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

Okay. And I guess, officially, good afternoon from the Bank of America Virtual Las Vegas Health Care Conference. I'm Bob Hopkins, along with Brad Bowers from my team. Really excited to have the senior management team from Inspire on today. Tim Herbert, who everybody knows, he's the CEO; and Rick Buchholz who's the company's CFO. I just want to thank you guys for joining us this afternoon. We look forward to a good discussion.

Thanks, Bob, Brad, great to be virtually with you. And wish we were in Vegas, but that's okay, next year. But great to be here today.

Exactly. Tim, we can just dive right into Q&A. Or if you have any opening comments you want to make, you're welcome to do that. But either way is fine with us.

No. I think we had a great quarter. We stayed focused to drive our fundamentals, and I'm sure that's the topics that we're looking forward to talking through with you today. So let's just kind of jump right into it.

Yes. That would be great. So one of the things I wanted to ask is a bit focused on the quarter you just reported. It's -- you guys obviously have been doing such a good job in introducing your technology to the world, and the numbers have reflected that. And just in this quarter, maybe it was that expectations got a little ahead of themselves, given all of the success. But the magnitude by which you exceeded those expectations was a little bit less. I mean, frankly, it doesn't seem like there's any real change going on from my perspective in the business, but maybe you could just talk about that dynamic as a place to start.

Absolutely. So I -- we don't see it -- we see the fundamentals of the business going very, very strong. We had a great quarter of $40.4 million, really significant increase in utilization. So we liked what we had in the quarter. Yes, in the beginning of the quarter, we always have our usual seasonality. It was compounded this year, again, by the shutdown from COVID. So maybe that was a factor that didn't come through as clear. But we believe that we've overcome that. We have good confidence. Hence, we did a significant increase in our guidance for the rest of the year to reflect that. So it's -- COVID is a challenge everybody has to deal with. We don't want to hide behind it. We knew we had a little bit of challenge in January, but we had a very strong rebound, a very good February, a very good March. And that gave us confidence going forward for the rest of the year. So the key is continually improve all the fundamentals of opening new centers, increasing utilization at existing centers. We had such -- several really great events happened during the quarter, including approval of the two-incision, which significantly reduces OR time and makes it more comfortable for the surgeon; approval in Japan; opening 47 new centers was really strong; and increasing the guidance on the number of centers that we're going to open for the rest of the year. So we are very confident, very happy coming out of the first quarter. And I think we kind of have COVID behind us in the United States, hopefully.

Okay. And then Rick, now that some time has passed since the IPO, and you've seen such explosive growth. How would you comment on sort of the predictability of the model right now? What are some of the metrics that you look at to try to get a sense for demand over the course of a 3-, 6-, 9-month period? Just kind of curious how things have changed since the IPO.

Yes. We've had good visibility in our business from the beginning. Initially, it was really prior authorization submissions and prior authorization approvals back 3 years ago. When we went public, we had 3 million covered lives. We're excited about 2021 because it's really the first full year of commercialization, in our view, because we have 220 million covered lives, and 100% Medicare coverage. And so what we do now is now that we no longer provide those prior authorization metrics, that's becoming less and less relevant. Reimbursement is in place. And so our real focus is to build capacity as well as improve our conversion and improving the connections of interested patients who want or need Inspire therapy. So the capacity is to continue to add implanting centers and continue to add territory managers to service those patients.

And maybe talk about where you are right now in terms of your ability to go from the first early lead, whether it's someone that accesses your website or whatever, all the way down to an implant. How has that improved? And kind of where do you feel like you are right now in that process?

It's evolving, and we're getting much better at it. As we'd mentioned, we had 1.7 million people come to our website in the first quarter. We did have 27,000 people reach out to a physician. There's a significant growth in there. I want to talk a little bit about that because remember, there's 2 groups. You can have the community LTAC or you can make a direct phone call into a center. Now part of those phone calls is a growing percentage of those are handled by our call center called the Advisor Care Program. Now we got to get a little bit careful on the growth there because the community LTACs, remember in the first quarter, went to 0 because -- first quarter of 2020 because of COVID. Our -- those LTACs used to be in-person meetings where you come into a hospital, a conference room, you go to a local hotel and a doctor could talk to the patients and answer any questions they had. But of course, with COVID, we're not able to do those as live, and it was until the introduction of Zoom. And that we're able to restart those community LTACs, and that's something that has really been a benefit for the patients that can do it from the comfort of their home. The physicians can organize those from their home or from their office. And that's something that's going to carry forward post COVID is doing Zoom community LTACs and it really ramped up in the first quarter, that's why you saw that growth. As far as using our Care Program, all new centers joined the Advisor Care Program. As we mentioned, 280 of the 475 centers so far are on that Advisor Care Program. We're going to have over 500 centers on that by the end of the year is the target. Because we can help patients identify where they are in the process, and be able to connect them with the proper physician. A lot of the patients that call into the center have never had a sleep therapy before. Well, they should be set up an appointment with the sleep physician where they can be diagnosed to figure out what's the right therapy for them. Other patients have had a diagnosis. They've tried, they're unable to use CPAP. They're ready to go straight to -- in smart prescribing physician, typically the ENT surgeon. And they're -- once we talk to the patient, we realize who is the right physician, then together with their conference call into a center, and the person who's answering the phone would be somebody who can make that appointment. And we have several metrics to be able to measure that. We want 90% of those phone calls to be answered by a live person who can make an appointment. We're not there yet because as we keep adding centers, we need to work through all those -- that learning curve to get those metrics up. We want those appointments scheduled within 2 weeks. Imagine us making a phone call and then realizing that the next appointment is in 3 months from now. That's not acceptable. So we're getting pretty good at that. We're still a little bit above 2 weeks, but we know where we want to be. And finally, the third KPI, key performance index, is we want 75% of the patients that we're going to refer to the ENT to be qualified patients, meaning they have previously been diagnosed with sleep apnea, and they are unable to benefit from CPAP. So call centers are going to continue to grow. And then once we get the people call the call center, when somebody had referred to it as call center 2.0, when we evolve to our net system, we're going to be able to track those patients better. Patients will be on the app. That's what our app is for, we'll know where they are through the process. And so we won't lose patients and give them the best opportunity to have Inspire therapy and dramatically improve what we term as our conversion rates from web to implant.

And then if you look at the centers that have been trained for a little bit of time, I don't know if you call it 3 months or 6 months. What kind of variability do you have in the success rates of those centers? And what are some of the common themes that delineate the difference between a really successful center, getting a lot of throughput and one that's slower?

Well, that number one thing is you have to have a physician champ. You have to have somebody who's going to spearhead the project. And that person cannot be an individual, meaning we need a team. And so when we open up new centers, there are certain elements that every center has to have. A leader, a physician champion is an essential. A patient navigator, somebody who can hold the patient's hand through the process and don't let them fall into any holes. That's a very important person. But knowing who is the ENT, who's the sleep physician? Have you had discussions with the C-suite? Do the reimbursement and the quoting people understand how to quote it? Does the surgical staff know what key items they need in the operating room or what surgical tray they need? So it's all about building a team and building structure. And the centers that we're training to date, we kind of make that a basic requirement, that they need to have all those elements, all the new centers will participate on the Advisor Care Program. And then we want to take the next step, and we want structure, we want scheduled, dedicated OR days. Because if we know that Thursday is an Inspire day, then the whole team comes into work that day saying, "okay, we need all the Inspire sterile trays in the OR, ready to go. We need any stress relief equipment like the nerve integrity monitor, ready to go." The quoting people know that on this day, there is my sheet for quoting as far as when I go to a commercial fare of Medicare, they get quoted properly. The navigator knows to call the sleep physician and say, we're doing these implants today. Let's get these on the calendar for 30 days from now to come into the device programming, and its structure and people know how that goes. And people get used to the procedure, the repetitive process, and they get good at it. So the top centers are able to dedicate OR time. Take the next step further, we are starting to grow the number of ambulatory surgical centers that are participating with Inspire that we started with academic and then large private, and now with reimbursement in place, now we're seeing the growth in ASCs. And with ambulatory surgical centers, you tend to have a little bit more flexibility to have these dedicated OR days because the -- it's smaller and the surgeons can control the schedule a little bit better than it would be trying to negotiate OR time at the physician clinic. So the business continues to evolve, and it continues to mature, and it's about building structure and having consistent patient flow. And all of this tied together is what optimizes patient outcomes, which is the #1 role of every employee of Inspire.

And then, since the IPO, how has your view of the addressable market opportunity changed and evolved? Have there been surprises in terms of -- or learnings in terms of the kind of a consistent theme among the type of patient that you're able to get all the way through the funnel versus those that you're not? I'm just curious for any kind of learnings since the IPO on that front and has your view of the market opportunity refined any since then as well?

It's -- we've learned so much. It was just two weeks ago, we had the 7-year anniversary of the FDA approval back in 2014. And if we can reflect back on everything that has changed as far as understanding our market. And what really we're doing at Inspire is we're changing that tech marketing, and we introduced direct-to-consumer. And what we realized early on is that patients who are unable to benefit from CPAP, you don't find them in a sleep physician's office, right? They're not -- they're lost in the health care system, we need to go identify them. And when we did our market research over the years, what we've learned was, well, we have a very large target market. The TAM is tremendously large. But you kind of break that into smaller segments and identify those people that you can reach with direct-to-consumer, be it a Google, a Facebook, doing some radio spots. And now, of course, we're in the television. We have -- we filmed 4 new TV commercials, we're only running 2 of them. And there's 2 surprise commercials that will be coming out in the second half of the year as we refresh those markets, and we're very happy with the feedback that we're getting on those. So we really can identify a small market that we can really target, and they're very responsive. And when we talked about the web hits and our ability to connect those patients with physicians, it's really evident that we're getting smarter with that. We've realized that the time from web to a physician is difficult. And so building tools, such as the Advisor Care Program to help patients through the processes, making the procedure easier. Again, we've got two-incision approved by the FDA. It also got approved in Europe. And it's already approved in Japan. When we start Japan, we will never train three-incision. We will be exclusive two-incision. So we've evolved the surgical procedure to make the procedure easier. We improved the programming to make it easier to manage patients. We're developing all our digital tools, including Inspire cloud and Inspire app to allow centers to manage a greater number of patients efficiently. And so we're just growing all elements of the business to be able to continue to evolve. And we have advancements in technology that's going to even further improvement going forward.

Okay. Maybe one more question for you, Tim, and I'll switch to a couple of financial questions for Rick. Can you just give us your updated views on the competitive outlook? What's coming down the pipe from your perspective, if anything, from a stimulation perspective? And then I know there's been some other devices improved to try to strengthen the muscles through various technologies. Just kind of what's your latest view on the competitive dynamic?

Well, we've had success. And it's a very large target market, as we've already talked about. And we certainly understand we're going to have competition. What's exciting is the amount of investments that's being made in the sleep industry, and both with stimulation and without stimulation. So that is really good for the patients. It's good for the physicians to be able to have more tools. As far as specific competition with stimulation, we're years away from really having any kind of presence anywhere. I think there's a couple of different people working on things. But there's no data out there yet. And so it's really important for those companies to continue to evolve in that clinical trials, look at the data that they collect, make adjustments and refinement. And I think that the few people out there doing stimulation just have a long way to go as far as technology development, getting in the data. But it's good to see people making those investments. As far as the other companies doing temporary stimulation to strengthen the airways so it doesn't collapse at night. We actually -- in the early days, we had to do our feasibility studies. And we showed -- we had to do nerve conductivity testing to show, are we changing the upper airway by doing continuous stimulation or closed-loop stimulation all night, every night? And through speech pathology and using nerve conductivity, we showed that we don't really have any long-term effects on the airway, meaning that when you turn the device off, the washout period is very short. Even in the STAR trial, when we turn the devices off, the patients reverted back to baseline in just 1 week, meaning that there's not a lot of sustained benefit from stimulation. The same is true with CPAP, by the way. When you stop using CPAP, the washout period, meaning the time it takes to get back to where you were at baseline is less than a week. So it's very difficult to think that you can use a temporary stimulator for 20 minutes during the day and think it's going to prevent the airway from collapsing. That's a little bit of a stretch. But I think that, again, with time and with data, we'll see how that works. Might be efficient for snoring or mild moderation. But you got to remember, we're really -- we're disease state management. We're dealing with moderate to severe obstructive sleep apnea. There are -- there's a good investment in biotech, right, looking for a pharmaceutical solution for sleep apnea, which is really exciting in itself. I think right now, they've got some data out there. I think, again, it's probably good for mild apnea. But to think that you can take a pharmaceutical that can hold the base of the [ top ] forward in a moderate-to-severe obstructive sleep apnea case is a little bit difficult. And so I think what that does is just bring awareness to sleep. And even the diagnostics around sleep apnea continues to grow, which brings more people to understanding the necessity for diet, exercise and a good night's sleep and whether you're -- it's your Google watch or your smart bed or tools you use on your smartphone to show how well you sleep, really are bringing people to market to say, "hey, it's really important to take are of my sleep apnea." And I think long term, that's what's really going to continue to drive the business.

Okay. And then for Rick, I mean, looking at the financial performance of the company lately, you would not really know that there's a pandemic going on. But still -- and yet, the pandemic has probably had some impact on your business. So I was wondering if you could talk about the dynamic of your perception of the impact of COVID on the business and potentially the backlog of patients that, that might have created?

Yes. So going back, we -- during the pandemic last year, we saw a real slowdown, obviously, in our business, the second week in March. And then -- but then we saw how our territory managers, how our health care providers were dealing with the pandemic going on. We are a 2-hour outpatient procedure. And so we really figured out early, and we rebounded, as you know, last fall in the third quarter and in the fourth quarter. And so there may have been some pent-up demand or just more of a -- not a pent-up demand, if you will, a constant demand, but really more of a shift of procedures that didn't take place in the second quarter that maybe moved over into the third and fourth. But we had talked previously that, really, we continue to have a real strong demand. We had 1.7 million website hits in the first quarter, 27,000 doctor contacts. So we continue to keep the top of the funnel full. And so we talked about on our earnings call that we do see some seasonality. We have high deductibles that reset at the beginning of the year, so we did see some seasonality as we would -- that we have seen in the past. Couple that with -- there were some areas of rebound of the pandemic in January in certain regions in the U.S. And so -- but once we got into February and into March, we provided initial revenue guidance in February, and then we saw a real strong rebound in our procedures, in our scheduled implants and scheduled procedures coming up. And so that gave us confidence in the ability to raise our guidance just last week during our Q1 earnings call.

Do you think -- in terms of the Q1 result, do you think there was, I don't know, $5 million or $6 million or $7 million that was left on the table because of COVID?

It's tough to put a dollar amount on that. I don't believe it was that dramatic, but we -- there's a combination of seasonality. You have to remember, just only about 15% of our centers have more than one surgeon. And so they work very hard at the -- in the end of 2020, as they do every year, doing our procedure and other procedures as well. So if they're fatigued and they take a little break in January to reenergize, they're not doing procedures. So there is a seasonality impact there. And so there was some impact. But again, by the time we got to March and into April, that provided us real confidence in the ability to raise our guidance that we previously issued just 6 weeks earlier.

Bob, I'll add to that, too. I don't think that it's anywhere near that number. I think that's significant. I think the seasonality really kind of drives it all between the COVID, the Dallas storm. Our warehouse is right next to a Fedex and we had to shut down that for a week. We're not worried about that. That's just things that we have to deal with. But I don't think it's going to renew that number. We had a little bit of an impact. But yes, we really like where we are at the quarter, and we have good confidence going forward, and that should lead to that significant increase in our guidance.

Yes, yes, yes. I was just throwing out a number. I didn't -- that wasn't based on anything other than just a thumb in the air. But some companies have said that because of this sort of odd dynamic with COVID and catch-up cases being done, that they saw a little bit of a sequential downtick in revenue between April and -- between March and April as a result of that phenomenon. And it sounds like you guys just aren't seeing -- it sounds like you're not seeing that in particular, and then it's been a little bit more linear. Is that fair?

Yes, we're busy. We're busy. And we have the team really excited, and we continue to open up more centers, continue to grow utilization and continue to take care of patients. And yes, we're not seeing any big [ deprecations] in April or whatever. We're busy working really hard, and like where we stand. And again, that's why we have the confidence to increase that guidance and look forward keep taking care of patients, keep driving strong outcomes.

Yes. Yes. I wanted to close -- I only got a couple of minutes left, but I wanted to talk about 2 quick things. One, so I want to get a sense for kind of the -- how you're framing the opportunity in Japan, and any thoughts on international, generally. And then also I want to just kind of ask a longer-term question into as you look forward over the next, call it, 2 to 4 years, what are the innovations and advances to the therapy that you'll bring that you're most excited about? And we'll close after that.

Very good. We're excited. We did our kickoff meeting yesterday with Japan Lifeline. And it's interesting. They started 5 in the morning here, and they stayed late and it's 7 at night there. So it's kind of a little bit of an adjustment, but we're very excited to work with JLL. They are a long-term partner of Boston Scientific. They really understand active implantable product, and that's why we chose them and look forward to working with them. We're going to take the rest of this year in preparation. Yes, we planned doing our first implant. We will generate some revenue. We didn't build it into our guidance because we really want to focus on this being time to prepare, make sure that Japan Lifeline really understands how we do marketing here, how we do marketing in Europe. What tools are available to them? What's our training program? What's the minimum elements that every successful center needs to have. And so we need to kind of really teach this to the JLL so they get the same patient outcomes. And we're committing the rest of the year to really work hard to implement that. So very, very excited about Japan. Overall, we like to think of international business -- if we can remain in the high single digits. I think right now, it's kind of -- Q1 kind of is down to 6% of our global revenue. And we'd like to see that a little bit higher. So if we can combine Germany with Japan to help drive that international business and then add in other countries such as like the Netherlands when they develop reimbursement and keep it at a high single-digit percent, that means international as combined has to continue to grow at the rate we're going to grow in the United States. But everybody knows our key investment and our key focus is growing the U.S. market, and that's where we're putting most of our dollars. As far as technology, the impact of the two-incision approval globally is going to be tremendous. That reduces the OR time from 30 minutes down to 1.5 hours. And that really makes it also more comfortable in that the surgeon stays up here in the neuro-stim pocket, the sensor is placed as a direct visualization rather than -- remember, ear, nose, throat going down into the 6th inner [ costal ] space is a little out of their comfort zone. That's going to be a big step. The growth of Inspire cloud and the new remote that has Bluetooth. So all the information from the implant and from the remote via Bluetooth to the patient's smartphone immediately to Inspire cloud provides the physician the ability to have both objective data when they do a telemedicine visit with a patient, and telemedicine will continue post COVID. That's -- there is a benefit out of it. But we doubt it would be another key to it. We've already talked to the FDA, it won't be too large before we believe we could do remote programming. That's going to be tremendous. So that's going to open a door to allow our physicians to manage a greater number of patients efficiently. Two-incision allow surgeons to do more cases, even getting 3-plus cases in a day. So we drive the efficiency there. We have tools for the sleep physicians to manage more patients. We talked on our earnings call that we are going to go sit down and meet with the FDA on Inspire V, which eliminates the pressure sensor altogether and using an accelerometer for a closed-loop stimulation, which is essential. And then from there, we get to move on to 6 and 7, where we get to build automaticity into the device and having an auto programming device. So I took that right down the clock going to 0, but obviously, very excited about where we're going to be taking this technology, both building capacity at existing centers, looking forward to the long run to take to treat more patients and being aware of our international market opportunities.

Well, Tim, Rick, thank you very much. We really appreciate your willingness to participate in this fireside chat. Thanks again for coming, and we'll look forward to hopefully seeing you live someday soon. Thanks again.

Thank you. Okay.

Thanks, Bob. Thanks, Brad.