheduled again. And I think that gives Inspire a little bit of a priority from an economic standpoint. Inspire also is pretty profitable for many of those hospitals. So that helps them to really generate some revenue to really help the performance of the hospital.

Tim, where do you think we are from an awareness perspective as it relates specifically to the notion that treating these patients is not just improving quality of life, but potentially has real downstream benefits from a kind of a "hard endpoint perspective", a cardiovascular endpoint, things like that? I mean is that -- for most of the physicians, do you think that's something that's like a concept they'd like to see proven out in a large clinical study? Or just really accepted that, that's a major issue for these patients long term? Just kind of want to get your sense, where are we on that spectrum?

Yes. I think everybody is -- agrees that there's a causal effect of untreated obstructive sleep apnea on a number of comorbidities. Now the challenge is to designing and conducting clinical trials that can show either prevention of future comorbidities or even reversal of some hypertension or cardiovascular disease. Those trials take time, they take large numbers. We have started work in many of the areas, including cardiovascular disease, hypertension. We've published papers even on depression and functionality of patients. And there is a study -- even if we talk about the pediatrics in the Down Syndrome, they're talking about improvements in speech and cognitive behavior. So we are starting that process and it's a very interesting and important metric for us to measure that is showing improvements in clinical outcomes. But we're committed to doing that. It's just -- it takes a lot of time and large studies to be able to show a long-term benefit. But we have started that with a lot of the leading clinical research centers like the Cleveland Clinic and many other centers.

And then do you have a sense right now for -- of those cases over the course of the last, whatever it's been, 6, 7 weeks that were postponed? What percentage of those have now been rescheduled?

Not yet. I don't have that specific data. We are working on that. But what I will say is, as we talked before, we help centers in submitting their prior authorizations. And we have patient liaisons that communicate with patients and inform them where they are in the process of insurance approvals and what they should expect. Combining those 2 during this pandemic period, we're able to stay in contact with the patients, in other words, have a real defined list of who those patients are, make sure that their insurance approvals are at the ready. And what I mean by that is when you get a prior authorization from an insurance company, there's actually an expiration date on those. And so oftentimes, we need to go in and extend the approval date. It's not a problem, but it's a process that you have to go through. Companies like UnitedHealthcare just provide blanket approval extensions due to the pandemic. So we were on top of it with the centers, with the patients to make sure that we're organized, such that when we come through the pandemic, that's the first bucket of patients that we really want to get scheduled. But the next bucket is also equally important. The second bucket is those patients that had a sleep endoscopy right before the pandemic hit. We had to suspend cases because sleep endoscopy was a procedure that also was suspended. But there's a number of patients that once they have that sleep endoscopy, we would continue with them to be able to get their insurance approvals, such as when the pandemic would end and we could schedule cases, they would be at the ready to be able to schedule cases as well. We have 2 other buckets. You want to continue down that pathway?

Please. Yes.

Okay. So the third bucket are those patients that had their initial appointment with physicians and they were right up to the point where they're ready to have a sleep endoscopy. But of course, we can't schedule those due to the pandemic. So those patients are at the ready. So as soon as we can start scheduling their sleep endoscopies, and we are scheduling those, and we are conducting those today, those are the next group of patients that will immediately go in to get their insurance approval set up. And then the fourth bucket, we didn't slow down in building the practices. Because a lot of the physicians, because they couldn't do procedures, they were able to update all their training and make sure that they're effective and using their time wisely. But we also converted over to a virtual environment where we did virtual community health talks. And we continued with our direct-to-communicate or direct-to-consumer campaign to be able to bring patients to the website, to be able to invite them to virtual health talks using Zoom, where the physician can communicate with 10 to 15 patients. And the patients can ask questions. And we can record those and replay them back. And we -- it's easy to schedule a number of those. And then if patients are interested after those talks, they can get the first appointment with the physician, but they can do it with telemedicine. And we worked -- CMS came out with guidelines to clarify how physicians can do CPT code billing to be able to be paid at telemedicines just like it was an in-person office procedure. So we really leveraged those tools to build the fourth bucket. Now those patients are ready to come in to do a final diagnostic and then get scheduled for their sleep endoscopy. So the whole point being, build the whole foundation of the business so we don't really have any air gaps that were coming through the process. We have enough cases to get scheduled and -- from bucket 1 that we need to find ways to build capacity. But we have the second bucket ready to have implants as well. And then the third bucket, once they have the sleep endoscopy, we know we can obtain their insurance approvals quickly. And then the fourth one is just keep building practices and keep bringing more patients into the funnel.

Good. Very helpful. And I think as a follow-up, I think you've already answered this in that discussion there. But through this period of COVID, how disruptive has this period been to the market development process, in the process of filling all the buckets and filling the pipeline? Yes, I'll stop there. I think you already answered it. But I just want to ask you kind of directly in this period of whatever it's going to be. Just wondering how disruptive you think it's been to that process.

No. Well, it's -- with every company, with everybody, with everybody in America, with everybody in the world, it's hugely frustrating. And the key is going to be, you got to get up every day and make your bed. I want to quote the general who gave that famous speech. But you need to be purposeful. You need to know that this is short term. Well, okay, define short term. But we need to understand that it's a process that we all have to go through, but make sure we're ready on the other side when we can start doing cases. And so do everything we can in the meantime to be able to build the practice and be at the ready such as we can start treating patients against patients that are looking for a therapy. So we changed our direct-to-consumer approach. We didn't stop it. But a lot of people aren't driving anymore. So you really -- there's not a big purpose to do a lot of radio. So we kind of slowed down the radio. With the hot spots in New York and Jersey, that doesn't make a lot of sense for us to be doing expensive television ads in those big metropolises. But we can do TV in areas that weren't hit as hard, through the Midwest, through Florida, Georgia. We continue to do television in some of the smaller markets. If you kind of look at it, if you think about it, there's no political ads going on. There's no airline ads. There's no hotel ads, no power rental ads. Acquiring TV during that pandemic period is actually a pretty efficient way to operate. And so we're able to do television commercials, but we focus them on news channels because there's so many people sitting home, staring at the news, and so we're able to reach out and bring them to the website. We changed our website. The cover says we're here for you. Although you won't be able to get an appointment with your doctor, but we can do that virtually. And so we changed the way we operate it to make -- try to be as normal as possible without being able to do sleep endoscopy procedures, without being able to do implant procedures. We communicated with patients as far as their programming. If they need their programming needs, they could still get them during the pandemic period by going into seeing their physician. And then from an internal aspect from the rest of the team, certainly, we, as a company, are working virtually. But the prior authorization team continued to effectively submit prior authorizations to insurance companies. The product development team can continue to effectively advance our product developments with the Inspire V, the neurostimulator, the new lead. We're about to launch the Inspire app on patient's smartphone, which is another tool that we can leverage for virtual communication. So we continued as best as we possibly could, knowing that there's going to be an end to this or at least a transition out of the lockdown and back to a sense of whatever the new normal will be.

Thank you, Tim. That's a great summary. One other question I wanted to ask. And I obviously realize that what's really important to investors is the outlook for the business in 2021, 2022 and beyond that. But from a stock volatility perspective, the outlook for 2020 isn't unimportant. And I do note that consensus has you at $31 million in revenues in the fourth -- by the fourth quarter, which while not a normal growth rate for your company versus what you've been seeing pre-COVID, is still a healthy amount of revenues relative to the run rate that you're experiencing kind of in the April, May time frame. So in light of everything we've just talked about in terms of your changes in strategy due to COVID, temporary as they are, and the momentum you're seeing early on. I'm just curious, is that -- like, do you think that, that kind of return to a quasi normal quarter is a good starting point, a good baseline for people? Or do you have different thoughts?

Well, I certainly would say that is certainly the direction in which we have the ship heading. And we want to pursue that as strongly as we can. We do know that in between the end game, there are going to be things that we simply can't control. And again, we already talked about the challenges of a second rebound and what's that going to do to a slowing down of our plan of being able to treat the patients. I certainly believe we have the patient interest to be able to pursue that goal. I think we have the interest of the physicians to be able to do that. We did not also slow down during the pandemic period. We did not slow down the hiring of territory managers. Remember, we work on a very consistent cadence. We don't go out and hire a big bulk number of territory managers. We want a consistent cadence to be able to hire through the process. We want to continue to open new centers. We've been doing that. We've continued the logistics of opening new centers during the pandemic period, although we do not define a center as being open until they have cases scheduled and have product on the shelf. And obviously, that isn't going to happen during the pandemic period. But I can say that we've already opened new centers since the pandemic has ended because they were right at the custom. They probably would have been doing implants in the March time frame. So we're at the ready, I think, on all fronts, from continuing our hiring process, continuing -- opening the new centers. We have plenty of patients in the pipeline. Our goal is to be where you just described. But obviously, there's challenges that will limit us to be able to get there. There are some successes that we had during the pandemic period that we haven't even been able to celebrate yet. One extreme example is on June 21, we will have 100% Medicare coverage in all 50 states. That's extraordinary. We announced on Monday that Palmetto was the last medical area contractor to issue their final policy, and it will become effective on June 21. WPS will become effective on June 14 or right before that. So we haven't even celebrated that, but that's something we can really leverage. We know that there's a backlog of Medicare patients in Florida that haven't been able to get Inspire since 2015 because of the negative policy they had in that state. So we're seeing good momentum in Florida. And so again, we have a lot of good momentum going forward with excitement and building centers and opening new centers. We talked about the extension a little bit. And I can even give you an update. I finally got a note back. We have now done implants in 21 states and we have over 35 states that have scheduled cases. So it is changing that quickly and America is really waking up. It's pretty exciting. We have to do it safe. We want to make sure we're being safe, and we're changing our procedures. We, as a company, have procured PPE kits that our field personnel carry with them. So if it's not available at the hospital, they do have it. We want to make sure that we protect all of our employees. We're setting up our own protocols to open up our office. So we're learning how to operate in a post-pandemic period. But it's really good to see the momentum moving forward.

Yes. Those are great data points. We're almost out of time. And so I was wondering if I could just kind of quickly hit on 3 other topics that I wanted to get your latest views on. And we can do kind of quick hits here. But just maybe an update on the pediatric and Downs. I hate to use the word opportunity, but just an update there. And then an update -- any thoughts on what's percolating on the competitive front from your perspective? I realize the total addressable market is really kind of the most important thing here. But I'm just curious what you're hearing out there on the competitive front? Because ultimately, I assume you will have some. And then finally, is it a kind of 2, 3 or 5 years away that perhaps you could have a product that was closer to leadless? I mean is that ever going to be possible? So just curious on maybe a quick hit on those 3 topics.

Absolutely. That's quick. We will go through them. The FDA, and we work closely with the FDA in regards to a pediatric opportunity as you described it. But the FDA, we agreed that the right thing to do is take the first step. The first step is to lower our age from 22 down to 18 to make the therapy available for that population. It is a general approval. It is not limited to 18- to 21-year olds with Down Syndrome, although that is included in there. The reason we didn't go younger is there's some thoughts about the recurrence or the self-resolving of obstructive sleep apnea in pediatrics. And so we're doing some more research with 5 of the leading children's hospitals led by Stacey Ishman at the Children's -- Cincinnati Children's. And we'll do some more work there and work closely with the FDA. The pediatric study with Down's, we had only data for 30 patients. And now we're close to implanting in the high 40s of the 50-patient study. So the agreement is we're going to complete the implants and follow those patients, and then we'll be back to the FDA shortly. The intention of both Inspire and the FDA, that we will continue to lower that age down to 15, eventually down to 13 to make it available on a broader indication. But there's more work for us to do. From a competitive standpoint, but pretty quiet, the challenge is, obviously, with all the procedures postponed, the -- Nyxoah is, in Belgium, they're unable to do any of their clinical studies right now. LivaNova has been really quiet for quite a period of time. We haven't heard from them for a while. But it's going to be -- it's always challenging to get clinical studies back up and running. We have our own clinical work that we're doing, and that's usually the last thing to come back online. So a little bit of a setback, I'm sure, from that viewpoint to get their studies going. But competition isn't necessarily a bad thing. Investing and stimulation for sleep apnea really gives credibility to the therapy. And we know that we'll have competition in the future. But I don't think anybody will have FDA approval for at least 4 years. So it gives us a little bit of a runway. That allows me to segment into our product development. We've mentioned that we're about to launch Inspire app on patient's smartphones. You'll be hearing about that very shortly. That will provide a conduit between the patients who communicate with their physicians via Inspire Cloud, which is our cloud-based patient management system. We are also actively developing our fifth generation neurostimulator. And we noticed that in the first quarter, an increase in our R&D spend. That's because we just transitioned to the time of that project where it starts to get expensive. We're doing the design of the application-specific integrated circuits or ASICs. And that's where you start spending some serious money, because it's going to be an important product. Our goal is to try and do internal sensing, both positional as well as some respiratory sensing to make that more improved product and simplify the implant procedure, but also to -- ideally to improve the performance of the system. And I'm not sure if we'll ever get to a point where we'll have a leadless system. You always need to provide power to the electrodes. And our goal is to provide those stimulation signals in the most efficient manner. And so we're always looking at improved stimulation techniques, but we are even looking at micro stimulators that will all be implanted in the local area. But that's years down the road before we'll get to that technology. But we are making very good headways with our Inspire V neurostimulator. That will really be a game changer.

Great. Unfortunately, that's all we have time for. But Tim and Rick, that was a really helpful update. I know there's a lot of work ahead, but nice to see a little bit of momentum building here. So good luck with everything. Thank you very much for participating, and that concludes our fireside chat with Inspire. Thanks so much for listening.

Yes. Thank you very much, everybody. Be safe. Bye-bye.

Thanks, Tim. Thanks, everybody.

Thanks, Bob.