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

Travis Steed, Bank of America. Welcome to the Bank of America Healthcare Conference. I'm glad to have Inspire Medical. We have Rick Buchholz, Chief Financial Officer; and Randy Ban, Chief Commercial Officer. If you wanted to make any opening statement or...

Yes. Thanks a lot for having us. Really excited to be here. We celebrated our 4-year anniversary of being a publicly held company last Tuesday. And so seemed like a long time ago, given where we are 8 days later, but very happy to be here. Unfortunately, Tim could not attend. And I'm just happy with the opportunity that he's going to allow me to speak a little bit more than normal, so that's good.

Congratulations on 4 years. I guess to start just on Q1, really strong quarter, the recovery in March. And just kind of curious to see how that recovery has played out and then some of the staffing challenges have gone away, some comments on the general trends?

Yes. We're really proud -- really proud of the team, because January was a real challenge, similar to January of 2021. So we saw some impact of COVID. But we also had our typical seasonality. And so January was tough, not for us, for other companies as well. And then as we got into February and March, we saw a real increase in the number of cases scheduled; number of prior authorizations coming through and then also just a number of calls. And so March was very strong. We saw that a little bit of the procedures that were done in January, get pushed into February, into March and then just real -- just organic growth of the demand coming through in April. And so with that, we had confidence to increase our guidance by about $18 million in our midpoint. And so we saw -- we've seen strength in the implant schedule for Q2.

Is there still some backlog left at this point?

I think most of the backlog from January, February has been completed by now. And so it's really the demand we're seeing from our DTC efforts, our expansion of our Advisor Care program. We're up to nearly 90% of our centers are on our call center. And we're seeing a real good response from that and it's really encouraging for our growth. A few of the other tailwinds which allowed us to increase our guidance is the fact that we're just a bigger organization with -- we've increased our number of territory managers by 50% from a year ago. And so we have more of a tenured sales force and tenured number of centers as well. We increased the number of centers about 50%. We ended the quarter at 733 centers. And so that, coupled with the expansion of our call center and the now fully adopted 2-incision approach with lower procedure time has allowed us to put expectations out there for our centers to really start out maybe doing 2 or 3 procedures a month versus just limiting that 2 initially. And so we're excited about the future. 2022 represents our first full year of the new code for the facility as well as the physician payment and so reimbursement is in a very good place. And so even though we've been on the market for a long time, it really represents 2022 is all about capacity. And so when we talk about capacity, we talk about adding more centers and adding more territory managers. So we feel like we're really just in the early stages of our commercial launch, even though we've been approved for a while.

Great. That's good color. I did want to touch on increasing price this year a little bit. I think 5%, just understanding how that's going through the P&L into next year. It's looked about 5% of revenue growth, I guess, in 2023, it falls through about 100 basis points on gross margin?

Right. So historically, we've done price increases when we have a technological advance or a new component of our Inspire therapy. And so we are making technological advances. We're investing heavily in our R&D and our technology. We have submitted -- we've talked about this, we have submitted for full body MRI. And we expect to have that in the not-too-distant future. And so that's a technical advance. And then also with our approval of our Bluetooth patient remote, it's another technical advance. And so we haven't had a price increase for 4 years. And so we decided with these significant advances that we would increase the price now. We have pricing agreements with all of our customers. And there's different notice periods within our pricing agreements. And so the real impact of the price increase will come through in 2023. We'll see a little bit of the price increase in the back half of 2022. But as you said, Travis, it's 5% price increase. So it could improve our margins anywhere between 50 and 100 basis points in the future.

All right. That's helpful. And speaking of margins, I want to get a better understanding of your path to real profitability. How we should expect that to ramp operating margins into '23 and beyond? And where you see peak margins for this business and what revenue level that would need to be?

Right. Ten days ago, everybody is talking about revenue growth. And then in the last -- a lot of means we've had over the last couple of days, people are asking about profitability. And we have demonstrated leverage in our business model. Fourth quarter, we had some really good relative leverage when you peel back the financials a little bit more, we actually had a positive EBITDA. You take out stock-based compensation and a few other items. And so we are demonstrating leverage. We even -- we had less leverage in the first quarter because of our 12% seasonality, but still improved leverage from a year ago. And so given the fact that with our new revenue guidance and we've talked -- I was maybe not so clear on our earnings call, we talked about -- people talked about what does your OpEx look like going forward. And what I was trying to say there is the increases we've had on a quarterly basis is what we expect to have incrementally going forward. So we've been increasing our quarterly OpEx about $6 million to $8 million per quarter go-forward basis. And so when you look at our guidance and then if you look on like Travis' model, we'll have improved leverage throughout 2022. We burned a net $10 million in 2021. We'll burn a little bit more than that in 2022, but we're gaining leverage. We're very close now. And we have a real strong balance sheet, $213 million of cash on hand at the end of the first quarter. So we feel real good in the position that we are in. Despite the macroeconomics, we are going to continue to run our plan. And our plan is to increase capacity. And we'll see it again and I say it again. But it's continued to add new centers and add territory managers because of the tremendous demand we're getting from our DTC efforts.

Right. Is there some rule of thumb like X dollars in revenue, you can get to like 20% or 25% or 30% margins.

Yes, I can answer your second part of your question. So we did some strategic planning last fall. And we've talked about this on one of our calls. But what do we look like as an organization? Right now we have 700 centers doing roughly 1.5 procedures per month. And so we're still very early in our rollout, again, 733 centers. Our plan is to be at about 2,400 on a long-term basis because we think we can be in about 1/3 of the hospitals and the surgery centers in the U.S. And so what do we look like when we get to $1 billion in revenue and that really is what does it take to get to about 40,000 procedures in a year and we did about 9,000 or so in 2021. And so that's coming closer and closer on the horizon. But if -- instead of having 700 centers we have 1,600 centers roughly doing about 2 procedures a month, that gets to $1 billion in revenue. Gross margin is 85%, 86%. And then that's when we'll be in the more traditional maybe 30% operating margins when we get to that stage a little bit more maturity. But right now our focus is driving top line revenue growth.

All right. And then going to 750 centers to 2,400, you've got that opportunity in front of you. You also -- most of the centers only have one doctor, but there could be multiple doctors. Like over the next 12 to 24 months, how are you thinking about new center growth versus deeper penetration in those accounts and how much opportunity is there for that?

Yes. So we're pretty transparent on our earnings calls. And we give you the metrics to calculate utilization. And so our denominator is growing pretty quickly. But our utilization has also grown. And so we like -- we've had a balanced approach in the past and we've talked about this too. But -- and the pandemic kind of messed that up a little bit. But in the absent COVID, our growth has come pretty balanced from 50% growth from existing centers and 50% growth from adding new centers. And so if we can continue to increase that utilization, that's where we kind of expect to kind of be in 2022 absent the pandemic.

How do you think about the market now there's the big follow-through call like moving this therapy to more frontline therapy, is this going to be a structural change to the market in your view?

Well, I think that that's going to happen over time. But I think right now we're solid second line. We want to be the very first thing people think about when CPAP doesn't get the job done. So we're comfortable in the second-line therapy position. But over time as we continue to make the technology better and continue to advance science, yes, that's absolutely going to be an opportunity for us.

Is there any way to like help quantify the benefit from fill ups this year moving into next year?

Well, I think we've been having this conversation for the past day and have quantified it's difficult. But I think what we're most excited about is it's creating new habits in the sleep medicine practices. They're having earlier conversations about frontline and second-line therapy as a result of this. So there's more conversations taking place about Inspire than there were before. And with some of those patients are working with their physicians and insurance companies and making their way towards Inspire, it's currently off-label for us to say anything about it. But there's a lot more conversations taking place for sure.

That's great. And I guess you're probably in charge of the DTC advertising. So I'd love to get your thoughts on some of the metrics you're looking at, some of the going national. Have you seen any uptick in new leads coming your way?

Yes. I think I'll start by saying it's been a fascinating journey the past 8, 9 years, starting with some basic rudimentary tactics and evolving to where we're at today. And one of the exciting things is we've built a team that's very savvy on this, a lot of consumer marketing experience on the team. And we've evolved from sort of less sophisticated radio strategies to now more sophisticated national television and cable strategies. Part of what we try to do is fill the funnel. We need enough people to top of the funnel and that's going very well. We had a great first quarter. Web hits were up considerably. We refreshed all of our TV advertising and our social media advertising. So that's a big part of it. We have equal focus on what happens in the middle of the funnel when patients self-educate, like what they see and they want to move forward, we have, as many of you know, structured our advisor care program as the vehicle to take the initial phone call, spend 3 to 7 minutes with the patient to answer basic questions, remind them of the basic qualifications and then sort of elegantly hand them off to the practice for an appointment. And we continue to work on getting better at that. We continue to work at optimizing the web strategy to help those people who are most ready. Some people are still evaluating not quite ready. We're most interested in those people who are ready and reasonably well qualified and how do we get to them and help move them on to appointment as soon as we can.

How are you looking at like the return on your investment there? Like do some math on what you're spending, how much how many patients you're getting? I think it's what, $5,000 a patient is costing on DTC.

Well, the DTC metrics evolve as well as we sort of redefine what we're actually looking for. The most basic one is I think we've learned how to very comfortably over time, get somebody to our website for $3 or $4. That's pretty good when you're in a business where you can do outreach and get somebody to visit you for $3 to $4. And then it gets a little more complex on what the rest of it costs. But we feel like we can take those interested patients and move them on to appointment. And we're probably closer to 10% conversion on those patients to get to implant. And we think we can chip away and every percent matters. And we think we can keep chipping away at that and get that up to 12%, 15% and maybe higher than that over time with the right strategy and tactics.

Okay. And then just, I guess, a month ago, you made 2 investments. I guess the big picture reason is like you're trying to take control more of your funnel, get more patients in control further up the funnel, just seeing like your vision here, where you're planning to go with these investments and opportunities for other things like this going forward?

Sure. And again, in the field of sleep, there's just this overwhelming demand for sleep medicine services. Sleep apnea and some are very prevalent conditions. The capacity of the practitioners to see all those people is somewhat limited. And we stepped back and said, is there anything we can do to help solve that capacity problem and get people in quicker and make it a better experience for them. So our -- we've got a little ventures team. And we looked closely at several dozen opportunities and we found 2 companies we think that are doing very helpful things to add capacity to sleep medicine. One of them is Ognomy. And the basic idea there is telemedicine and a home sleep study are a very acceptable way, a very effective way to get somebody re-baseline and updated on the degree of their sleep apnea. And what we found through our Advisor Care program is about half of these patients who come through it need an updated sleep study, which can take on a best case scenario weeks, but oftentimes months to get that done given the capacity constraints. So instead of just sending them on into the center, we will begin to pilot sending them first to this Ognomy virtual visit. They'll get a baseline re-baseline council. They'll get an HST. That HST will be sent to the consulting physician that the patient wanted to see in the first place. The results from that sleep study will be put into our digital health platform Inspire Cloud. And by the time that patient shows up at the ENT office, they'll have that taken care of. So we're saving some time and adding some capacity back. That's the basic story on Ognomy and we're in the early pilot stage with that. EnsoData, basically, what they can do is sleep studies can be read and interpreted accurately and effectively and quickly using AI. They are the leader in that. They've got an impressive list of initial customers. And we want to partner with them and do some joint sales calls and programs to introduce them to many of the labs that we work with because if we can get more labs using AI to score studies, we can take the technicians that used to spend time doing that. And they can do things like follow up on CPAP and tolerant patients; give somebody the role as the Inspire navigator in the practice. So free up capacity to help people with second-line treatments.

Do you think a year from now we're going to be looking at these investments be like, this is the reason we've seen better patients coming into our business? Is that impactful? Or is it more on the margin?

Well, we're going to learn, right? We're going into the pilot stage with both. We think both have a lot of promise and both have the ability to sort of give capacity back to the system to do the eyeball to eyeball patient care that we need.

When you look at in your VC portfolio and everything that's out there; is there other opportunities for -- to do this over the next year or 2 for other?

I think we're always looking. Nothing to talk publicly about, but we're very excited about taking these 2 through a nice pilot stage test, pilot test pilot and then see if we want to roll these out more broadly.

Yes. And Rick wanted to shift to the pipeline and kind of break it down first full body MRI, just to make sure I understand the impact there?

Yes. We submitted, we've hit the 180 days, and we're getting closer. And so hopefully, we'll hear some good news on that soon.

And then the next thing is the new patient remote controller.

Sure. So on the full body, I just repeat there that we're excited about the opportunity there because those patients early on in the process. It may ask a question if they could do full body MRI and they learn early that they're not really eligible. But we've educated our health care providers to let them know we're in the process of getting this. So those patients that maybe are waiting to get a procedure because of MRI, they're still kind of in -- waiting in the wings, if you will. And once we get that approval, we expect a lot of them to come back. So we think it's going to be a real driver for us to some degree. And then from the Bluetooth Remote that we're going to -- we're doing kind of -- as we've talked in our earnings call, and have a soft rollout. And we're going to introduce it more fully at the sleep meeting. Randy, do you want to add?

Yes, we are. This is a really exciting product line. Probably the most important one we've done in a while. And when you think about our customer base, we've got the patient, we've got the ENT, we got the sleep medicine practice. The sleep medicine practice is very accustomed to with CPAP using a technology where they can see critical diagnostic and patient adherence information just on a digital health system, on a digital health platform. It's sort of a basic expectation. And today, we have adherence data. But it's a little clunky. They've got to come into the office with the remote and upload it through a USB. The Bluetooth Remote allows us to now look a lot like CPAP, anywhere, anytime adherence 24/7 on a nice digital health platform. So as Rick said, we're in the beginning stages of sort of a soft launch, hope to have this fully launched by the end of the year. But it's going to give us a different perception on that sleep medicine customer. They're going to go wow. This technology is a lot like CPAP in terms of the digital health information that you're providing to me.

And then on Inspire V, just to understand the timing there, incremental change impact that's going to be on the business?

Yes, really no changes from our earnings call last week. But we're passed the design stage, obviously, because we're getting closer. We're in the verification and validation now with our ASIC with the integrated chip. So things are going well. We're in interactive discussions with the FDA, and we haven't changed our time line at all. We still hope to -- we're working on our press up with the FDA. And we -- our plan is to file by the end of 2022, assuming there will be a 1-year review that we get approval by the end of '23 and then a rollout more substantially in 2024.

And is that going to be more for the physicians that we can procedure faster or better for the patients to say yes to therapy? Yes.

There's a couple of features. We're super excited about it. But it's really the foundation for further growth for Inspire VI and Inspire VII. But what that is, it's a microprocessor. And so we have a sensing lead. That sensing is now going to be an accelerometer in the IPG itself. And so we envision our procedure now is about a 90-minute procedure. We expect with Inspire V that the procedure times will come down even further with that. And then it does allow us for Inspire VI and VII to do more software upgrades.

Where do you see long innovation going longer term? What are the things that you maybe saw from a technology perspective to really completely penetrate this TAM?

Yes. I'll start and then maybe Randy can add some color. I think Inspire VI, I mean we envision that. If we could have the auto on, auto off, I would really get us closer to CPAP, if you will, and further increase our adherence, which is already high. But when we get to that stage, and we have more data and we get further down that line. When we get to the Inspire VI in several years out, that's when we can start talking about being first-line therapy. We need data and data and data, and we also need time, but that will be kind of a big step for us to allow us to do that. And that's a multiyear process, but -- and we still think we can get into 1,600, 2,400 centers with being second line to CPAP.

You have to convince the FDA and reimbursement payers for that, right?

Right. Yes. I mean, it's really exciting. We're just scratching the surface and some of the things we can talk about, some we can't. But I think the best way to think about innovation is the Inspire V platform with this new integrated circuit is going to allow us to make a lot of enhancements just through firmware. And we want to make it smart, intelligent and capable. And -- some of the things that we're talking about there, as Rick said, auto on and off. It might be the device delivers a little more energy when I'm sleeping spine versus when I'm sleeping lateral. Those sorts of things are just going to continue to make it a better, more efficacious experience for the patients and the physicians, so really excited about the pipeline as we've got it laid out today.

When you look at your pipeline and you also look at some of the coming competition, which I'm sure you've taken quite a bit of look at, like how do you see the competition coming to the market stocking up?

Well, I think when you ask that question, you need to come back to customer wants, customer needs. I think the main thing that customers need, and again, we've got an ENT, a sleep doctor and a patient is just proven results, right? So I think the thing that we've got going for us right now is well over 20,000 treated patients and well over 200 peer-reviewed publications that speak to the safety, effectiveness of the treatment, right, and the long-term durability of the treatment. So that's where we kind of start as a platform as is proven predictable results. When you look at the ENT, today we've gotten our procedure down to 2 incisions, 60 to 90 minutes these incisions are 4 to 5 centimeters safe, fast, predictable outpatient procedure and with Inspire V will eliminate the sensing lead and the procedure will get even faster, right? To the sleep doctor, we're making a big play in digital health. Again, we want this system to be every bit as good, if not better, than what they get with CPAP. They want to see critical diagnostic and adherence information on their patients so that it's easy. And they can communicate with the patient through the digital health platform, through the Inspire Cloud platform. The patient has an app on their phone and they can message back and forth. How is it going? Are you sleeping better? Do you need to come back and see us? All these things are designed to make it easy and time-efficient for the following managing physician. And I think finally, for the patient, today, it's wonderful. Again, these are patients that struggle with a mask and they come in and it's as simple as going to bed at night and pressing the remote on and off. There's no recharging. There's nothing sophisticated about it. Other competitive attempts in our space often require them to plug something in and recharge it. Some require putting adhesive tape on neck. But today, it's on and off with the remote. And as we get into Inspire V and VI automatically turn it on and off. So I think we've got a good game plan to address fundamental ones and needs of all 3 of those customers.

And then indication expansion, I think something you've talked about water BMIs, how -- like when do we expect some of that stuff to start?

Yes, we're working on that. We're talking about the limitation on HI-65. We're trying to increase that because these patients are desperate, they need a solution. They don't have any other alternatives. So we're working on that with the FDA now. And the BMI, that's really more of a self-imposed type of indication.

And then kind of last question on international. Just an update on kind of how you're expanding there and countries you're moving into, especially given some of the...

Yes, we haven't changed our approach internationally. In the first quarter, the U.S. is growing so quickly. In the first quarter, OUS represents 4% of our revenue. A year ago, that was 6% just because the U.S. is growing so quickly. But on a long-term basis, we're very excited about the opportunity outside the U.S. We've been in Germany, in the Netherlands. But our philosophy is we only go into those geographies where we have good reimbursement in place. And so we have FDA approval in Australia. We've had it for a while. We continue to work with their authorities on reimbursement. We have started our launch in Japan. So we're progressing there. We're training more doctors. And we're really going to try to focus on 10 doctors, 10 centers initially in Japan. And we also -- we talked about on our call last week we actually had our first shipment to Singapore through a distributor. And we've also have done our first implants in the U.K. And we have good news on France as well that we do have reimbursement. It's going to take a few quarters to figure out exactly where that reimbursement comes in for France. But because we want to hold tight on pricing and reimbursement throughout the world, so we don't jeopardize any of these geographies. And so U.S. is going to continue to grow quickly. But if we can maintain the outside the U.S. in the high single digits or mid-single digits, with the growth we're seeing in the U.S., that means the OUS segment is really going to be growing pretty well.

And last question, how does the supply chain then you have all the components you need?

Yes, we do. We spend a lot of time on that. So our operations and logistics, want to commend them because they work feverishly on that daily. We like to keep one quarter, if not more, of inventory on hand. We have really good partnerships with our suppliers. And so we really try and work on that diligently. We haven't had any disruptions. We don't intend to have any disruptions. And we -- it's challenging, but we're working through it.

Anything else that you wanted to touch on?

Thanks, Travis.

Thanks for having -- thanks a lot.

Thank you.

Thank you.