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

Oh, absolutely. What a great partnership. The opportunity that the new weight loss drugs are presenting, if they think about bringing -- being able to bring those patients for the BMI at 37, whose 20% weight loss to get them down to a BMI 33, 34, and resolving that lateral wall collapse. What the drugs won't do is resolve the tongue-based collapse. So it's multiple dimensional challenge in the airway. And so we treat the tongue-based collapse, which is the majority of sleep apnea cases. But when you get to the high BMI, those cases are predominantly dominated by the lateral wall collapse. So it really is kind of a perfect partnership between the obesity drugs and ours. And as they all do some sleep apnea testing, we hope they do. What we will find is they will get a reduction of their AHI, apnea hypopnea index, but it won't resolve the sleep apnea because what it's going to do is it's going to expose the tongue-based collapse, well, that's where we come in. So it's really going to be a strong partnership. Those patients that have the high BMI that we can't treat today, again, because of the lateral wall collapse, we're going to look to get them on maybe the drugs that can help those patients not only lose weight, but they're going to be healthier and they will become potential Inspire patients as well.

That's great. There's, I guess, the A-fib population, there's some potential new technology coming, grow that population. There's a little more awareness on sleep apnea in that population. So I'm just curious, I think there was some data that recently came out, maybe kind of touch on the opportunity within A-fib?

Atrial fib. It's been a long history with atrial fib and there's a known causal effect of untreated obstructive sleep apnea to atrial fib. In fact the studies have shown that if a patient has a treatment for atrial fibrillation, the recurrence rate if left with untreated sleep apnea is 57%, right? So I know there's a bunch of talk out there with Boston, Medtronic and PFAs and the new way to be able to treat atrial fib, and that's fantastic. It's great for the patients. The challenge is the physicians that are treating the atrial fib have got to be aware of the risks of sleep apnea. So in Europe, I know it's very much more common in the guidelines, in the United States this maybe 50-50 spotty. But every patient who has an atrial fib treatment, really needs to have a sleep study to assess, do they have sleep apnea and is it the causal effect. The great majority of atrial fib patients have sleep apnea by definition. That's the connection between the 2. Left untreated, it doesn't give the patient any benefit to be able to treat them. So we're working very closely with the cardiovascular docs that with the new awareness in atrial fib, with the activity of our good friends at Boston and Medtronic. We think that's great. But again, this is another strong partnership where you can really help the patients with the new treatment without taking care of the sleep apnea, you're really not doing the justice that needs to be done, and we're certainly going to be there to help those patients, and that will be a good boost.

Do you need to do more work with the referral channel? And is that something you're already doing?

We're already doing that, but we're really wrapping that up this year. So all of a sudden, we're having a presence in those conferences, we have a little pop-up table on. People with the -- cardiovascular docs walk by and say, Inspire, you guys are that TV commercial, what do you guys do? And we're there for atrial fib. And so they've heard of Inspire, but we know we just need to drive a connection and how it's important for them to really understand it. On the same note, patients go to our website and learn about Inspire, but they don't go to our call center. They need to enquire with their own private practice doctor. So we're sending people out and we're sending pop-up booths at the general practitioner conferences as well, really to educate them that your patient is going to come and ask you about this. And they do, and said, "Look, I saw this ad, I went to the website. I got educated on Inspire. I think it's for me. Doc, what do you think?" This is the family practice doctor and they say, "I've never heard of it," right? And so we get calls in to educate that population too. So an educational process for our marketing team is really not only with sleep and ENTs and we continue that work. But with the referral networks and the family practice doctors, cardiovascular health and -- and that will only continue as we grow.

That's great. Maybe switch to the digital program. I think that's something that's probably unappreciated by a lot of investors, maybe frame the opportunity for Inspire with some of the new digital stuff that's coming over the next couple of years?

I think the -- we know that, well, as we just kind of mentioned, today's capacity challenges the ENT, but that's going to be resolved. We know the challenge down the road then is all these people that we're treating need to be managed by the sleep physicians. So we need very efficient tools to be able to allow them to handle the magnitude of patients that are being treated with Inspire and hence we created the digital program, SleepSync. And what it is, is the -- our cloud-based patient management system. The information is imported from multiple sources. A patient will have a little remote control, always have the toys in your pocket and don't leave home without them. So the little remote control has Bluetooth. So all the information from the implanted product goes from the patient's smartphone to their -- smartphone to the Inspire Cloud or SleepSync. So we know how often the patients are turning the device on, turning it off. We know if they're making any adjustments. And so we really get the characteristics of usage. We're going to be providing patients with a sensor that goes underneath the mattress that that uploads to the cloud, so the sleep physician can gauge the quality of those patients' sleep and are they having events. We have our new physician programmer that's in review at the FDA right now. That will come out that automatically logs into SleepSync, so all the physician instructions will be able to go to the SleepSync. So now when a physician does telemedicine visit with the patient and will have all of the objective evidence as far as how well the patient is sleeping, are they using the device? What were the program settings I set it at? Then they contact to the patient and get the subjective feels. How you feel? Are you comfortable in the morning? Is there any changes we need to make? What are your thoughts? And now the only thing the physician can't do today is they can't make any changes. And so this is, well, you know what, I think you're going to need the programming changes. So we need you to drive in 1.5 hours to come to my office, so I can do programming changes. We're about to change that. So as soon as we get the physician programmer in, we're going back to the FDA and we're going to get approval for remote patient programming, where the physician can see all the information, and say "I think I can help you". And they can do remote programming from their office to the patient's home via the same digital program that we have. As we move forward and Inspire 5, we'll talk about in a minute, but those tools will continue to evolve with SleepSync. And our goal is to have every patient globally on SleepSync. And one last benefit with this is that physicians can go on and they can see the patient data, but they can see all their patient data and see if 1 patient is doing better than the other. Then in a de-identified manner, they can see every patient globally to see how their center stacks up with any other center. Okay. Here's the trick. We get to see every patient globally. So we get to see if some centers are performing better than other centers, we can learn why is that center have -- why are their outcomes so strong? And if this center isn't as strong, we can go kick them in the butt and say, "Hey, we've got a -- this is a teachable moment here." So the whole point of Inspire Digital is our continuous feedback loop to show our patient outcomes remain strong, which is the #1 objective of the company is strong patient outcomes because that's only going to keep fueling the growth.

And then Inspire 5, any updates on that when it's -- I guess, early next year?

Absolutely. Inspire 5 is a, well, fifth generation neurostimulator. The fourth generation system has both the stimulation lead, a sensing lead and the neurostimulator. With technology, we've taken the sensing capability, and we've incorporated that inside the neurostimulator on the circuit card using an accelerometer. Accelerometers are standard technology for cardiac pacemakers for rate responsive pacing. So when you go jogging, your pacemaker goes faster. We're using that same technology. So it's been incorporated into the Inspire 5 device. Therefore we no longer have to manufacture the sensing lead anymore. And so it's just the stimulation lead and the neurostimulator. The design is frozen, and we are in qualification testing, and that's going to get submitted to the FDA in June. FDA gets 180 days to review that. So technically that's the end of the year, there's a big yes but in there. The yes but is at day 100, that's when the FDA tends to ask you questions. When they send us their list of questions, it stops the clock. So the amount of time it takes us to respond gets added to the end. That's why we say it's moving into early 2024. We'll do a small pilot study to make sure it debugs with all the digital tools and field use. And whereby midyear, we'll probably be a full launch of that, and it's going to be a very quick adoption because getting rid of that sensor is both a positive experience for the surgeon. Surgeons don't like going below ear, nose and throat, they don't want to go place a sensor if they don't have to, so it removes a very comfortable or uncomfortable part of the procedure. It will take -- the average ENT does the procedure in 90 minutes now with Inspire 5 will go on to 60 minutes. The top surgeons do the procedure today in 60 minutes, it will take them down to 45. So a great experience for the surgeon. The patients have one less product in their body and of all of our revisions. And we don't have many small single-digit percentage of revisions. The sensor is the #1 culprit. So we are getting immediate step-up and reliability that's wonderful for outcomes and the patient experience. And then from our own standpoint, the sensor is a pretty complex product to make. It's a sensor with a medical lead attached to it. So we no longer have to manufacture that. So we have an improvement in the cost of our goods sold and will reflect in gross margin. But it also provides capacity whereas we are going to convert that sensor line into a second stimulation line to build capacity of manufacturing on the [ stim line ]. So it across the board is just an absolute win for all parties. And we really look forward to being able to launching that.

I think there is a little bit of an ASP uplift too. So it does sound like a little bit of gross margin expansionary and then also utilization too, right?

Yes, there is more.

What's the more?

It's a microprocessor-based neurostimulator. So when we're allowed to go to Inspire 6 and 7, it's only firmware changes. So if you get the Inspire 5 today, Inspire 6 is already targeted to have sleep detection. So when you fall asleep, the device turns itself on, the patient no longer uses a remote to turn it on at night. Here's the cool part that's new to implanted technology. If you have Inspire 5, once Inspire 6 is approved, patient comes right back on whether there is regular software upgrade, we're going to upgrade their implanted product to Inspire 6, and so they will have the latest technology. So we're working very hard to make sure we get this in place in 2024 because our battery life is 11 years. Our first commercial year was 2014. All those first patients are starting to come around in 2024 for the replacement batteries, we want to make sure that they have the opportunity to get Inspire 5.

And the utilization uplift, if you're going to do the procedure faster, these doctors tend to stack cases on a day, it feels like there should be a little bit of an inflection or at least some improvement in utilization with Inspire 5.

Right. And think about what we talked about with the PREDICTOR study. If we can eliminate sleep endoscopy, reduce OR time, build surgeon confidence it all kind of comes together in 2024.

That's great. And there's a sleep conference coming up, this in a couple of months or next month, both, I guess, asked about it from a competitive data standpoint, anything new that you see on the competitor front and also from an Inspire standpoint and what to expect from you guys at the Sleep Conference.

I remember the early days of these sleep conferences and everybody has been there and they know how you have the poster boards all lined up, and we would be excited because we would have the third poster on the Fifth Street, right? You go down there and there's an Inspire poster. Okay. Now we've kind of matured a little bit. Now we have a whole street. And so all the academic centers continue to do research. And we have the ADHERE registry, which is approaching 5,000 patients, and every physician has access to that database to do any research that they need to do. So we're going to have a whole street of posters to be able to talk about it. We will have many oral presentations. I think we talked about atrial fib. We have a poster of a single patient with atrial fib that received Inspire and had a spontaneous resolution of their atrial fib. So that's something that we're going to continue, obviously, to do more research on, but that really shows the relationship between sleep and atrial fib again. We have a publication coming out with a 10-year experience of Inspire. Think about that. That's how long we've been around now. And this one really has some data to it, but it really focuses on the replacement characteristics of that battery. And so that's going to be well received because that's going to be a new part of the Inspire program that people aren't used to yet as people are going to be coming back together with replacement battery device. And we're going to expect that 80% of the patients are going to want a replacement device. And so that paper is going to be presented at the ASM and obviously several more happening.

And then, Rick, maybe talk about just the path to sustained profitability. I think that's a question that investors ask quite a bit. So how you're thinking about that?

Yes. We know profitability is important. We demonstrated that in the fourth quarter. We had our seasonality, so we did lose some leverage in the first quarter. But the reality is we're very early in the rollout on a commercial basis. We're in 973 centers. We think we can be in several thousand centers. Utilization a year ago was 1.3%. It was up to 2.0 in the fourth quarter, seasonality, we're at 1.7. So long term, we can increase that utilization. We're very low on the penetrated number of centers as well as procedures on an annual basis. But we expect that we'll improve leverage as we progress through 2023 and beyond. And so we have 84% gross margins. And so we want to drive the top line and increase utilization. We have $450 million of cash on hand. We're not burning much cash, so that allows us to continue to make investments in R&D as well as DTC, yet still improve leverage on long term.

Great. I think we're getting there. Thanks a lot.

Very good. Thank you very much. Thanks, everybody.