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

All right. I get to officially launch JPMorgan. How is that? That's awesome. What -- Robbie, thank you very much for having us and what a privilege it is to be here on a Monday morning and have everybody to come join us. I'd love to see a show of hands if anybody remembers when we had the last meeting on Thursday a few years ago and who is in the room. See, and then we all participated. We swept the floor and shut the lights off and went home. So it's all good. Well, thank you all for joining us. And let's just get it going. We got the disclaimer. Everybody read that quick. Put a little agenda together because we're going to go -- we're going to talk for 20, 25 minutes. And then Robbie is going to come up and ask more specific questions, but these are basically the topics we want to get through, right? We want to go through the year in review and talk about our revenue in the fourth quarter, which I'm sure you all saw this morning. We do have just a preliminary guidance to put out in our pipeline and the normal topic that you all want to talk about. Before we do that, though, the team back home put together -- I got to make sure I don't stand too close to any -- put together a little video just to highlight what a great year we had in 2023, and we're so excited about it. So we thought we would just take the opportunity and share it with you all here. [Presentation]

So my buddy on that podium at Stock Exchange is Jesse. He is the first kid to receive Inspire therapy. He's had Down syndrome. He used to have a tracheotomy for his whole life, and we were able to implant him when he was just 13. And then we were able to remove the trach. This happened beyond his birthday, and it was 8 years after. And this kid is 20-some years old now. He's a grown man and he got to be up there to ring that bell. And you should see the look on his face. It's absolutely precious, but it's the definition of why we do what we do. And that really just kind of highlighted the year. Had a great fourth quarter and really happy about that. Ended up with the range between $192.3 million to $192.5 million in revenue. That midpoint is going to represent 40% growth. So very strong activity, both in the U.S. and in Europe. I don't have the splits yet. Our earnings call will be coming up in just a few weeks when we'll have the split. But what we do want to talk about is -- at Q3, we talked about the European revenue and the challenges we had with our EU MDR. Well, since we last spoke, we now have derogation approved in the Netherlands, in Belgium and in Germany. So we are shipping products. So that's really the good news. We also are making very good progress with the derogation and expect to have that resolved quickly. But in the interim, we're able to take care of the majority of the patients, and that's really strong. So overall, it's a very good revenue year in the range of $624.6 million to $624.8 million, 53% growth in the midpoint over the prior year period. Very proud of the team at that. Gross margin is going to come in between 83%, 85%, which is absolutely tremendous. We do want to put a little bit of a preliminary revenue guide. So you can see that we're setting up a revenue between $775 million and $785 million for 2024. It's going to represent between a 24% and 20% -- 26% growth over the current year. So pretty excited about getting the year started. We continue to build a steady cadence of centers. And you can see that we're averaging about 70 new centers per quarter in 2023. And now we're at the point of having 1,180 centers in the United States offering Inspire therapy. That number is going to continue to grow. But also remember, our growth is really focused on same-store sales and really trying to drive the utilization and that's what it's all about. Randy is in the audience back there. He runs our U.S. sales team, and he right now has 287 territory managers representing the therapy, which is absolutely tremendous. Now he's also building up our team of field clinical representatives that are so essential for case coverage, covering the cases, training sites on how to do their programming. And the key is the steady, steady cadence. And this goes back to the old slide we start -- we show that says you can only grow as fast as you can protect patient outcomes. But you can see it's an accelerated growth to be able to keep us on our way. From a pipeline standpoint, for those who don't know, I always start on the right-hand side here. It's key to understand how Inspire works. And we have a sensing technology that can assess respiration. That's what you see is the black line there, right, exhale going down and then inhale going up. So what we want to do is we want to track -- when a patient starts to inhale, that's when we provide stimulation to the hypoglossal nerve and hold the tongue forward as the patient breathes, thereby preventing obstructive sleep apneas. And you can see on the polysomnography how complex those things are. But really, in the second half of that chart, when it really kind of shows the therapy on and the benefit the patient receives. Today, the Inspire procedure has 3 implants, to the middle slide. It takes about 60 to 90 minutes to do these implants to small incisions because where we show the sensing lead on this one is now moved back to being placed right underneath to stimulation cuff or underneath the neurostimulator. As we move to the left, we are in the final process of documenting the Inspire V. It's going back to the FDA in the very near future for their final review. And when Inspire V comes out, we're looking at doing an early launch in 2024, but we want to do the full launch in 2025. And that's what we're gearing up the team to do. That is going to incorporate that sensing function inside the neurostimulator using accelerometer that's going to be on the circuit board. So we still need to have the closed-loop stimulation because that's the key to have a very strong effective therapy. But we can simplify it by making it inside the can, which, of course, is better for the patient because it's one less product in there. I'm going to show a chart on our revision rates, which are very low. But very important to talk about how the sensor is going to improve reliability, putting it inside the can. It's a less of a burden for the surgeon. It could reduce the OR time from 90 minutes down to 30 -- or 45 to 60 minutes, right? Significant improvement. That can help drive capacity. And it's good for us that we don't have to make that pressure sensing lead anymore. We're down to just 2 implanted products. And Rick yells at me when I say we should gain improvement in gross margin, too, by having less COGS. SleepSync. We've been talking about this, the digital health platform. But I want to put a chart just to kind of show the benefits it's having for everybody, right? From a patient -- the patient has their Inspire app. That's their interface with SleepSync, right? And they can find a doctor on there if they're in the early stages of Inspire. They can customize education. They can track their therapy and their sleep quality because they get reports back, too, on how well they're sleeping. On the other side to it is we have the clinician who can now monitor how well the patients are doing. They can see trigger points if a patient needs a little bit of help in some areas. And what we're working on now is the ability to do remote patient management. And the next step after that is to do remote patient programming. So the physician's office to a patient's home. So a lot is going to continue to happen in our digital health platform. Three key areas for success -- but I'd say 3 key areas, and then I show about a dozen bullets on the right-hand side. We're going to continue to show -- continue to grow patient flow. That's what it's all about. We know how to do that. That's our direct-to-consumer program that we have. We've gotten much smarter with it. We've gotten refined. And you're going to see refinements as we go into the new year and how we're going to be able to improve that, get some leverage out of that, but also be able to really focus on our target market. And that's what it's really all about. Capacity is really key. Capacity is getting more surgeons to offer more of their time to do procedures and continue to train more surgeons within the existing practices as well as train new practices altogether. So big effort to continue to grow capacity. The last bullet you see in that area is activate early career MDs. We have 2 programs to train fellows, both one with ENT, one with sleep physicians. We want to catch them as they're graduating. For the ENTs, we have a year-long course that they take with Inspire. They all have experience with Inspire coming out. And we want them to -- when they go out into the workforce -- to be able to start or join an Inspire program. And then, of course, what drives us, and going back to Jesse, we're all about outcomes, right? Nothing can slow us down as long as we protect the outcomes that we've been able to demonstrate. And that's really the most important part of who we are. All the technology advancements are meant to improve patient experience, are meant to improve outcomes, improve safety. And that's going to just continue to be the focus going forward. I'll show you a couple of charts on that. Customarily, we used to always show our new TV commercials at JPMorgan, and we're not doing that this year. And I know nobody gets up and walks out. The key to it is -- what we're doing is we're repackaging what we have. We have a lot of material that we can leverage. And so rather than going out and filming new, what we're doing is kind of combining the messaging. And you're going to see some more very creative ways with our direct-to-consumer. I'm going to show you one combined commercial that we ran. [Presentation]

Very fun. So the team's got a lot of material for which to be able to repackage and still get the message out there. It's really about still building the brand awareness, right? Our brand awareness scores have continually grown over the last several years, but we're not where we need to be yet, right? And we can't just walk down the street and ask somebody, tell me about Inspire and they don't -- they haven't heard of it. But our scores are coming up. So it is about building the brand. It's about bringing new patients to the funnel. And it's about also bringing awareness to the general practitioners. That's going to be a key part of it, right? Because a lot of patients will come to our website. They'll get to watch the videos. They'll be educated. But they won't do anything until they go talk to their family doctors. So what do you think about Inspire? We need to make sure that they have the same level of education. Focus is, again, on strong patient outcomes, as you can see. We track both the ESS, Epworth Sleepiness Scale, on the right-hand side there. High is not so good. Anything less than 10 is normalized. And we consistently have our patients down at 6, and it stays there. That's great. The apnea-hypopnea index, you can see, just continues to fall. This is all from our ADHERE registry that is 5,000 patients. We finished that study at 5,000. Now it's rolling in to be part of SleepSync. And the key to it that we knew that we have a very important therapy now is when we ask patients 6 months after they've had Inspire and we said, what do you think? And 90% say they'll do it all over again. That's when we know this is on the right pathway. So very exciting. This is my favorite slide. We have survivability on the -- for revisions on the left and for explants on the right. Now there are 2 different scales here. But if you go back to 2018, when we did our first IPO, you can see we were running at -- what's that rate? 92% of the patients did not have a revision for the first, what we're tracking, 5 years there. And you can see a continuous improvement all the way up to -- now right here in 2022, we're talking 1% revision rates. The great majority of those revisions are because of the pressure sensing lead. If we can get rid of that sensing lead, we just get another step-wise improvement in reliability. So it's the desire to get revision rates to 0. And I know that's the law of diminishing returns, but that's what satisfaction is. So we continue to improve year-over-year. Look at the explant rates. In the beginning of '19 -- I'm sorry -- in 2018, you're talking 4% explant rates. Half of those were patient selected, right? Half were because of infection or a different reason. We now have that down to less than 0.5%. So very, very dramatic improvements in safety, and that just shows the commitment of the team. Okay. Mechanism of action is very important. We've got 2 slides here. It's come up with GLP-1s all the time, but it's how we've lived since the beginning of Inspire therapy. On the left-hand side, you can see it's the tongue falling back into the airway. It's called a tongue base obstruction. The majority of patients with obstructive sleep apnea are tongue base obstructions. As you start to gain weight and you get a larger neck circumference, that creates a lateral wall collapse that you see on the right. You see those sidewalls creeping in. Now we stimulate the hypoglossal nerve that moves the base of the tongue forward, right? We do not address the lateral wall, right? We will get a benefit on complete concentric collapse. But you can see on that third bullet or a second bullet on there, if we stimulate patients with complete concentric collapse, they'll do fine. But it's going to be 15% less performance than tongue base alone. And that's really kind of significant. Our average group is about a BMI up to about 40 and -- I'm sorry, BMI typically is about 28, 29 with the AHI apnea-hypopnea index at about 30. The SURMOUNT trial that everybody is waiting for that to come out, they have a AHI at about 50. And they have a BMI approaching 40, completely different patient group. We need those patients to lose some weight to relax lateral walls to be able to qualify for Inspire. So we still say we're going to wait until the data comes out, but it's going to be a net positive for Inspire. And we hope those patients are able to get to a point where they can benefit. One of the key things -- and this kind of ties back into the GLP-1s. But one of the key challenges that we've had is the steps for patients to receive therapy. Takes a lot of time. We need to continue to reduce that. One area we're going after is drug-induced sleep endoscopy, right? It's an effective procedure, but it's something that the patient has to go in and have propofol and have a doctor take a look at their airway. Jordan Weiner is a doctor in Arizona that started a program called PREDICTOR. He can take a regular caliper that you see right there, and he can measure the width of the airway a [ weight ] in a supine position, SPW, supine pharyngeal whip. That's the word that you're going to hear. He did a study of 100 patients. We came back and we did a study of 300 patients. And then we saw that data, and we did another 300 patients to be able to validate that data. And we're down to just a handful of patients left. So the team has done just a great job enrolling that study. We'll be able to see a lot of that data early in 2024. In fact, a lot of insurance companies have already incorporated the data from 300. What's key to it? And this kind of ties back to the GLP-1s a little bit. We know from that study, each unit increase in BMI -- now you've got to think about how this is worded. But it's a 14% decrease in the absence of lateral wall collapse, LWC, lateral wall collapse, right? And each unit increase in BMI is a 13% decrease in the odds of CCC. Okay. What does that mean? We need these patients in that SURMOUNT trial who are hanging with a BMI of 40 -- every step down in BMI is going to have a dramatic reduction in the lateral wall collapse. We don't believe it's going to have a significant impact on the tongue base collapse. And therefore, we believe that those patients are going to come back into the Inspire population, which is fantastic. There was a small study out of Ireland that came out that looked at GLPs and showed minimal AHI reduction because of the drug alone, showed a great benefit using CPAP. That's just published. So we're just kind of looking forward. We know the data is coming out. We want to be prepared for that, and we want to be able to help those patients as best as we can. Policy reviews, Inspire indications. We had several improvements over 2023, including increasing our apnea-hypopnea index to 100, increasing BMI up to 40 and of course, Jesse in the pediatric population with Down syndrome, and then also coming back and now starting to address -- alternative ways to address the airway anatomy, specifically, if we can remove drug-induced sleep endoscopy, right? We already have Aetna, Humana, are 2 examples that have already incorporated all of the changes, including removal of the DISE. That's wonderful. You all saw UnitedHealthcare came out with a proposed policy last year -- or last week, that isn't really a big change. We've been working with United for the longest time. They've always been hovering with the use of mandibular devices, which are usually for mild to slightly moderate patients, not high moderate to severe where we spend our time. So it's really not going to have a big impact on us. The key to it, we've already trained a lot of the physicians to be able to document the anatomy of a patient and show that they're not appropriate for mandibular device. So we'll continue to track that. But we don't think it's really going to have any kind of significant impact because we've been dealing with this United for years on and off. I give you one more on this one. We deal with this in Germany as well, and we have for the last several years. So that's really not a big surprise. Every single insurance company has their own little specific area that we deal with. And our prior authorization team, it's their job to know each 1 of them. They have a big spreadsheet that tracks every insurance company and what information they need for each prior authorization, and that's their job. They're good at it. They know how to handle things like this. So we're not too worried about the whole United. The good news is United increased the AHI to 100. They increase the BMI to 40, and they actually relaxed the documentation for CPAP intolerance. So all in all, it was really -- it's a strong policy for me, and we're happy with it. It includes a lot of the new indications, and we can handle the mandibular devices. Okay. Last slide, Robbie. Growth strategies. Just kind of want to walk through these just a little bit. Number one, as we already talked about, it's about ensuring strong and consistent patient outcomes. And that's how we train, the rate at which we open centers and making sure that every patient is taken care of. We've got to improve the customer experience, right? The digital technology is going to certainly do that. We have a new website. We have tools to help patients be able to make an appointment. We talked about our last pilot study with electronic scheduling. That continues to expand and because it is showing an effective way to help patients get an appointment with a health care provider and streamline that process. And we'll continue to work with technology. Inspire V is going to have a dramatic improvement. So it's all about improving the customer experience, both physician and patient. Widespread consumer awareness. We're going to continue our DTC program. We've got to continue to build the brand, continue to bring patients to the website, continue to get them in front of a health care provider. We're going to continue to scale our commercial operations. We're going to continue to scale the number of centers offering Inspire. But we're going to do it in a very consistent manner as we have since getting approval in 2014. It's always been very consistent cadence all the way through. And then we're making heavy investments in research and development, right? Inspire V and digital are just 2 examples of it, but we have a host of other platforms that we're working on as well. And then finally, we are working to facilitate our international expansion, right? We already talked about being close to locking in EU MDR. But in the meantime, we've got derogation in Netherlands, Belgium and Germany. We've had a good year in Japan. We actually completed the transition from a distributor to a direct sales force in Japan. Singapore had a great year. Hong Kong is back doing cases, and we're looking at other opportunities as well. So pretty exciting. We like where we stand right now. We had a great '23 and really look forward to a strong '24. Thank you very much.

Great. I want to say thank you first for kicking off the 2024 JPMorgan Healthcare Conference. Great way to start. Great quarter. And maybe we could start there with questions. You reported a range of $192.3 million to $192.5 million. That's up 40% year-over-year. $15 million plus or minus above where consensus was, so an 8% beat. Added 13 new territories, 78 new centers. Let's start with the quarter and exactly what happened. Because I think a lot of people remember back to the third quarter and you talked about an issue with new prior authorizations in a pilot program. Maybe you can walk us through exactly what that was, what you did to resolve it in fourth quarter and what actually transpired? Obviously, the sales were great, so I imagine there was a fix.

Yes. Our prioritization program is working great. It was working great. Before, we did drive some independents, and then we realized it was going to be a challenge in the third quarter. That's when we brought everything back in-house. That's going back to our earnings call back from Q3 when we realized we had a little bit of a challenge there. We're able to take care of that and had a great flow from a prior authorization standpoint. And again, it's not policies that we have a challenge with. That was some of the concerns that people had back then. The policies are strong even -- as we just kind of talked through with UnitedHealthcare, the insurance company is always supportive. We had logistics problems being able to get the prior authorizations into the insurance companies, and that's really been resolved. And that program is working really well. And obviously, it shows with the response in the quarter.

And I remember, part of it you implemented -- there's a third party that's doing sort of the easier few-day approvals and Inspire Corporate is handling the more complicated ones. Maybe you could just talk to how the implementation of the third party is helping so far.

Yes. It's still in the early stages. They are operational. And all the cases will come into Inspire. They will get logged into our system, and then they can be routed to the third party. So they are an overflow for our internal team. They are doing cases right now. We're still training that group up, but they're able to handle some of the overflow. But the key is the internal prior auth team just really stepped up, too. And they really knew that the burden is going to be on them for the quarter and they really managed it. But now the third party is going to really kind of help them as we move into 2024 and beyond.

So do we think of some of the fourth quarter sales as catch-up from third quarter? Or is this now a normal run rate?

Well, I think there's a little bit of catch-up because we knew -- we talked about not having enough capacity in the third quarter. But as you know, we've had our challenges in Europe. So there's always a little bit of a balance of where patients land, if we can get the cases done in the existing quarter, if they do fall into the first quarter of next year. So there's a balance of both, both in the United States and in Europe on that.

Buried closer to the bottom of the release this morning, you also not only had a great top line, but you were profitable in the fourth quarter. Maybe you could just speak to some of the dynamics down the P&L, and we'll get to '24 guidance also. But how we think about a breakeven timeline for Inspire.

Sure. Thanks, Robbie. So yes, we were very pleased with our performance in the fourth quarter. And that growth in performance was really driven by higher utilization at the center level. In the third quarter, that utilization was 1.8 procedures per month per center, and that was up to about 2 in the fourth quarter. So when we have higher utilization and continue to expand on revenue and increase revenue, that's where we're seeing a leverage. And so we have demonstrated leverage on a quarterly basis throughout 2023. And as a result of the increased utilization up to about 2 in the fourth quarter, we saw even more leverage. And that's what we reported that we're not completely done with our closing of the books. But we're going to have a profitable fourth quarter, and we're very proud of that.

Are you willing to say when Inspire may tick sustainably net income or GAAP net income profitable?

Well, we're just under a month away from our earnings call. So we will give a little bit more clarity as to our spending levels and our improvement of our leverage and our margins, but it's still early. And we'll talk about that in less than a month, I guess.

I want to shift to '24 guidance, and I was a little surprised to see it. We haven't historically seen you provide guidance. It's a little earlier than we normally -- it's usually a month or 2 later from now. So I imagine there's probably a still a good guide, but a little bit of conservatism. It's above where the Street is, $775 million to $778 million, 24% to 26% year-over-year growth. Just for reference, the Street was sitting at $773 million. So good guide, moving -- numbers moving higher most likely after today. Same sort of question, what's assumed there? And it is earlier than normal. So how much conservatism is layered in there?

Right. Well, we wanted to show confidence. And I think that was kind of the key. I think that as we mentioned with the 6 growth platforms that we have, we're going to be able to drive leverage. And most of that growth is going to be same-store sales, but we will see additional centers being added. We want to grow the capacity, new sales. And also, we expect a good year out of international as well. So we have good confidence going in. We think that patient flow continues to improve. The new website -- our ability to connect patients with health care providers and being able to reduce the time from website to implant is still too long. We think that we can continue to reduce that. So that gave us confidence. And we wanted to put some guide out just to show confidence and that's why we put it out today.

One of the things I want to try and do, hopefully, this week is get people's models set appropriately for 2024 cadence because this is, let's call it, for the most part, a normal year. '23, '24 is a fairly normal year and a lot of people haven't seen normal seasonality in 4 or 5 years. So models are a little funky potentially. Any way to think about in a normal year, how much of a sequential downshift there is from fourth quarter to first quarter? And also realizing last year, you had extra sales in first quarter's catch-up and maybe a little extra here in the fourth quarter.