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

All right. Well, good morning, everyone. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. It's my pleasure to host this session with the management team from Inspire. With us, we have Rick Buchholz, the CFO; Randy Ban, Chief Commercial Officer; and Ezgi Yagci, Head of Investor Relations. The format is going to be fireside chat. If anybody has a question, please raise your hand. So Rick, Randy and Ezgi, thanks so much for being here.

So let's start with, of course, GLP-1. There has been a lot of interest around that. Lilly is running the SURMOUNT-OSA study with tirzepatide in OSA patients. I think the study is expected to be completed, call it, late first quarter next year. I'd love to hear your general thoughts on the study and the potential implications for the market. I don't know -- who wants to take that question?

I'll take that, Larry. Thanks for having us here, by the way. We've been getting a lot of questions regarding GLP-1s and the Lilly trial. We expect them to meet their end point. which is a reduction in AHI, but that's really the sole endpoint is reduction in AHI, and it's really a different patient population that we treat today. The average BMI in that study is 39. Our average BMI in our ADHERE registry, which is a post-market approval study, is 29, so it's really a different patients than we're treating today. And the average AHI is 50. Our average AHI in our study is about 30 in our original STAR trial. So what we really focus on is the mechanism of action of tongue-based collapse. And so with the Lilly trial, even if there's a reduction in BMI and AHI, it depends on what the resultant AHI is going to be.

So I mean we've seen there's been studies with weight loss drugs and other GLP-1s. So we've seen a correlation. I mean you're going to get -- with the 20% weight reduction, you're going to get about a 50% reduction in AHI. What are the implications if that's how the results turn out? We don't know exactly what it's going to be. But how do you think about the puts and takes? Some patients may fall out of the funnel and some patients may come into the funnel. Without getting here into too much of the nitty-gritty, how do you think about the net impact on your TAM?

Right? We actually think the GLP-1s are complementary to us. And at the end of the day, we think it's a net add to our TAM and the number of patients. Because, again, with the BMI, if the average BMI is 50, we treat those patients that have a BMI -- it used to be a BMI of 32, and that's where our average BMI is now because that's where our warning label is. If we bring those patients into the BMI of under 40, which is our now our expanded warning label is up to 40, we think it will bring in more patients into the top of the funnel with lowering that BMI as well as AHI. The prevalence pool of sleep apnea in the United States is almost about 20%, but only about 20% of those patients are currently being treated. So we are very low in the penetration rate of patients being treated, and we think that will bring in more patients to the top of that funnel that we might potentially lose at the bottom, because we treat moderate to severe sleep apnea, which is an AHI of 15 or above.

I got it. And just on the numbers, I want to make sure we got it right. I think you said the average BMI of the patients in the ADHERE registry is 29?

Correct.

Okay. And the label just went from a limit or 32 up to 40. Okay.

Yes. And so in our STAR trial or in the ADHERE registry, the BMI is 29, real-world experience is about 28 to 32. And that's really primarily driven because of our warning label at 32.

Okay. And you mentioned that only 20% of OSA patients are diagnosed and you think that -- we have a big company like Lilly if the trial is successful, coming in, doing -- potentially doing direct-to-consumer advertising, meaning it opens up the market more.

Yes. We think it actually will bring more awareness to sleep apnea. Another big point, too, is PFAs, right, that are a hot topic now with significant product introductions coming. AFib-related to sleep apnea is a significant item. There's a study that was done in Wisconsin several years ago, that if the reoccurrence of AFib is about 57% if you don't treat your sleep apnea, the reoccurrence of that. So we are focusing some of our traditional direct-to-consumer dollars. We are doing more PCP as well as cardiology marketing initiatives to get that -- those doctors aware of Inspire therapy.

Okay. Just a lot of acronyms. Just so people know, PFA, we're talking about pulse-field ablation, new energy source for treating atrial fibrillation. Are you thinking about basically outreach more to cardiologists?

Correct.

Basically, you need to -- if you treat the AFib, you also need to treat the OSA.

Correct. As well as just primary care physicians as well, the PCPs, and we talked about what we're doing. We're attending some of those conferences and seminars to get the awareness of what out there.

All right. Well, that's helpful. I don't want to get into too much into the weeds on GLP-1s and the math and all that. We can obviously do that offline. But you guys see this, at the end of the day, as a net benefit to your TAM.

That's correct because the real focus is we treat tongue-based collapse. And the higher-BMI patients have lateral wall collapse which then presents a concentric closure, CCC, and we don't treat those patients now. And so we think the net addition of patients with a higher BMI will come into our labeling.

Okay. GLP-1 questions? Because I was going to transition. Okay? We can always come back to it if you have a burning question. Anything, Ezgi, you want to add to that you've been getting from investors?

I would just note that you had an analysis out last week on this exact topic for us, and I think your math makes sense. And would want to point that out.

Okay. All right. Thank you. Great. Randy, it's a good opportunity to ask you some operational questions, given your role. I had some specific questions around sales territories, center adds, surgeon bottlenecks, et cetera. But before diving in, love to hear from you kind of what you're focused on kind of in the field to kind of expand adoption.

Yes. Well, I think it's a multifaceted approach. The most important thing we do is, as we expand, Larry, try to find ENTs and sleep doctors who want to form a good care team, get good support at the administrative level at the hospital and build these programs with people who really care and want to lean in to do it the right way. Because ultimately, good patient outcomes is the most powerful accelerator we have to market adoption. So really staying true to that playbook, acknowledging just like other companies in our space that human capital and capacity constraints are real, whether they're at a site of surgery or in the clinic, and trying to make the case to grow Inspire programs. Inspire's a very safe, effective, well reimbursed treatment. There's a lot at stake to treating sleep apnea and trying to help our doctors make the case to their administrators to better resource some of these programs because human capital is tough, right? Capacity constraints are real. So we're doing a good job with that. We -- as Rick said, we're going to amp up our medical education effort, not only with our core customers, but to include primary care and cardiology. There are segments of those specialties that know a lot about sleep, care a lot about sleep. Many of these people prescribe home sleep studies. We've got to get them more involved in the care pathway referring patients into our programs. And then finally, we'll continue to be aggressive with our direct-to-consumer program. It's always been a staple of our market development effort and will continue to be. Not only will we continue to try to promote awareness and visits to our website, but make investments in digital patient nurturing so that for the people who visit us and are quite ready to make an appointment by opting in with cell phones and emails, we can stay in touch with them and deliver them really good patient education materials, so that when they're ready, they can take those in and have conversations with their physician of choice.

We did a call with a physician recently at University of Pennsylvania to identify 2 bottlenecks. One is the surge -- not in a surgeon, ENT surgeons to do -- there's the opportunity to do even more procedures, but there's just not surgeon capacity. And second, you talked about the DISE test being a bottleneck. Would you agree? And is there anything Inspire can do to alleviate those bottlenecks?

Yes. I think that we continue to see new ENTs that have interest in this procedure. And I think we'll bring them on at a cadence that you're accustomed to in the past several quarters. So I think that's a big part of it. I think with respect to DISE, every patient needs a good airway assessment to see if they're airway's amenable to being treated by Inspire, ruling out the concentric collapse of the palate. We're doing the predictor study which is measuring supine pharyngeal width. And we're hopeful, based on the encouraging early data that, that will be a comparable way to assess candidacy for Inspire. And if so, it will eliminate the need to schedule time in an ASC or to do a DISE procedure. It's an in-office, quick, supine-based procedure. So that's got the potential to really save time and increase productivity to each of our centers. Need a little more run time to finish those results and publish them, but we're cautiously optimistic about that helping.

And the DISE reimbursement is going to $1,000 from, I don't know, less than $100, I think. How much of a tailwind would that be?

Well, that's going to be helpful. I think it's going to eliminate a little economic friction for the DISE procedures, and it's a good thing for us. But I do think that if the supine pharyngeal width test is comparable to doing a DISE, that will be rapidly adopted just because of the time savings for everybody.

So Randy, 2 metrics you guys give every quarter, one is territory adds, the other is new centers. I think you're at about 280, 290 at the end of -- I think on pace to be at about 280 at the end of this year. Centers, I think you're at 11 -- you ended about 1,100 this year based on the guidance. Where do those numbers go in the U.S. over time?

Yes. I think in the next 12 to 24 months, I'd expect them to be pretty consistent, Larry. And again, part of it is resist the temptation to go too fast. We've got to make sure where we go, these are centers that are well equipped and well built to generate the kind of outcomes we need. So I think sort of consistency on both of those over the next 12 to 24 months.

I'd add to that, too. So our guidance is to add 52 to 56 centers. We've added roughly 70 last quarter. We've added kind of a varied number, and it's all dependent on the process. We have a robust pipeline of a lot of centers to add. And it all is dependent on physician training, dependent on value analysis committee for the hospital or if they're part of an ASC larger agreement. So -- but we have a long ways to go. We're at 1,045 centers now, and we're going to continue to keep that ratio of about 4 centers per territory manager. And so we talked long term -- previously, we used to talk about 2,400 hospitals or an ASC. We think we can be in much -- many more than that on a long-term basis. And so we're still very low on the penetration.

And Randy, just to clarify, when you say consistent, you were talking about the consistent adds, not that it was going to plateau, obviously.

Consistent adds with what we've done historically, yes.

And a lot of investors focus on productivity per account, which has been increasing nicely. How do you think about that? And where do you see that going?

It really is a combination of steady patient flow, outcomes that are really good and to build confidence in the centers, and then just chipping away at efficient processes in the clinic. And I think it's just chunking away at all 3 of those things and making sure that they're healthy, and that's been the whole key to getting the upward trend you've seen in center productivity.

That's helpful. International was a bright spot last quarter, a big bump up in revenues. How do we think about the trajectory going forward?

Yes, we're very proud of our European organization. We had a significant growth in the second quarter. We've made a lot of effort for -- we actually are doing DTC now in Germany, and just the long, hard work of our team in Germany is paying off. We can see number of procedures being done there increasing. We also, in the Netherlands, we've added 3 additional centers that we had previously. And so we're doing more procedures in the Netherlands. And we are awaiting listing of our reimbursement code in France, which we think can be a real good driver for us outside the U.S. in 2024. And we also have a countrywide reimbursement in Belgium. And so we had good growth in the second quarter. We expect to have continued growth as we progress through the year.

So there was nothing onetime? We know about Europe, summer seasonality, that kind of stuff, but there was nothing onetime about Q2?

No, not really. It's just kind of accumulation of all the hard work that we've been doing there. And there is a little bit of seasonality in Q3, but we still expect to have growth in the second half of the year.

When you talk about growth, you talk about year-over-year or sequential?

Both.

Both, okay. Randy, you have international too?

Yes.

Got it. And Tim, I think is somewhere in Asia is what I'd guess. Randy, I'm curious, you had the AHI, the label change. You had AHI, the ceiling, go to -- I think the ceiling went from 65 to 100. BMI went from 32 to 40. You've talked about that increasing your TAM by about 20%. Randy, I'm curious what you're seeing in the field now that that's been approved.

Yes. Still pretty recent, but encouraging. And of course, we have the FDA label expansion. We're working to get the insurance company to sort of update policies, but there's always a prior authorization pathway even when the policy hasn't been quite updated yet. But I think the doctors are very excited about the high-AHI patients. They're also excited about the higher-BMI patients. But being careful to do the right airway assessment to make sure that we rule out concentric collapse at the palate for those patients. But yes, everybody is very excited about those, and there's a prior authorization pathway for those patients as well.

Yes. So what we'll do is on a longer-term basis. A lot of -- most of the commercial policies already have the Down syndrome patient population already approved in their policy. And so we'll take the expansion of AHI and expansion of BMI, along with -- depending on the timing of our procedures of our results of the predictor study, we'll take those to the insurance companies. And instead of doing a mid-cycle review, we'll supply that information to those payers. And over time, we expect them to include that in their policies.

Predictor study, I know there was some early data published. When can you really put that into practice? What's -- is it '23, '24, '25?

So the initial 300 patients, we expect to have that presented at the end of September at ISSS, which is a sleep and ENT society meeting at end of September. And we are currently enrolling the next 300 patients that we expect to complete by the end of this year, and so some time in '24.

When you'll like have the full data?

Well, we'll publish probably on the 600 patients, and then we'll go into insurance companies after that.

Yes, I got it. And the pediatric Down indication came 2 months ago. That's an interesting opportunity because it's easy to identify these kids is a high unmet medical need. Randy, what are you seeing in the field with that indication?

A lot of excitement. We've been very disciplined to go to centers that are well suited to do this. They need a pediatric ENT who can do it and a good sleep practice to manage these patients as well. But I'd say we're off to a very good start, the initial dozen or so centers that we approached on this.

I mean is this something, Rick, you think it will be noticeable to the numbers?

It will be part of the numbers along with increased AHI and BMI. And so our main focus is building capacity and driving utilization is our real key focus.

I wanted to touch upon the outlook, Rick. How are you thinking about seasonality this year? I mean you guys have a pretty seasonal business when we look at prior years. Anything different about this year? The guidance implies more seasonality than we've typically seen.

Yes. I mean we haven't changed our guidance philosophy at all since day 1, which is just now over 5 years since we've been a public company. And we did mention in the second quarter that we had a little bit higher mix of Medicare versus commercial. But that's similar to other companies that have called that out. But really, we expect that to revert back to a heavier commercial mix in the second half of the year because we do have a little bit more pronounced seasonality in the fourth quarter because of the deductible plans resetting because the majority of our -- more than the majority of our procedures are commercial cases.

I mean on the Medicare, there's been -- on the Medicare mix in Q2, there's been some concern among investors that, based on what some of the managed care companies have said, that there's been some like pent-up demand, some bolus of patients that came through in the second quarter. And you talked about the mix reverting. Is this a headwind to you guys, this mix issue?

No. I mean we're -- we have a robust pipeline of patients awaiting therapy. So don't expect that to be a headwind.

Okay. And summer seasonality, we read about pent-up demand for vacations. I read about that last year too. Anything structural this year, Rick or Randy? Randy, you're in the field, what do you see with surgeons?

I think it's the same as it's been. I don't know if there's any significant change, Larry.

No change, okay. That's helpful. Moving along here. Rick, you can probably anticipate the next question, the 2024 question. This is when you give us guidance for 2024.

And Tim's not here.

So I talked to him and he said it's okay. So I guess, maybe you can talk about some of the puts and takes, and any framework for next year.

Yes. I mean we're going to continue to run our game plan of methodically, yet not aggressively, but methodically adding centers. And we want to have, again, 4 centers per territory managers. We're going to continue to add centers because we're a low penetration, add territory managers. We're at about 260 right now. We're going to continue to do that into 2024. We think with the increase of the BMI as well as the AHI and the Down syndrome, these are all a combination of continued areas that will help us improve our utilization. We're really focused on utilization. That number is just under 2 at the -- for the second quarter. We expect that we have a long ways to go there. The other part that can also drive utilization as well as drive revenue is adding a second implanter at a certain kind of facility. Most of our centers have one implanting surgeon, and so that's really low-hanging fruit to increase utilization and drive revenue. Again, we haven't put forth any long-term guidance into 2024. We'll be addressing that down the road. But we feel comfortable with our outlook.

The Street said about 28% growth, which is a pretty sharp deceleration from the 47% to 50% this year. Any reaction?

No.

Okay. And at one point, the utilization was about like a little under 2, you said. I think that's per month per center. What -- Randy, what are some of the top-quartile centers at? Where can that number go?

There's a lot of centers that are doing 8, 10, 12 a month or more. So it's possible. It takes typically a couple of surgeons and it takes a big commitment from everybody in the program. And that's why, to Rick's point, as we expand territories, we're trying to make sure that people have no more than 4 medical centers as a rep to kind of work and bring that together. But those kind of numbers are possible, and we're seeing it happen.

That's helpful. Rick, back on, well, just the financial outlook. The focus has been on driving top line growth if you have been driving some operating leverage. I'm curious, how do we think about that in the next couple of years, especially in the context, you mentioned earlier, PCPs and cardiologists. When investors hear PCPs, they get a little nervous about the expense because there's obviously so many of them.

Yes. So it gets back to profitability. We know profitability is important. We were profitable in the fourth quarter last year. We continue to make investments across all facets of our business. R&D expense is 20% of revenue in the last few quarters. We expect that to be in that range as we continue to make innovations. We're working on Inspire V, which we haven't really talked about yet. And we're going to continue to work on new iterations of Inspire VI and VII and so on. So we're going to continue to make those investments as well as invest in our commercial organization. And despite those investments, we still have improved leverage. We generated $15 million of cash in the second quarter. We're not burning cash per se. We were at positive EBITDA, and stock-based compensation is a large number. We expect to increase DTC, but we have shown leverage on that line item as well. But we won't increase DTC spend as much as we have in the past, but we're still going to make those investments because we're still early in the penetration. And so profitability is important, but we're really focused on continued driving adoption and increasing utilization, and profitability will take care of itself with our 84% gross margin.

I would just add to that. So our Advisor Care Program remains a very important tool for us to bring patients into our funnel. But increasingly, we see patients visit the website, do their own research and then self-refer either to a sleep doctor or a PCP. So if they go to their primary care physician and that patient is ill-informed about Inspire, we lose that patient and we can't afford that. The other comment I would make is our medical education spend around these programs is actually very low. It's really not that high. It's not a lot of money to go to a general practitioners conference and set up a booth. We were actually at ACC this year, we had a booth and we had a poster there. So it's not a huge investment for us to go after these channels. I know there are a lot of PCPs in the U.S. But again, we're setting up a booth, we have online tutorials available, so it's not a huge investment, either financially or time-wise from a resource perspective, for us to get better penetration into these referral sources.

That's helpful. All right. So Rick, we've got 9 minutes left to talk about the pipeline. I can tell you're chomping at the bit to tell us about Inspire V. You or Randy, what is -- is the launch still on track for early '24? And what can this do for Inspire and the patients?

Yes. We submitted the PMA supplement at the end of June. And so it's a 180-day review cycle. The 100-day mark is up in October. And then the clock will stop once we get comments back from the FDA. So we're still expecting -- because we'll have to take a little bit of time to respond to those questions, we are still expecting early 2024 approval and more of a second half of '24 full product launch, if you will, for Inspire V. We're very excited about Inspire V. It's really our new platform technology. We will be removing the pressure-sensing lead in Inspire V. We have an accelerometer in the IPG, and that will be included and will actually make the procedure more straightforward for the physicians -- or for the surgeons to complete the procedure. Current procedure times used to be 2 hours, now it's about 90 minutes. And so we think we can further reduce times down to -- by another 20 to 30 minutes, thereby increasing the potential capacity for surgeons to do another procedure in a given day. And so we're excited about that. From a technological standpoint, it really brings in our connected health, our SleepSync platform that we want to get introduced. We are -- have it completed now, but we're going to have that further enhancements and features with Inspire V. And so we're excited about adding that. I don't know if there's anything you wanted to add?

I think well said. And we're excited. I mean the easiest thing to talk about with Inspire V is it just makes the procedure simpler. It probably takes 20 minutes off the procedure. And any time you can save surgeons any kind of time and complexity, it's a big win. So excited about that. And the platform is going to allow us to do software upgrades to the device that just help with patient comfort, patient adherence on a lot of fronts. Subtle ramp into therapy, customizing therapy depending on sleep body positions. So those are all exciting opportunities as well to make the therapy better and more comfortable.

That's helpful. I think, Rick, I may have heard for the first time that it's a full launch in the second half of next year. What -- I don't know what you've said, but I'd be curious to hear about the rollout. Is this something where there's a limited market release and there are certain things that you just want to make sure everything works well? So how do we think about the rollout?

Yes. I mean we'll do a rollout. All the details around that are yet to be determined exactly, but we expect to do a limited rollout and then a more full product launch after.

What's the purpose of a limited rollout?

I think any time you launch a new product, there's always a little pilot phase to it, Larry. So we'll probably do that prior to the broader launch. But more details forthcoming.

And I think -- I know you've been asked this before. I can't remember the answer. Pricing, you're still considering whether you charge a premium or not?

Right. That's still to be determined. We generally have done price increases when there's been a technological advance. We are removing the pressure sensing, but we're going to assess that whether or not we'll do a price increase or not.

And price increases in the past for you have been modest, I would say, 5%. Is that right?

Correct. We did a price increase a year ago and that which is now fully in effect, and our ASP is $24,900 now.

So if there is a price increase, we shouldn't be thinking about anything dramatic.

Correct. Correct.

Randy, a question we get a lot, I can understand it, I'm curious to get your perspective, is around patients and physician pausing. I can understand it. Once it's approved, Inspire V, why would someone get the current version? How do you manage that?

Well, is your question, how are we going to launch Inspire V and transition to it?

Let's just say you are in a limited launch in the first half of next year. Patients might -- or physicians might say, "I'm going to wait for -- until I have Inspire 5 to implant it instead of the old version."

Yes. I mean most of these procedural physicians are accustomed to companies moving from one generation to the second one. So there's ways to work through that with the patients and the physicians. It's not typically an abrupt stop-start sort of scenario. So we'll work through all those with the launch plans in the manner that they're used to seeing.

Got it. And I mean I know you have a lot more in the pipeline, Rick. Anything else you want to highlight?

No. I'm excited about the SleepSync and Inspire V, but also just our commercial refinement, especially with the predictor study. I think that will really help with capacity. Once we get that, it's not so much product pipeline. But once we have that in place, that will really help increase capacity for surgeons.

And DTC has been the core part of your marketing effort. Sounds like you're still happy with that. The amount -- absolute amount will continue to increase, which you disclose publicly, but you're still going to get leverage on that.

Correct. Yes. It won't increase as much as it has in the past, percentage-wise.

Randy, we don't see you a lot at these conferences. What else are you excited about? What else are you working on that maybe doesn't come up with these venues often that you think we should understand better?

Yes. I mean I think part of it is just continuous improvement on our DTC program. We're going to be relaunching our website at the beginning of next year. We haven't done that in several years, completely redoing a lot of the patient education materials to make just a lot more clear what Inspire is and how it works. These things matter. As I mentioned, we're going to have much more capability to just do customized e-mails and texts to web visitors who, again, told us they're interested. They want to stay informed, but they're not quite ready to make an appointment yet. So being able to communicate with them. I think those are just sort of the continuous improvements as part of the DTC. And then there's just a huge opportunity to continue to get more physicians and health care professionals that see sleep apnea patients, see them, but may not manage them, get them more informed about Inspire. And the comment that Ezgi made on cardiology and PCP was great. You don't have to win with all of them, but it's just taking a little bit at a time, right? And I think there's going to be some big wins over the next couple of years, getting more cardiologists who see AFib and sleep apnea all the time, sending more patients over for Inspire. More primary care doctors who actually prescribe home sleep studies that know about Inspire because they've had a couple of patients come back to them, unbeknownst to them with the implant, they say they're doing great. So now there's a connection...

All right. I don't know what's going on. AV guy, excuse me, hello?

Thanks.

Thank you.

So again, I think just continuous improvement on DTC and then just getting better at professional education out there and more venues is going to help contribute to better results. So...

I'm going to sneak one quick last one in here. France. How big can France be relative to Germany?

Well, we estimate that France is the fourth largest market in the world for medical devices, and that includes obstructive sleep apnea. And so we're excited that it can be a decent portion of our outside the U.S. revenue on a longer-term basis. It's really more waiting for that reimbursement code to be listed, and then that will really help us in 2024.

Got it. All right. We're out of time. Thank you so much for being here. Really appreciate it.

Thanks.