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

All right. Great. So thanks, everyone, for joining us. My name is Matt Miksic, I'm medical device analyst here at Crédit Suisse. I'm very pleased to have with us this year at our Annual Medical Healthcare Conference Inspire Medical Systems. So Tim Herbert, President and CEO; Rick Buchholz, CFO. We're going to ask Tim to give sort of a brief introduction to frame the discussion and then go into Q&A. If anyone has any questions they'd like to ask, please, I'll try to keep an eye on my e-mail here. Glad to entertain additional topics and questions as we move through the next 30 or 40 minutes. So with that, Tim, take it away.

Okay. Was I successful? Can you see my screen?

Yes.

Okay. Very good. I'm just going to -- Matt, thank you very much. It's really a pleasure -- privilege to be here virtually with you. Quick introduction, just want to go through a couple of slides. Myself, I am the founder, President and CEO of Inspire Medical Systems. I started working on Inspire while an employee of Medtronic back in 1996 and was spun off of Medtronic in 2007 and really has grown the company. Rick Buchholz is our CFO. He joined us after our private financing in 2014, has taken us through the IPO and has really been instrumental in growing the business. His background is a list of medtech, most notably superDimension that was sold to Covidien several years back. So let me just quickly jump through just a couple of slides. We rebranded the company last year, really being a consumer-based company that -- No mask. No hose. Just sleep. And you can see right there that there's a -- the patient has -- I'm looking for my little laser pointer. The patient has just a little remote control to use at night to turn the device on when they go to sleep, provides a short period of time to allow them to fall asleep before the device quickly activates. Quick question that I get from everybody about what's the impact of COVID. So in the third quarter, we reported last week we generated $35.8 million in revenue, which was a very strong 72% increase from the third quarter of '19. We continued to recruit and train new centers even during the COVID period. In the third quarter, we opened 42 new centers compared to 16 in the second quarter, 28 in the first quarter. With that, we increased our guidance to say we're going to open 28 to 30 in the fourth quarter. Continue to add territory managers, 7 in the third quarter, but we did add 9 during the COVID period. We're currently at 98 centers, and we are guiding that we're going to add another 6 or 7 territories during the fourth quarter. Last week, we also announced a brand-new Category I CPT code, was approved at the October American Medical Association Meeting, which is going to have a profound effect on reimbursement for the surgeons going forward. That new code will be listed and able to be used January 1, 2022. So between now and that date, they will be doing a survey to determine the amount of work it takes to be able to set the proper reimbursement level. And then we continue to closely monitor the COVID environment right now. Everyone is aware of the spikes globally, but we do not see suspension of cases like we did early on. Therefore, we continue to lean forward. We are an outpatient procedure. So we don't take up hospital beds. There's not a limitation on PPE like there was back in the first wave of COVID. And hospitals, our staff and patients are more comfortable in going to hospitals and having a procedure. So we don't see a reluctance in cases, and therefore, we're not seeing a suspension. Therefore, we continue to drive forward with our procedures. Just kind of quickly jump through a couple of other slides. Here is the patient remote that the patient uses to turn the device on. Inspire is completely implanted. So here, you have a neuro stimulator, there's a sensing lead and a stimulation lead to the hypoglossal nerve. The sensing lead detects when you inspire. And then during inspiration period, then we provide stimulation to the hypoglossal nerve to hold the airway open. The device is implanted in a 2-hour outpatient procedure with 3 small incisions. We, to date, have implanted over 10,000 patients globally. And when the patient goes to bed, they just use the remote control to turn the device on. We look for multiple ways to educate patients on Inspire therapy. We certainly do the typical market development which is standard medtech, training sleep physicians, driving referrals to the Inspire core program teams, which has a sleep physician and an ear, nose and throat surgeon. But we also have a direct-to-consumer approach, where we'll use Facebook, Google, we'll use radio, we'll do local TV, and it's educating physicians, driving them to our website. You can see we've had 3.6 million people come to our website so far in 2020. That has generated 206,000 doctor searches and about over 40,000 patients reaching out to contact a doctor. But part of the process is we need to educate state physicians in the world of what Inspire is all about. I love this slide. It so simply depicts it. CPAP has been around for many, many years, and people understand the flow of how it is. And sleep physicians believe it's a straight-line treatment like riding a bike to get treated with CPAP, but there's challenges on compliance. And the way people see Inspire today is there's still many obstacles from the insurance to it's a surgical procedure, to programming adjustments and getting the right payment. So we just need to continue to educate the world on a minimally invasive procedure, what's the risk/reward benefit, especially for the patients who have strong outcomes, the cause and the value position, not -- value proposition, not only to the physicians but also to the patients and to the hospitals. We've had a very strong run as far as quarterly revenue goes. By the way, all these slides I'm showing you are part of a larger deck that you can download by going to our website at inspiresleep.com. But you can just see a steady cadence growth. You can see the impact from the COVID environment. But really, our annual revenue growth has continued. And even in the COVID environment, we significantly increased our guidance, went from $84 million up to over $110 million to $112 million, which represents a 34% to 37% growth year-over-year. So -- a couple of other things. We do have 10,000 patients implanted. We are currently working on a 5,000-patient ADHERE registry that shows both objective results. Apnea-hypopneic index is the #1 reason or #1 objective measure for the success of sleep apnea treatments. You can see we get our patients from 30 down to 10. Anything more than 30 is severe. Anything more than 15 events per hour is moderate, and we're approved for moderate to severe sleep apnea. But getting the patient to less than 10 events per hour is tremendous. The Epworth Sleepiness Scale is bringing patients from -- you got to get patients to less than 10. That's a normalized event. And you can see we show a real sustained benefit at 12 months and beyond. Most importantly, this is results from the first 1,000 patients. We asked these 1,000 patients 6 months after they've had the device, what do you think? Over 90% said they would do it all over again. That's when we realized we hit a home run. We have objective improvements, subjective improvements and over 90% patient satisfaction score. And the average home device use is 5.6 hours a night, which is absolutely tremendous. We continue to invest heavy in our R&D platform. This is just showing development of our digital tools, where we're going to have Inspire Cloud that's already been launched. But we're launching a new patient remote that has Bluetooth that will take the information from the implanted product, share with information provided from the physician programmer in the cloud and prevent a cloud-based patient management system that will only continue to develop further as we move forward. And then finally, I just want to highlight this new Category I code that is specific for hypoglossal nerve stimulation. And previously, we shared a code with the vagus nerve stimulation and physician reimbursement was based on the work to implant a vagal nerve stimulator. And the American Academy of Otolaryngology, or the AAO, which is the ENT society, felt that it's most appropriate that they have their own code that's surveyed and the reimbursement is based on the amount of work to do an Inspire procedure. So the good news with this new code, this will take effect January 1 of the year 2022. High potential it will significantly increase the physician payment. The real good news is the hospital payment will not change because the hospital reimbursement is really strong. Here's a couple of data points. The national average Medicare reimbursement is $29,000. Now remember, commercial insurance companies pay 1.4x Medicare. So that's national average Medicare. For ambulatory surgical centers, the national average Medicare payment is $24,000. Now commercial insurance pays 1.9x Medicare because it's so much more efficient to do procedures at ASCs. And again, it's coming off a lower base. So there's really a lot of incentive to develop ASCs. Hence we spent a lot of attention in opening up ASCs, especially post-COVID. And just to highlight those, the proposed 2021 reimbursement increases both those facilities by an additional $850. So pretty exciting. We have a lot of activities ongoing at Inspire and commercial execution is really highlighted, and we really like what we have with our direct-to-patient strategy to kind of drive forward. So Matt, I'd stop right there to see if there's any immediate questions that we should focus on and rather than that, let me continue to ramble on with the presentation. But if we can even get more focused, we can always come back to more slides.

Sure. No, I wouldn't call that rambling. So pretty impressive results and great progress over the past several years. So maybe one question just back to where you started in terms of recent trends. The growth really kind of stands out in this environment, in particular. Maybe talk a little bit about, if you could, what -- how much of that we felt were folks on the sidelines unable to get sort of their endoscopy procedure or whatever in Q2? And it's kind of the same thing with the center ads. How much of that was sort of a backup? I know you've raised guidance and you've raised your sector guidance. So it couldn't have been that -- all backlog, but maybe some sense of where you are in terms of working through that.

Yes. I think that's a key change. COVID, obviously, affects everybody, and we are completely shut down with all the implants. And as well as a sleep endoscopy, which is a diagnostic procedure that we do as a final screen, we really started to ramp hard in May and June when centers started to open up. Again, remember, we're an outpatient procedure. So we don't take up a hospital bed. And even a lot of the key hospitals, they -- for their ambulatory units, they have side entrances. So it is safe to go back to a hospital. Hospitals have a full supply of PPEs right now. So we've really been ramping. And then we get a question quite a bit about our patients who elected to have a therapy. And people need to realize that untreated moderate to severe sleep apnea has a significant impact on quality of life. And our patients are very motivated. There are risks of untreated sleep apnea and comorbidities of hypertension, stroke and not to mention, relationship issues and quality of life and work, especially when people are now at home. So our patients are very, very motivated. We've seen very limited reluctance of patients to have a sleep endoscopy diagnostic procedure, much less implant procedure. During the spike that we're seeing right now, both -- and in Europe is a little bit ahead of what we're going to see in the United States, and that's even increasing, very limited suspension of any cases. Again, hospitals don't make a lot of revenue with COVID cases. They certainly have the resources to be able to take care of the COVID cases, but we don't abstract those cases being an outpatient procedure. So again, we're seeing all centers ramping. We don't see suspension of cases, and we continue to schedule cases right now. Hence, we think that the growth that we're seeing in the third quarter, even in the fourth, are not primarily from the backlog of cases suspension, but it is new cases that we've identified during the period with our direct-to-consumer and our referral networks, and we really feel strong going into Q4. Hence, that's why we increased our guidance so much.

Okay. No, that is impressive and stands out, as I said. And I guess, the acuity, you touched on some of the motivation to get these cases done. I won't go into my -- any personal opinions that I have about the -- how forceful some of the motivation can get maybe to deal with this issue. But that's been a debate for some time, the most -- who are the most motivated patients that are tied into elective procedures? MEs or cardio, for example. And what we found certainly surprised a lot of folks, that it really is the motivated patient and the motivated center and clinician, particularly in ASCs, that can get these things done or outpatient centers. So I guess, the process, I mean, of getting the sleep endoscopy. I don't want to jump around too much, but I'd love to just go through the reimbursement. That was a much bigger conversation a couple of years ago, I think. But now things, as you described, are kind of falling into place. Can you -- if I covered you, I guess, I'd know the answer to this. But the endoscopy procedure, is that a separate procedure from the 29000 hospital code that you mentioned? So it's like a preparatory procedure that the center can also get reimbursed for?

Yes, absolutely. Well, let's back up a little bit more on the COVID right there and talk about the world a little bit and how they open up these ambulatory centers and outpatient centers and who gets priority in the outpatient setting and how do we get these cases scheduled and the motivation of the patients. And so we do see the motivation of patients, but we also knew there is such an economic downturn for all the facilities of ENT surgeons, especially the ASCs, right? ASCs, they have no revenue coming in. So it's really a strong motivation to be able to get these procedures back and who's the most motivated and what gets priority. Yes, that's really a difficult thing. So both from a patient motivation as well as from an economic standpoint, Inspire really was able to help that out. That does bridge us a little bit into reimbursement, and sleep endoscopy is a completely separate procedure. It is completely separately reimbursed. Interesting enough, when we talk about the new Category I code for the Inspire procedure, right alongside that, the American Medical Association also approved a separate Category I code specifically for drug-induced sleep endoscopy. So that will be a new code that will also take effect January 1, 2022. Today, it's -- there's about 7 different ways people code that procedure. There just is no consistency with that. The reimbursement is obviously very, very poor. The challenge is it's a necessary procedure to qualify a patient for an Inspire procedure. So they will be able to get full reimbursement to that. More importantly, the facility will be able to get reimbursement. It's probably about 15 minutes of work for a surgeon in an outpatient setting to do the procedure. So they'll get billed 15 minutes worth of RVUs, or relative value units, in the U.S., but the facility will also get reimbursement. They probably have 15 minutes worth, but there's room on the preparatory side as well as cleaning. So they may get a half hour worth. So that's going to be significant for their facility. So that's really good news for sleep endoscopies. But then transition a little bit more on to reimbursement of the overall code. We've had a lot of other benefits that have happened post-COVID, primarily Medicare coverage in the United States. We have universal coverage in all 50 states in the United States for Medicare, but it took effect in May and June, right in the middle of the COVID period. And so what that means is as soon as COVID ended, all of a sudden, all the Medicare patients can now get fully reimbursed. But we have a couple of different coding structures that we're using right now before that new code gets put in place, and one of them was a Category III code that did not have any payment to it. With Medicare, surgeons got a $450 raise to do an Inspire procedure. All this happened after COVID, and that's another key factor that had -- a key driver for a ramp of Inspire procedures, both implant as well as the DISE diagnostics after the COVID period. That's another reason we're seeing such a strong ramp to date. Try to keep that structure, but I guess, I'm kind of jumping all over the place a little bit.

No, that's okay. It's important to understand. And the reason I asked about the diagnostic procedure and then the procedure, procedure is that, that is sometimes a bit of a challenge to sort of string together sort of a value proposition to centers who are trying to get this stuff done, but being able to book with diagnostic charge for the endoscopy, bringing the patient back, charge adequately for the procedure. And then -- for a procedure where the doc can get paid. One question on the new CPT code that will have the ROC assigned, I guess, back half of next year or something. In the meantime, do they continue to use the vagus nerve CPT codes? Is that sort of the plan over the next 12 months until that new code clicks in?

Absolutely. It's been a very good code for us. If 64568 is the CPT code, 64568, it's actually labeled as a cranial nerve stimulator. Well, the vagus nerve is the tenth cranial nerve. The hypoglossal nerve that we stimulate is the 12th cranial nerve. So the code is a good work share. The problem is it's valued off the work to implant a vagal nerve stimulator and the ENT society just felt that, that was too undervalued. To cut down to the vagus nerve, we cut down right here in front of the carotid artery, and that's where the vagus nerve is. Inspire goes further up under the chin, and we have more specific placement of the electrodes around certain branches of the hypoglossal nerve. So there's more work involved with that, more specificity on the placement of the electrodes. So the ENT society just felt that it will be significantly higher. But from a facility standpoint, it seemed to be relatively the same. That's why both new -- both the old vagal nerve CPT code and the new Inspire CPT code were both mapped to the same hospital or facility payment. So that's really good news. So it doesn't jeopardize the benefits that the facilities are getting today, but will increase the surgeon payment. And again, as we just mentioned, there also is a whole new code for the sleep endoscopy or the DISE procedure. So really good, strong win-win. If I can take that one step further, we had a big win yesterday. We did a press release, that in Germany, we matured from the new tech code process, which is called the NUB, where every year you have to submit an application to the German reimbursement to get an NUB rating. And good news, for the last 5 years, we had the highest rating, which is NUB1, which has allowed for very good reimbursement. But just late last week, we finally were listed as a formal DRG, meaning we are now a mature, stable therapy for the long run in Germany, and that's just -- Germany is very excited about that. They no longer have to go through these annual new tech applications. And once we get the ZE reimbursement established that we have long-term sustained reimbursement. So a lot happening on the reimbursement front to really just show the maturity of the Inspire therapy now.

That's great. And not having to have to sort of convince clinicians to tangle with a tracking code or any of the other things for the next year while the other codes click into place is a huge win. So curious about one of the other dynamics during COVID. And I think in any sort of disruptive market like this, is how to get the patients to the point of care? And I'm just curious, the interest that's coming in, the demand that's coming in, what's the mix of sources of that? You mentioned socially you had some DTC and customer-facing, patient-facing programs. Where are you seeing the biggest pull?

Well, we do both. We -- certainly, during this time of COVID, we certainly continue to develop the referral network. That's classic medtech marketing, if you will, where you make sure that private practice and sleep physicians know the benefits of Inspire and refer to the ENT. What we've also found to be tremendously effective going all the way back to the clinical studies is our ability to go direct-to-consumer and whether it's the TV, radio or Google, Facebook. Now what COVID presented is people cannot have face-to-face meetings with physicians that attend to them. What we did is we used to have these community health talks, where patients would come to a hotel conference room. They'd go to a conference room at a hospital. Just an area where patients can gather and a physician can talk to a group and describe the therapy, describe the procedure, describe the risks, the benefits, educate them. And if they're interested, they can sign up for an appointment. Well, just like we're meeting here today, virtually, all those community health talks have gone virtual. You can go to our website at inspiresleep.com, you can say find a physician, you can sign up for a virtual health time on Zoom. In fact, you can go back and you can download one that's previously recorded, and you can learn about it. And then from there, you can communicate with that physician or a physician in your area. And oftentimes, your first appointment is a telemedicine visit. And one of the good news is the CMS came back and they said reimbursement for telemedicine is the same as if it was in-person held. So the first meeting doesn't need to be in-person. The first appointment with the ENT can be telemedicine. So I can learn about you. I can learn about your history with sleep apnea. I can learn if you've tried and unable to use CPAP. What's your height? What's your weight? What's other comorbidities that you have? What insurance do you have? Such that the first time I see you in-person may be for your DISE or sleep endoscopy procedure. Those tools will outlive COVID. Those tools will continue to stay with us going forward because it really reduces the time from a patient to be educated to implanted. And reimbursement is no longer such a hurdle. Reimbursement approvals can be done in just a few days. Longer term, we're doing a technology development that we are working on remote programming of the device using our Inspire Cloud communication portal. So lots going to happen, and the virtual tools will continue to stay with us going forward.

That's great. And on that same front, so there is -- those are terrific ways of getting patients involved, and the virtual call has kind of been a benefit for -- in many ways over the past 6 months. Having covered Respironics years ago and sort of we had some familiarity with the space and the sort of significant medical need and growing sort of epidemiology and demographics of this category, it was much different conversation back then. But there were surgical procedures available. Not great, but there were options that were offered, I'm sure, to patients. This is much different. But still it is a surgical procedure rather than putting on a mask and giving it a go with CPAP. What do you find, I guess, in terms of points of resistance from patients or adoption from patients? Or what's helping patients get over the hump of, this isn't working and now I'm going to do this other approach?