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

We're starting this morning with Inspire Medical. Joining us from the company are the President and CEO, Tim Herbert; and CFO, Rick Buchholz. In terms of format, this will be a 30-minute fireside chat. Tim and Rick, welcome, and thanks for joining us virtually.

Well, thank you very much, and thanks for allowing us to be first [ and for setting ] up the meeting, so we'll get it off to a good start. So there you go.

Looking forward to it.

So Tim, I wanted to hit a couple of different topics, including the recovery, maybe the outlook in 2021 and competition and reimbursement. So let's start with the recovery. On the Q2 call, you gave some encouraging metrics about centers reopening and restarting procedures. Remind us of what you said on the Q2 call, and any color you can share on how that's progressing since then.

Well, during the call, I think we wanted to really show that centers were coming back online at a rapid pace. And so I think back then, we quoted, wasn’t it like 24% in May, half the centers in June and more than 60% in July. And we weren't intending for that to be specific, calculatable numbers, but those are accurate. And really, if you kind of look at where we are today, virtually all of our centers are seeing patients. They're open for business. People are learning how to deal with COVID, and it's still with us obviously, it's still a serious concern. But people are learning to manage with it, and they need to get back to generating revenue at the hospital and physicians need to start performing cases. So while virtually all of our centers are seeing patients again, scheduling cases, we're still not at 100%, but we're probably north of 80%, and that will continue to ramp up. But again, the other way to look at this, if you want to put color to it, if you look at the centers, what percent of centers on a normal day, pre-COVID, actually do an implant in a given month. So there's always months that a center won't do it. So when we start talking about high 70%, 80%, that's virtually all the centers are operational, up and running. And I think the recovery has been very, very strong so far. So we're very encouraged by that, and we'll keep driving that and driving utilization because, again, centers want to generate revenue and take care of the patients.

That's super helpful. And you were one of the few companies in our coverage universe that actually guided to 2020 on the Q2 call. So kudos to you. I think the second half revenue implies about $55 million to $59 million or about 18% year-over-year growth at the midpoint. You were asked on the call, the Q2 call, about how to think about the cadence. Rick, maybe remind us of kind of what you said and how we should be thinking about Q3 versus Q4.

Yes. We talked about that, and we had actually several follow-up questions even during the Q&A session of our last call. And so we probably weren't as clear as we could have been. But we do expect to have growth in Q3 as well as Q4. But given the fact that we still do prior authorizations, even though that's becoming less and less relevant as we continue to get more and more covered lives, we do have some vision into our procedures and to our scheduled implants, and so that gave us confidence. As we talked about, about half of our centers were doing procedures at the end of the quarter. That allowed us to give guidance, and so that's why we did provide guidance for the second half of the year. But we do expect that we will have growth in Q3 and Q4, and I think consensus is in that ballpark, so.

Perfect. Rick, maybe, we'll stick with you, get the 2021 questions out of the way. It's inevitable in these September health care conferences, as you know. It looks like consensus is modeling about 60% growth in 2021, which is similar to what you grew in 2019. Any headwinds, tailwinds that you'd call out? Anything that the Street might be missing?

Again, as -- we knew the question was coming, obviously, given the time of the year, but we haven't provided guidance for 2021. But we feel good about the position of our business as we continue to open. As Tim mentioned, we continue to have more of our centers seeing patients, doing elective procedures, scheduling implants. And as you recall, we now have 100% coverage for Medicare, which we didn't have until actually back -- until actually COVID hit, is when the pandemic was at its peak, we weren't able to celebrate the 100% coverage of Medicare. We've also -- last week, we announced that we got Humana. We'll talk about the insurance policies. But we got Humana last week, and that's another approximately 17 million covered lives. So we're up to 207 million covered lives currently. A year ago, we're at about 145 million. And so 2021 will really be a first full year of having over 200 million covered lives. We also talked about that we -- during the pandemic, we continued to add territory managers, we continued to add centers. And we were kind of leaning forward, if you will, on continuing to do that. And we talked about how we're adding ASCs. Just last week, we had a good -- another good event that we can talk about is that we added -- we signed another national ASC agreement with one of the largest ASC outpatient companies. They have 220 ambulatory surgical centers, and so that -- in 35 states. That's SCA, Surgical Care Affiliates. That allows us to go and pursue ENTs that are working in those ASCs. And we think that will be another tailwind as we continue to add centers and territory managers into 2021.

That's super helpful. So maybe we'll stick with reimbursement. A lot of good updates there, Rick, a lot to unpack. On reimbursement, Tim, Medicare has -- you finally have these local coverage decisions across the country. Talk about what that means for your business. And maybe it's just me, but I feel it's a bit underappreciated that you're getting paid for the -- the physician is getting paid now for the center lead. So the physician fee has gone up pretty significantly. And my understanding from talking to you, Tim, that that's nationally for commercial as well as for Medicare. So help us understand kind of what this Medicare coverage means for you and the physician fee.

I think Rick stated it correctly that we haven't had a chance to really celebrate that yet, and that all those LCDs were -- went final right during the tail end of the COVID process. And once the physician payment is set up, there's a little bit of, yes, I got to prove it, we got to see it, we got to experience it. So physicians would do one or 2 Medicare cases and then submit the billing to CMS or to the MACs, and then they had to watch it to make sure that they are getting paid. And voila, hey, we are getting paid this extra $600, and that's dramatic. And they used to get paid, what, $800 on average Medicare. So that's a significant increase for those surgeons, and so that spreads. Now the confidence is there that, yes, in fact, they are going to get paid for all the Medicare cases. Remember before, the LCDs, they were getting paid maybe 50% of the cases. And at $800, you're really not going to do a big, long appeal because the return isn't there. And so you end up doing those cases gratis, and that's not appropriate for these surgeons. And so now they're getting paid for all their cases. They got a raise because they get paid for the pressure sensor. Now there's confidence behind it that they're getting paid, switch over to the facility site. Places like KU Medical Center was shut down from Medicare because WPS is the MAC in that region. They weren't paying for Inspire. They also manage Michigan. So Michigan centers weren't doing Medicare. Now that the policy is in place, the centers, they need to kind of dip their toes in the water and test it a little bit, do a couple of cases, get confirmation that they're getting paid. And now that, in fact, has the time -- there's enough time now that they've experienced. Say, yes, in fact, we are going to get paid for all of these cases, then they can take the governor off and they can open up and say, okay, now we can start scheduling these Medicare cases, which is really exciting. And I think you'll see a little bit more of that in the second half of the year. And as Rick mentioned, that's going to really carry over into '21.

It's helpful. And I know you got Humana just recently. Remind me, do you have Anthem? I can't remember. Is that -- do we have every -- all the major commercial payers?

They're the last hold-out, but it's a big, either. Anthem is the for-profit side of Blue Cross Blue Shield. Their -- they manage over 40 million covered lives. And they really are the last big policy out there. And we are working with them. They are communicating back. And I think they're scheduled to write policy sometime in October. We certainly hope that it will be positive. We believe it will be, being that everybody else has written a positive policy. And all indications are as such, but it's up to Anthem to actually write that policy and issue it. So we'll keep working with them, and we'll keep watching them closely, but they're really the last big hitter out there. I know we have all the commercials, Medicare, VA, and -- then we can go to work and start driving utilization and growing capacity.

So it sounds like, if I heard you correctly, Anthem is writing their policy, you said, in October. They're making it -- there's an update coming? I'm sorry. What's happening in October?

Their annual scheduled review is October. So we believe they are working on it, and they have told us so that they're working on it. And we will expect to see that policy come out in October. And we certainly expect that it will be positive. But Anthem, it's entirely their decision, so.

Okay. And anything about the CPT Panel meeting in October that we should be watching out for? Anything new? I know it's very technical. We did a note on it a couple of weeks ago. Anything new?

No. I think your note was really strong. I think the key to this application is it's going to still be a neuro code. All the neurostim codes are kind of bunched together. And what that does is that ensures that the hospital payment remains stable across all neurostim platforms. Yes, it's a specific CPT code for the surgeon to implant the device. And that allows the ENT to -- or the ENT society, the American Academy of Otolaryngology, to go out and do a RUC survey to determine the amount of work defined as RVUs, relative value units, and that determines how much a surgeon gets paid. And the American Academy of Otolaryngology believes that that payment today is not appropriate and it should be a little bit higher and that they want to have their own code because they believe that Inspire will be a real significant part of the ENT community for years to come. And so they want to move away from a shared code with neurostim to having 2 codes, one for the vagal nerve stim, one for hypoglossal nerve stim, both underneath the overall neuro family, but -- and your note really laid that out in great detail. So we've -- the AAO, I know they're preparing, and they have -- a top ENT will be representing it at the CPT Panel meeting, which is, of course, virtual. But we think that it will be accepted well.

Great. So let's move on to international markets, which don't get a lot of attention with your business given the growth we've seen in the U.S. Japan, let's start there. What's the latest with the MHLW regarding reimbursement?

We are working closely with them. We think we're getting really close to being able to formally submit the C2. I know you've heard me say that before, but with the COVID and with the Olympics, they have a huge backlog, but we're still trying with the physicians to really get priority and get moved up and say, you've got to at least make a decision here on what you're going to do. So we have good discussions with MLHW (sic) [ MHLW ]. We are moving closer to a distribution decision. What it is, if we're going to use a distributor, if we're going to go direct or if we're going to go share. A lot of that is hinged upon what the reimbursement level will be. And if it's efficient, and we believe it will be, then there's enough in there to be able to support a real strong distributor, which I think is probably a good way to start in Japan. And I think the MHLW and the government, I think, likes to see that as well because they want assurance that once they make the decision, that they're going to be able to move forward. The next date for publication is in December. I don't think we're going to be on that. When I mean published, I mean, ready to use, right, ready to go. But end of Q1, Q2 is looking pretty good. And with the progression that we're making, and we'll know more by the end of the year, to get everybody ready to go because it takes about 3 months once it's decided to get it listed. So we're still pushing to communicate by the end of the year, which would get us in a position to have a reimbursement by end Q1, Q2 next year.

So we shouldn't be thinking about a large number of implants in Japan in 2021, it's more -- it would be mostly contribution.

It would definitely be modest, but it's going to be a very significant milestone. Because remember, the 3 big markets in the world are the U.S., Germany and Japan, and we need to get all 3 of those markets well. And then that allows us to kind of expand from there. And getting a good position in Japan, albeit it won't be a significant revenue in '21, it will have a factor in out-years.

That's helpful. One other kind of international-related question, you have another randomized controlled trial that you've done in Germany. It maybe investigator-led, but it's similar to the pivotal U.S. trial, some nuances, I think. But that trial could help you with your evidence base, maybe it could help you with reimbursement in Germany. Like what's the status of that, Tim?

Absolutely. We had actually 2 randomized studies I want to talk about, and I'll come back to the Germany one. There was one done in the United States. That came to us from Aetna Medical Director. And he says, "I don't know why insurance companies don't approve all these patients, so let's do a randomized study." So what we did is, we did like 250 patients approved by insurance companies and received Inspire. And then on the randomized side, there was 100 patients that, for some reason, insurance companies denied their coverage. They have the same demographics. And we followed them for 6 months, compared the results. Obviously, those with Inspire therapy did much better than those who were left untreated. And the question goes back to the insurance companies, why did you randomize this group to the off-cycle, and a really effective [ net ] has been published. On the second study is in Germany, whereas a similar study to the start, where patients were followed for a year, and then they were randomized into a crossover. And so half the group stayed on, then the other half was turned off. We followed them for a period, and then they were both crossed over, and we could -- compared the crossover periods. And those results have not yet been presented. But I know that Clemens Heiser in Munich is the lead author, and they are working on the manuscript right now. They will be submitting that very soon. And we are encouraged by the results, and we think they -- again, to your point, it's just added confidence in the number of clinical trials that have been published to show the efficacy of Inspire.

That's helpful. And where has the Aetna study been published? You said it's…