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

Okay. Good morning, everyone. Thanks for joining us. My name is Matt Miksic, and I cover medical devices here at Credit Suisse, and we're very happy to have with us today Tim Herbert, President and CEO of Inspire Medical; and Rick Buchholz, CFO of Inspire Medical. So thanks, gentlemen, for joining us again this year. We're going to get started.

Thanks, Matt. Great to be here.

It's our pleasure, 100%. So I wanted to just -- maybe we could just jump right into questions. There's a lot to talk about, maybe starting with the current environment, maybe impact on growth, COVID in Q3, impacted a lot of companies in our space. Your business appeared to be very resilient in this environment, particularly in the face of the surge that we saw in August and September. Maybe if you can talk a little bit about that, and then we'll sort of jump into questions to follow.

No problem. We experienced the same surge from the Delta variant as every other company. I really want to give credit to my field team. They are the resilient ones. They're the ones that stayed positive through the whole thing and really worked through the challenges. During our August earnings call, we talked about the Delta are already hitting Miami. And everybody knew that it was not going to stop there. It was going to go right up the coast as it did, and it shut down Florida and then continued onward throughout the United States. So we knew we had a challenge in Miami right upfront. So we kind of at the beginning of Q3, we talked about how COVID is going to be a challenge this quarter, but we are able to work through that. A couple of things that worked in our favor. Number one, we do treat obstructive sleep apnea. So it's really not considered disease. I mean, it is disease state management. We're not considered an elective procedure in a lot of hospitals. Therefore, we could continue procedures. And as long as we have the staff to support it, we can get them scheduled and do the cases. Secondly, we've been adding a lot of centers lately that gives us more flexibility. And one example is adding ambulatory surgical centers, we could move cases from hospital that are managing the COVID cases to ambulatory surgical centers to keep those cases underway. In some cities, such as like Houston, in Houston, Baylor Hospital Downtown was taking care of a lot of the COVID cases. So we would just reschedule those cases to the suburban Baylor Hospital. So we just have more flexibility to be able to schedule the cases. And the key to the field stuff is everybody has got the same challenge, just stay flexible with your doctors. Doctors have privileges in multiple sites to make sure that you can get those cases scheduled. Then also stay in touch with people, so any suspended cases could be quickly rescheduled as we move forward, and COVID, the good news is it was pretty fast moving. So while it shuts down Florida for August and part of September, by the end of September, they really got a chance to get those cases back on the schedule and get them performed. The key coming into Q4 is COVID has not gone away. I do think we'll have another research once we get the cold weather coming, I'm not an expert in it, but I think we need to be predictive of this, and I think you hear a lot of other companies as ourselves, talk about the staffing issues. And what's going to happen in the fourth quarter is, I think the staffing issues the last 3 weeks of December are going to limit those operating centers to be able to be at 100% capacity. That means scheduling a lot of time the last 3 weeks of December is going to be very challenging. And everybody knows, for a med-tech that is really the busiest time of the year because all the patients are really fighting to get their cases performed before their high deductible insurance resets on January 1. So we're working very hard right now to get cases schedule those last 3 weeks of December because we know what an environment is going to be like to compete for that hour or time. So we're not done with COVID. COVID isn't going away. We've got to keep pushing the vaccinations across the board and most of our field people, of course, have to operate in hospitals, so that's not a challenge for us. But we're still just leaning forward. And we're not disassociated with COVID, we have to deal with it like everybody else. But I believe that the team really is strong about stepping forward and being proactive and persistent about getting the cases performed and letting patients get Inspire therapy.

That's great. So there's a lot of things you touched on there and staffing being one of them. With your exposure to sort of outpatient and ASC environment, can you talk a little bit about how -- I think there's some questions around whether and how the staffing issues affect centers differently, whether they're in-patient, whether they're outpatient or ASC. Can you provide any color based on what you're seeing in the field?

Right. Well, I think ASCs are in pretty good shape, right? Because they have the flexibility to schedule, the flexibility to recruit and retain their talent. Right now, ASCs make up about 20% of our centers. The key to it, it's really only about 16% of our procedures because the ASCs are relatively new and growing. So we still have an opportunity there to expand that capacity. For as far as the outpatient centers, most of them are obviously tied to the hospital system. And as long as COVID remains in control, they don't pull a lot of that staff to the COVID floors. So if we can keep the COVID rates down, that allows the OR staff to remain, and they can operate at full capacity. But if they get staffing challenges, you got to move the staff to the priorities to where the patients need them most. And unfortunately, those tend to be the COVID for us. So as long as we keep COVID at bay a little bit, that's going to help the staffing issues, if there's any kind of research again without the ability to back-fill all the staff that have left the hospitals, it's going to be a challenge as we get to the later end of the quarter.

Right. So essentially, the good news is, whether it's outpatient ASC in an environment where the hospital is trying to preserve its acute care overnight stay capacity in the face of a surge. This is a procedure that can get done when, say, maybe a hip or a knee or something that needs an overnight stay has more to it.

Let me give you one more side to that, too. We have the luxury because we help all help centers get patients prior authorizations and with all the policies that only takes 2 to 5 days. But we're able to see the pipeline a little bit better, and so we're able to schedule those cases out and get them on the books now. So we are scheduling some cases in January already. So typically, surgeons are running about 30 days out as far as scheduling cases, and we're trying to accelerate that before the Thanksgiving holiday to get them locked up for the Christmas holiday because we know how busy those last 2 weeks are going to be. And we do have line of sight on those patients. We're being very proactive on getting those scheduled.

Okay. But just to be honest, there's one last thing on the staffing issue, though it does -- if I am understanding this correctly, like a surge that's going to put patients on the floor in a hospital and require staffing to cover that, it draws from the same pool that everybody needs to get cases done.

Absolutely. No question about it. That's the challenge that the hospital administrators are dealing with today. They certainly care about patients first, and they're doing everything they can, but they have a challenge with their staffing, and I know they're working hard to fix that challenge, but the rest of us have to understand the rules and operate within them and do what we can to make sure we can get therapy to patients.

Well, I mean, those are challenges. I don't want to seem like that's the only thing that's going on, because you did put up a pretty strong quarter and an unusually strong quarter in this environment. Can you talk a little bit about some of the other drivers? You mentioned adding additional centers, growing volume in existing centers. Maybe talk a little bit about that dynamic?

Yes, we'll give you a kind of just a hit list of things here that's making such a difference to us. Number one, we've never really added all those centers at one time. We've always had our steady cadence, and we can only add centers at the rate at which we can control quality and patient outcomes. So we're very strict about that. Now over the last year, we've been adding staff significantly, including not only the field territory managers and field clinical reps and even sales management, but we've been adding to our training team as well that allows us the flexibility to bring on centers at a little faster pace. Hence, over the last couple of quarters, we brought in over 60 new centers even in a COVID environment. A lot of those are ambulatory surgical centers, because that's now up to 20% of our makeup. That's just the first thing. Number two, we need to continue to build the capacity at existing centers. In other words, get the utilization higher so they can handle more cases. The most impactful single item to help that along, well, we're going to get into reimbursement in a minute, is the 2 incision procedure, which is pretty much 100% of the cases. There might be just a couple of surgeons that are still doing few incision, but very, very few. That reduces the OR time by 30 minutes, and it really has a significant impact on performance, patient satisfaction, the physician experience, and what we can do now as we move into the fourth quarter where it's going to be competitive to get OR time, we can just go to the surgeon. We can now add a third case to an already booked day where they have 2 cases scheduled. So we have the ability to just quickly add another case. And that really helped out in the third quarter. That's going to help out more in the fourth quarter. So we really like that. Number two, we've really never have been able to really take advantage of the reimbursement environment that we have. Remember, all those Medicare local coverage determinations took effect right in the middle of the pandemic last year, and we're still kind of coming out of that, and COVID is still around. And so the Medicare cases are really starting to take hold. We have national coverage from Medicare, albeit through the MAC's and through Local Coverage Determination. We had Anthem earlier in the year, so we now have covered with all the major payers. And so we really have a strong reimbursement environment. There is confusion around our facility and physician reimbursement, all that's going to resolve on January 1, because we have our brand-new code. It's fed through the RUC process. We now have stability and strong reimbursement for the physicians, strong reimbursements for the hospital, and CMS is going to correct the miscalculation on the ambulatory surgical payment, and we're sure that's going to come back right to where it was last year. And so reimbursement really is a non-discussion point next year, and that's really going to help us grow capacity and take care of more patients.

And there have been some questions around that. Any time there's questions around reimbursement or uncertainty around reimbursement of billing or booking or coding, we all know that, that can have kind of a stalling effect on immunization in a steady-state plan. And this is obviously not a steady-state plan.

Right.

But can you talk a little bit about your sort of visibility and confidence in some of the points you just made on reimbursement, just because folks have been surprised in the last year around coding and new reimbursement levels.

Right. Well, so the first step is the new CPT code 64582, you got to remember new numbers. It's not a lot, it's 64568, that's the base category, number one, is 64582, which is the new code for closed-loop hypoglossal nerve-stimulation incorporates all elements of Inspire from stimulation need to the neuro-stimulator, and the previous code only had the stimulation need in neuro-stimulator, we had to have that add-on code for the pressure sensor. So it's really kind of difficult to understand how you use those codes, how they get reimbursed in different environments, what do academic centers and academic surgeons get as compared to private practice, physicians. Now it's all clean. January 1, It's straight-up one code for the whole procedure. The national average Medicare payment is $863 depending upon how they do the calculations. It was $870. Come July, I'm sure they'll do another minor adjustment for physician reimbursement risks for our view is relative value units. Once Congress kind of gets their hands on it, that's across the board for every physician. So we think really if it comes in about the $860 to $870, that's fine. What that means is the national average Medicare spread is about $800 in the smaller communities to about $1,050 in the big population centers such as Chicago and New York City, so where most of our procedures are done. So Medicare is going to fairly reimburse the ENTs. Remember, the procedure now is down to 90 minutes. So ENTs are going to get paid about $10 a minute. That's competitive with any other procedure they have, and that reimbursement is stable for years to come. They know what it is. And commercial payers should reimburse about 1.4x that. So they really have a strong case, and now we're in a position where private practice physicians can dedicate more of their practice towards Inspire cases. They don't have to say, I do this on a charity because I'm not getting reimbursed for this. That's not true anymore. We did a full RUC survey and every doctor that filled out the RUC survey, they used that data to say how long that case took and they calculated the actual work of the RVU, and so the reimbursement is fair. CMS accepted at least what the RUC recommended, CMS accepted to the RVU. So if a doctor complains, the first question you ask him is, did you fill out your RUC survey? And if they say no, they can't complain anymore. They have their opportunities. So it was sent out to 300 surgeons to do that. In the test, it did talk about that the 2 incision is part of that calculation. So that means it is going to be stable going forward. When we get to Inspire 5, I think there might be a time to look at it, but we're talking at the end of '23. So it will be 2024 before they even look at that. Hospital reimbursement is, as expected, it maps to the same APC, ambulatory procedure code as all other neuro-stimulators as it did with the prior code. So it's the same reimbursement for hospitals, which is already strong. In fact, for 2022, there's a proposal, it went up 3% to over $30,000 on a national average Medicare payment, only commercial payers pay 1.4x that. So very strong reimbursement for hospitals, and remember our ASP this year is $23,850. So it leaves a lot of room in there for hospitals to do Medicare cases at a profitable situation. Then we got to ambulatory surgical centers. We just expected that when CMS did it, they would use the historic data of Inspire from last year in 64568 to calculate the new ASC payment. The CMS is really busy. They got to deal with a lot of codes. You saw that big OPPS book is 900 pages. They just missed it. And by not seeing the historic Inspire data, it automatically goes to a default rate of 31%, calculates out of $17,000, that's what they published in July. We went to the panel meeting, the panel unanimously recommended to redo the calculation. In the OPPS rule, which is the text CMS data, they agree with the panel, and they will redo the calculation. The data tables are only there for reference, but last week, when those came out, they hadn't done the calculation yet, and it still show at $17,000. We sent an e-mail into CMS, give credit to CMS. They're busy, but they replied right back immediately, and they says, no, we get it. We get it. You see in the rule, we wrote that we're accepting in the panel, of the panel recommendation, but the calculation just has not been completed yet. Don't worry about it. And so we're always worried about it, because last week, I received no less than how many phone calls on it, right? And the doctors aren't worried about it at all. The ASCs aren't worried about it at all. I think we get more attention from the investors being worried about it right now. But it's going to get fixed either 2 ways. The final tables that are used for reimbursement won't come out until January 1. If they don't -- that's one way they can fix it. The other way is, is to actually publish a change notice in the next couple of weeks. I don't know which way they're going to go on that, but we're just confident that the calculation will be made. They do know what the data is to be able to do the calculation. And we expect the payment for ASC is going to be exactly that of the base code 64568, which have bought a national average of $25,000.

Great.

It's great, right? That's the range. If you go, the spread should go anywhere from $24,000 to $27,000, something like that, it's more familiar with population.

No, that's really helpful color, and a challenging process, I'm sure. One are the things that when you talk about sort of building out centers, adding clinicians in interest of performing this procedure, we talk to clinicians across the spectrum in other markets. And as the surge has impacted volumes, as folks face an uncertain kind of December, some of these clinicians are looking for other things to do in the ASC and in the outpatient center. So I mean, I guess, how much of that do you see folks who might have been, the concentration of their practice might have been in one area and they're sort of like seeing this as a way to keep busy when some of the procedures that they normally perform are either just coming in a little lighter or just tougher to get done in a center?

Well, we've got 2 other things going on that's kind of driving our need. Number one, we've been doing a lot of drug to consumer to build our brand. So people know what Inspire is. And I think, believe it or not, I think our marketing is growing now somewhere about a 42% recognition on our brand, which is pretty good, but Nike is 99.9%, where Credit Suisse is probably 99%, right? So we're a long way from people really understanding what Inspire is and how Inspire can help. But in the meantime, people who see our outreach programs come to the website, we've got 5.3 million people come to our website already this year. We have our new call center that took effect August 1 and is really having a dramatic impact on improving patients transition from an inquiry to an appointment with a physician. We're using all kinds of technology, not just the phone, we're using e-mails and other approaches to get patients connected with a physician. That is driving demand. And we either need to increase the utilization at existing centers where we got to have additional surgeons at existing centers or new surgeons at new centers. We're doing all of that. And that is something we're going to have to continue for years to come. Right now, we're at 600 centers, but our saturation point is somewhere about 2,400. We're about 24%, 25% penetrated with the number of centers. But the majority of the centers that we have are still at one surgeon per center. That can double, if not triple. So the number of surgeons available to do to procedure is even further under-penetrated than the number of centers. So we have a long way to go. The really good news is, is we certainly have the demand from the patients. Respironics had an unfortunate safety incidents that is causing challenges out in the field. We do see patients coming in. We haven't seen the big wave yet, but we know it's there, but we're really using this opportunity to communicate with the sleep physicians and make sure that they can talk about Inspire because right now, they can't take care of those patients. They don't have a CPAP solution for those patients, and they know they have to be treated because the risks of untreated moderate to severe sleep apnea is very difficult to handle. So we're going to have a good headway down the road being able to change the top track of Inspire. But it's really going to be a focus on us to continue to build capacity.

Right. Okay. So last thing here, just on -- maybe not the last thing, but just on this capacity and not to sort of look at this in a sort of critical way because it has been such a strong trend, and you're sort of building a new market here. But there have been some questions around sort of the pendulum swinging back. So the COVID, certain procedures, markets, even things like Amazon and Netflix, right, swinging the other way from the pandemic as you kind of come out of this. I guess, what kind of concerns do you have that as the rest of the health economy gets busy, that's some of the attention and spotlight kind of falls off this procedure and you lose some of them on that and what confidence do you have that you're going to be able to sort of power through '22?

No, that's our problem, right? That's -- we just need to make sure that we stay on the top of our game. The key to our success is we're really helping people, and we have a very safe and effective therapy. And the quality of life associated with untreated moderate to severe sleep apnea baton is horrible. We've all had challenges where we didn't sleep a night or sleep 2 nights in a row, and we know how we feel the following day. You got to get up early for a banking conference, be at your best at 7 in the morning in Minneapolis there. So I mean sleep is such an important thing. And the world continues to evolve that as we get through the pandemic, we're going to go back to the basic pillars of life, which is diet, exercising and a good night's sleep. And everything that we have tells us how well we sleep, whether it's your Apple Watch, whether it's your smart bed, whether it's your phone saying, you didn't sleep well last night, you go, well, thank you, I can tell that. People who have untreated moderate to severe sleep apnea are extremely motivated to find treatment, and the patients we treat are unable to benefit from CPAP, they don't have a lot of other choices out there. They don't want to have a surgical procedure because of the risk profile and the probability of success there. So that's why we have such a high demand. So as the world comes out of the pandemic and continues to open up, I think you're going to see more people want to improve their quality of life because they've been living in the pandemic world. I think that's an opportunity for Inspire. We're not going to get overwhelmed by it. I think we're going to be on top of the way. So that we really look forward to the world with all the pandemic, trust me more than anybody, so I don't spend so much time down here in my basement. But it's going to be key for the world to get back, but I think people's health and quality of life is going to be at the forefront, and their expectations are going to be very high. So we look forward to that day.

Right. No, that's fair. And 2 ways to look at that, I guess. One is there's a pendulum analogy where something has to swing back and the other is there's sort of a disruptive curve or a ramp, market development and adoption that in some cases has just been accelerated like telemedicine. I don't know that people think of telemedicine as a pendulum. They think of it as we knew it was coming, it just came a lot faster.

Well, you kind of hand that to me, so I got to grab it and jump on it. We've developed our whole digital platform. If COVID did anything, it brought the importance of telemedicine. And so we expect in December, a new remote is going to be approved. The new remote has Bluetooth. So all the information from the implanted neuro-stimulator and from the remote, can now quickly via Bluetooth go to the patient's smartphone and immediately uploaded to Inspire Cloud. And so we are expanding our Inspire Cloud platform to be able to support telemedicine, because as we continue to grow capacity, we're expecting the sleep physicians are going to have to manage a lot more patients, and they have to be efficient doing it. And so we're creating the digital tools to allow them to do that. Once the new remote is out, we also have a new physician programmer that's in development now that will go to the FDA in 2022. And by the end of '22, we want to launch that. That allows physicians to just use their normal computer to login to the programming routines. That will also tie in to Inspire Cloud. Where we're going with this, in a short period of time, we're going to be able to provide the physicians the ability to do remote programming from their office to the patient's home. So when they do a telemedicine visit and get the subjective feel and say patient, Matt, how are you feeling today? Are you able to use the therapy every day? Do you have any questions or any challenges, and the physician could say, you know what, I think it can help you out. I'm going to make a small programming change. We're going to have you test it tonight. Maybe we'll check back tomorrow. If it's not working well, we can always change it back. That remote programming really puts ultimate flexibility to the physicians. Whereas today, if they do a telemedicine visit and they need a programming change, patient Matt, you've got to get in your car, you got to drive into the office, not going to do it in the office. And then if it has to change again tomorrow, you go back. So that is going to just really drive into the digital world. The key, it's all fully reimbursed as well, telemedicine, remote programming, fully reimbursed for the sleep physicians and now they can really manage all their patients, and they have Inspire Cloud that they can easily see how all of their patients are doing. And globally, they can look at every patient globally de-identified, of course, to protect personal health information, PHI, but they can kind of compare themselves. The key to Inspire, we get to see every patient globally. We get to look at every center. And if one center is doing better than another, we got to go learn from them. If another center is falling short, we get to go kick them in the butt. It's a teaching opportunity to get their outcomes up. And that's what we're going to use to make sure global patient outcomes are strong, whether we're talking Europe, the United States and we're about to do our first implant in Japan. So really, now we're going over to the Asia Pac. So digital is going to be a really key component of Inspire moving forward.

Well, you've checked it up my next question, which was all about digital, and that's great. I think that covers that and bridging into international. So can you talk a little bit about maybe what the market development process looks like or the challenges look like in some of your international markets, Europe or as you mentioned, just getting started in Japan.

I think right now, we're hovering at about 6% of our global revenue is in Europe. And all the other revenues in the United States, and we're investing so heavily in the United States, and we're growing capacity and even that we talk about is growth in the United States. There's not a lot of surprise about that. We have an unwritten policy that says we don't really significantly invest in any country until we have a reimbursement solution. Germany is about 90% of the European revenue because we have reimbursement. We have the NUB at start. This year is the transition year to the full DRG, which is absolutely wonderful. And it's going to be put in place, and it's going to allow Germany to continue to grow for years to come, I think, of all of our employees, the great majority are in Germany in our -- a field team there. We also do a direct-to-consumer in Germany. We have a call center in Germany. So everything that we create in the United States, we have also created in Germany. The Netherlands is the next step. We have a breakthrough in reimbursement there that we are now allowed to train additional centers. So we've only had 2 centers for the last couple of years, and they had a cap on how many active business they could have at one time. Those rules are changing, and that's allowing us to expand the Netherlands. That's really opportunistic. We are in reimbursement review both in Belgium and in France. We've been through the first gate in Belgium. We're cautiously optimistic, but it takes time to get reimbursement, but we continue to fight in those countries to bring Inspire to that population. First case is scheduled in the U.K. in early '22, we had a favorable ruling with NICE. So that's great. We are working programs in the Nordic region and Austria, Switzerland are pretty strong. So all in all, Europe has the potential to continue to grow, although it's going to be growing at a lesser rate obviously than the United States because we're really throwing everything at it. Go across the other pond to Japan, very excited about Japan. And they haven't opened the borders yet because of COVID, but we're optimistic that our top trainer is going to be able to travel to Japan to support the first case. They're working to identify the patients down and get them scheduled. We do have a couple of training courses scheduled as well, not just the first 2 hospitals, but for the next wave of hospitals after that. We're entering Japan market where we have full reimbursement -- well, full regulatory approval and full reimbursement already established. So that really lets us get in there and ramp up. And we want to ramp that up to the level of Germany in the next few years, and we think we can do that with our partner, Japan Lifeline. Our trainer will move and reside in Tokyo to be able to support that training, but that also provides that individual the opportunity to travel to nearby other opportunities. I think Singapore is one that we can start relatively quickly. There is one center there that has the top physicians, and we can start doing cases there, as well as Hong Kong. Hong Kong is a place we can start today, but that partner will have there will also have the ability to start bridging into mainland China to figure out what our program is going to be to enter that market. It's going to take years to do that with that regulatory environment. But Hong Kong really gives us a point to enter and a stepping-out point. The other 2 countries we're working on is Australia and South Korea. South Korea is very early stage, but that's starting to rise up as a top med-tech market, interesting enough, and we'll see what we can do to help them. We're going to be very careful on all of these markets. Australia, we're going to run into troubles with reimbursement. And again, we don't invest heavy in countries until we have a reimbursement solution identified. We don't have that in Australia today. We do have regulatory approval, but we'll continue to work with the authorities in Australia. The physicians are pushing very hard to get Inspire into Australia, but it's going to take a little bit of time to do so.

Okay. So in the couple of minutes that we have left, building markets, expanding a global footprint, all these things are costly and being like on a steep part of the S-curve of the quarters, those kinds of investments, but maybe to bring Rick into the discussion. If you could talk a little bit about how you think about profitability or trajectory or margins, got great gross margins, what one of these curves start crossing at the sort of EBITDA line or the operating line?

Yes. Good morning, Matt, thanks for having us. Tim mentioned it, we're still very early in the penetration of our potential procedures and implanting centers. We're in 603. Ultimately, we want to be in about 2,400. So we have accelerated our commercial footprint. We recently reconfigured our sales organization for the second or third time. We used to have 2 area vice presidents. Now we've expanded that to have 2 zone senior vice presidents and then have area vice presidents underneath them, and that just gives us the ability to continue to increase the capacity on our side of defense. And so we're focused on making investments that's going to drive our revenue for years to come rather than optimizing our P&L right now. We have 86% margins. We have strong cash position. We're not burning as much cash as we have a year ago. So we have actually improved our leverage, but we're really focused on driving that top line to increase the number of centers and physicians that are offering this. And that's why we're continuing to lean forward and invest in our DTC efforts. Also, that just increases the brand awareness and drives patients to our website, and that's why we're also investing in our Advisor Care Program or our call center. So we get down the road further, we can start talking about more traditional med-tech operating margins. But right now, we're in a good position to drive growth.

Well, congratulations on all that, and we're at time. So we'll stop it there. But thanks so much for joining us, and hope to keep in touch.

Great, Matt. Thank you very much.

Thanks, Matt.