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

All right. I'd like to welcome everyone to the KeyBanc Life Sciences and MedTech Investor Forum. My name is Brett Fishbin, MedTech analyst. And I'm pleased to be joined by the Inspire team, who today is represented by Tim Herbert, President and CEO; Carlton Weatherby, Chief Strategy Officer; and Ezgi Yagci, VP of Investor Relations.

I'll start us off with some questions here, but we have an open forum and if anyone in the audience has additional questions, you can submit them directly to me by typing in the box below the video screen and I can relay them to the team here. So maybe just to start off, we've -- now we're starting a lot of the fireside chats this week. Just really asking for an update on how you're viewing the underlying environment as we kick off 2024 here? And how you're seeing broader trends progress maybe around physician contact activity, patient web traffic and things like that compared to the past few years?

Fantastic. Right. Well, thank you very much for organizing and thank you very much for hosting us. We really appreciate it and the ability to communicate with so many people today. So thank you very much for doing that. The patient demand for the therapy continues to be very, very strong. And we continue with our outreach programs. We know that we have changed the way that we do marketing to grow awareness of Inspire with our direct-to-consumer activities being both social media as well as television and other aspects and that continues to go very, very well. We continue to see a very strong demand from the web activity. We launched a brand-new website in December, and seeing very good feedback from that and really helping patients take the next steps to connect with and to make an appointment with a physician regarding Inspire therapy. So continue to see very strong progress with that from the beginning of the year and through the quarter, and we'll continue that activity moving forward. And then continuing with technology and awareness campaigns just to help patients build the efficiency to make those appointments even better going forward.

All right. And then you recently hosted the 4Q '23 earnings call, and you reiterated the guidance that you had provided earlier that month. And there was a little bit of commentary that investors, of course, focus on around 1Q, maybe being a little bit softer than the Street was modeling just based off of seasonality. Just as we're now a little bit later in the quarter, has your thinking around the 2024 cadence changed at all?

No, we're still solid with our '24 cadence. We're in the middle of the quarter. We'll be talking about that at our next earnings call on what we want to do for adjustment of the guide going forward. But at this point, yes, we're comfortable with the guide that we put out there and continue to run the business.

All right, sure. And then maybe just following up a little bit on the 2024 outlook and guidance. I'd say the outlook implies a modest step up in utilization year-over-year. Just curious how the onboarding of the third-party vendor to help the market access team with some of the prior authorization challenges you faced last year support that outlook and implied progression to around 2 procedures per month per center. And then just curious if you see any other opportunities for that addition of some help to drive a little bit of upside as the year progresses?

Absolutely. I think utilization is our #1 focus. We know that the majority of our growth comes from same-store sales or increased utilization at existing centers. And that is complemented by us opening new centers as well. So we're going to continue to open new centers at the cadence that we provided. We kept our guide consistent with the opening of new centers. We've always tend to be a little higher than that. We realize that. But really the focus about growing utilization and making sure centers have the ability to treat a greater number of patients. And the #1 driver is we know centers that have the highest utilization, have the best patient outcomes. And so we really kind of leverage that going forward. From a prior authorization standpoint, the team is back taking care of centers. Prior authorization program is up and active and running very, very well. No concerns over that. There were some centers back when we were teaching independence that have become independent and are doing their own prior authorizations. But for the most part, we brought them all in. We've added staff and prior authorization program is strong going forward. And we can work with the individual centers on how do we drive increased utilization. Again, the new website has really helped to make the first appointments. And we're looking at the ENTs, how can we help the ENTs be more efficient and spend more time in the operating room. A couple of examples are the very first appointment. Can we use APP or advanced practice provider or a PA to see the patients for their first appointment? Do they really have to see a ENT -- and that makes it easier for the patients to get the first appointment and help improve capacity with the ENT. Can we train the ENT's partners to build capacity, get them to do additional time, midterm, we can talk about the predictor on how -- if we can eliminate DISE, that really can build efficiencies for the ENT as well. So really doing the easy steps right now to really help grow the ENT capacity, and those are being effective. And then longer term, of course, the Inspire V will certainly improve capacity by reducing OR time.

No, certainly. And definitely looking forward to getting into some of these more interesting long-term topics in just a minute. I did have 1 question come in here just around similar on the guidance. Was there any change to your philosophy in terms of how you guided either for the year or just quarterly setup compared to the past?

No, the way we do our guidance has been consistent for all over the years. And we don't really tie that to utilization. I know people want to do mathematics on it, and I credit them for doing so. But no, we set our guide consistently like we have in the past, but utilization is what we're really focused on for driving our business.

Got it. And last question on the guidance. Understand utilization certainly the most important and probably most sensitive driver of the model. But just thinking about the other side of it being new center additions. Your guidance was 52 to 56 per quarter, which was the same range that you gave last year. Like how much visibility do you have into that target -- and then just like how do you think about balancing that consistent cadence of adding new centers with also driving increased utilization at existing facilities?

Right. We do have -- we can see in the runway. We know for a new center, it could take 6 months to get them fully trained, contracted, seeing patients and ready to open. And so that's a group of centers. There's other centers that are part of a larger organization, let me call it the Ascension Health Advocate system in Chicago. Banner Health in the Mountain regions, right? Kaiser in California. We have national contracts with the large systems and for us to open up a new hospital there, we can do that in just 3 months because we're just focusing on identifying the team and going through the training aspects, and there's like 6 training modules that centers have to go through. So there is varying levels of center readiness, but we do have a pipeline that we have visibility to. And we open centers when they're ready to open, when they have patients identified. The last training module is training the surgeon to do the procedure. We don't like to do that training longer than 2 to 3 weeks before they do their first case. And so we kind of get that all set up appropriately throughout the quarter. And we're going to continue to drive that. We like the cadence that we have set up because we have staffed around that cadence to be able to open that number of centers, and we can only open the number of centers that we can control patient outcomes. And so really, our focus is on driving increased same-store sales and driving utilization and complementing that with opening new centers.

Yes. I mean, you had a couple of comments already about utilization and touching on higher utilization actually driving better outcomes. And we had another question coming from the audience on that topic. Just wondering what -- what kind of metrics do you see improve as utilization gets better? And if you have maybe like lower utilization facilities, where are the possible areas that can show improvement once they get to a better level of scale?

Oh, I think that's a great example. I think it's -- number 1 is the ENT surgeon that we focus on at centers. And what role does the ENT surgeon playing at that center, right? -- they're probably the champion. But as he, she or they, dual-boarded in both sleep and ENT such that they're doing not only the diagnosis of the surgery, but they're also doing the follow-up. Well, that really limits their individual contribution and the surgeon is the only 1 that can do the procedure. So what we need them to do is really form a team and have multiple surgeons that can do the procedure to improve capacity, and really rely on the sleep physicians to do the longitudinal management. So number 1 is identifying the efficiencies at the center, specifically around the ENT, so they can maximize their time in the operating room, and that's the #1 factor that drives utilization is OR time. We can find OR time at hospitals because we just use any general operating room suite. We don't have specialty equipment. And so we can find the OR suite time. We just need to make sure we get enough ENT time. And that continues to improve as we build those efficiencies with the practice we already mentioned using a PA or APP to help patient diagnosis, leveraging the sleep physicians longer term, addressing sleep endoscopy and certainly Inspire V.

Thanks for that color. And 1 more a little bit kind of near-term question. You've been talking the last couple of quarters about the EU certification process. Yes. And specifically, some of the country-by-country derogations that you've been trying to secure. I think you mentioned Belgium, Netherlands, Germany, Switzerland, as examples where you've gotten those specific derogations. Just curious if there's any other updates you can share given this is changing pretty quickly?

No, we have derogation in all 4 of those countries. Those are the predominant business in Europe right now. The U.K. is up and coming. We are working at compassionate use and ready to remember is Brexit as the rules are a little bit different there, but we're working that. We have several patients scheduled in the U.K. that we want to get scheduled, but we need to get through 1 board compassionate use documentation there. But Germany is up and running and very strong, and we fixed that derogation in January. Netherlands, Belgium and Switzerland, as you've mentioned. We are -- the next countries to deal with are Austria. And France is a little bit different. France is about to release their new codes because we know we've been awarded countrywide reimbursement advance. We don't have the new codes yet. And it's probably going to get announced at the same time, we have full EU MDR certification in anyways. So that's going to allow France to come on when we launch in France and with all the new products. So things are good. We're working with our notified body to get the EU MDR complete, and we continue on progress doing that. But in the meantime, do have derogation that's going to carry us through until we have filed approval. So it becomes a little bit more of a nonfactor right now.

No, that's good to hear. And more to come on the international opportunity down the line. I did want to shift to everyone's favorite topic, which is SURMOUNT OSA, some of the work that's being done in GLPs. The question that comes up a lot, I think you've answered publicly many times, which is around the potential outcomes and impact on TAM. So unless you have specific new thoughts on that, which you can follow up on. I did want to ask just how you think about assuming this class of drugs does make its way to the market, longer term, which I think would be the expectation. Just how you think about the increased interest and maybe investment dollars and how that could impact the TAM long term in the OSA space?

Well I -- Carlton is tracking how many shot all she gets today, but come on Oprah put on a show last night to educate people about GLP-1s right? There's how many people are going to call their doctors today say, I need to lose weight, and I need to go on one of these GLP-1s. How much does it cost? Can I afford it? And the doctors are going to screen them for heart failure, for diabetes and for sleep apnea. And they're going to have to treat their underlying diseases as well as dealing with the weight loss. And let's be honest. These drugs have been around for 20 years for diabetes, but most recently approved for obesity management. And I know that SURMOUNT is trying to get into independent indication for sleep apnea, that's going to be a little bit more of a challenge because they are weight loss drugs. Our position has not changed. We will reiterate that, that we expect a SURMOUNT trial will show a reduction in the severity of sleep apnea. We believe -- it will help the TAM because the people in the SURMOUNT trial today are people that we cannot treat because their BMI is too high, and they likely have complete concentric collapse and retreat tongue-based obstruction. So we need those patients to lose weight so they can be screened for additional therapy to resolve their sleep apnea. So again, we think the GLP-1s will be positive, is going to help people lose weight, help them move into our funnel significantly greater than those patients we see following our in the funnel. But overall, I think the awareness of the GLP-1s and the desire for people to address their weight will increase the number of patients that will be diagnosed with obstructive sleep apnea and will increase overall sleep apnea therapy volumes.

All right. And then maybe just a little bit of a follow-up there. Let's just assume that the headline results from this trial are relatively positive, kind of in line with expectations. I guess my only real concern would just be whether that entrance would cause some kind of near-term disruption in the market where people at least want to consider an alternative and maybe defer a decision to see if that was effective enough -- is that something that you guys think about or think could have some kind of a couple of quarter transient impact, like if this does come to fruition?

No, for sure, we think about it. And I think right now, when people come in, the majority of patients, are going to come in and get screened for sleep apnea. Sleep physicians are not going to delay a prescription of CPAP. They're going to give CPAP and a GLP-1 at the same time. And then 6 months later, you're going to see, number one, are you still on CPAP? Do you need to be on CPAP? The key is going to be -- we know the compliance with CPAP is limited. And we know a lot of people are going to fall off it, but they're already going to be on the GLP-1s. The key is going to be they need to lose weight to be able to qualify for Inspire. With the amount of demand that we have going back to your initial question with a number of web hits and context and patient demand for Inspire, you're not going to see any pocket where people are going to stop and try a GLP-1 for a while. We know that a big qualify for Inspire that they're going to continue forward. And those patients that are going to have a higher BMI or they will fail due to complete concentric collapse. Those patients we will send back to a physician to get them on a GLP-1. So no, we don't think that there's going to be any kind of window or gap for patients trying the GLP-1. We think that we're going to leverage GLP-1s for those patients to get screened out on a complete concentric collapse to get on a GLP-1 to lose weight and qualify.

No, sure, sure. And I think it's similar to how I'm thinking about it. And we did have a question -- a lot of questions coming in, but we had 1 on this -- on this exact topic really, is this something that you've already seen where there's been examples of patients who didn't qualify because of their BMI went on to GLP-1s for weight loss or any other reasons? And then became eligible and actually got an implant?

Yes. And -- but it's very limited today. And when we talk to our physicians, it's just a few patients because this is all relatively new. And even when we talk about physicians, a lot of them refer back to their old patients that have bariatric surgery qualifying and coming back and qualify -- so very, very early stages, but we do get physicians talking about patients who have done exactly that. But again, number is very, very small at this point. .

All right. And then just 1 more on SURMOUNT. Another question came in a little bit similar to what I wanted to ask -- and you definitely have this cohort of patients who have very high BMIs, who will go on the therapy and then move into the TAM. But there's also maybe a group of patients who aren't starting off like as high of a baseline and thinking about the ADHERE Registry where the average AHI is in the low to mid-30s. And if there's a patient who starts maybe closer to high 30s of an AHI shows 40% or 50% improvement and gets down below 20 -- and I think there's some reimbursement differences around eligibility at lower AHI rates below 20. Would you also be potentially losing a certain amount of patients in that cohort? And just how do you think about like those offsets at the higher and middle range of...?

Yes. I think, sure. I mean, you can play the math all you want. You can find some patients that will lose a little bit. We have indicated, by the way, for any patient who has a AHI greater than 15. For insurance company has a limitation at 20, we'll submit the prior authorization in anyways, because it is not off label. It might be off policy, but we'll get them approved. And so unless they get down below 15, that's really what we're focusing on. There's going to be a few patients. I get it who will fall at the bottom, we think it will be far superior that patients will fall into our funnel, then the few that will follow at the bottom. We think that's a very limited number. But of course, you can do the math and kind of see that happening.

Yes. No, sure. And then another question on TAM is also -- it's been a little while since I think we've talked about this, but -- you have in the past framed kind of an addressable market from a center perspective and the number 2,400 had been thrown out -- but I think you've also alluded to there being some additional centers maybe in the smaller to midsize that would still be very viable outside of that core TAM. So maybe with that in mind, if you could just provide an update on how you're thinking about the TAM and then your level of penetration exiting 2023?

Right. Well, initially, the 2,400 was really kind of just a rough estimate. We used to estimate 4,000 hospitals in the United States 4,000 ambulatory surgical centers, of the 8,000 we'd target about 1/3 of them, and that would get us to the 2,400. I think now we're getting a little bit more specificity, and we're looking at the community hospitals and we're realizing that patients want to be treated in their community. They don't want to drive 1.5 hours to a big academic center. And we're seeing more and more of the centers that we're opening are in small communities, and they have strong utilization because the physicians there are -- have the ability to show -- have the capacity to take care of these patients. And so we're going to continue to increase that number of centers above 2,400. We haven't put out a specific number yet, but we know we have much more area to be able to cover from that standpoint.

Yes. We're also -- another interesting point about the TAM from a patient perspective, is that we are starting to reach the really early stages of the first replacement cycle for the earliest -- for the earliest patients. I guess the question for me is, do you have processes in place to reengage those patients -- and are there any differences in requalifying a patient or any differences in the economics for somebody who's coming up for a replacement versus a brand-new patient?

Yes. The -- yes, we do have ways to stay in contact with patients on the back to their remote control. There's the lights. And when the little LED lights up that says you need a bad low battery is when they make contact with their physician. As we move forward, patients who have the new remote and they have the app on their phone, they'll actually get a notification -- that it's time to contact your physician or the physicians, if the patients are in SleepSync, the physicians will start to get a notification because that data will get uploaded into SleepSync. So we have our ability to stay in contact with those patients. We're targeting 85% replacement rate. We know our satisfaction scores are for patients. We track our patients going through. And so we're targeting a pretty aggressive number. 85%, I think, is a fair number. Obviously, with our older patients, we do lose some patients, they do pass. But we think it's going to be starting replacement. As far as coding, there are codes in place for replacements. If a physician needs to do a revision of a stimulation lead or remove the sensing lead, there are specific CPT codes for each of those. And there's full coverage from all the payers, those codes are in, all the payer coverage policies for replacement. And 1 last point on that, we recommend today, we do have processes in place. Surgeons are trained on this, that we have them unplugged the 2 leads and when we go to Inspire V, we are going to have lead the sense -- leave the sensing lead in the body and not remove it. We believe it probably is more risk to remove the lead and just leave it in place, has no impact on MRI or any other. But if the surgeon chooses to remove it, there is a [ Alacare ] code to be able to do that.

I think that's a really good segue into a couple of questions around the product portfolio and R&D initiatives, which has always been a great highlight of Inspire and your patient addition. I think I'll have a couple on Inspire V, but most recently, you announced the launch of -- or the upcoming launch of a new physician programmer. Maybe just talk about some of the biggest advantages around that update?

Well, the first thing is a SleepSync. And it's our global patient management, cloud-based system. And the new physician programmer actually logs directly into SleepSync and all the information from the patient, all the programming settings are all automatically uploaded into the system. And the physicians can just use their own computers, their own surface that we don't longer sell a tablet for the physicians. They don't need it. They can just use any old computer they have. They just get antenna with a Bluetooth module that communicates with their computer. We have recently enhanced that. Believe it or not, the sleep lab is a very noisy center, not noise for sleep, I mean electromagnetic noise. And so we have a lot of buffering with our device in shielding to make sure that we protect our telemetry. That new product is all available and being released today. And that's certainly going to work as we go forward with Inspire V and future generation neurostimulators as well.

And then, yes, maybe just moving to Inspire V, that's the new generation device -- for folks who are new to the story, and you're expecting to have a limited market release potentially around the end of the year and maybe a full market release if everything goes as planned next year. Maybe just talk about some of the features of Inspire V -- and to the extent that you can maybe put it in context with potential competitive launch in a similar time frame?

Absolutely. Well, I think the #1 feature of Inspire that the competitors don't have today is we sense respiration, and we provide stimulation when you inhale -- inhale and exhale, and we stimulate when you inhale and the device turned off when you exhale. If you think about BiPAP, bilevel positive airway pressure, which is the next step from CPAP. When you inhale the pressures higher, when you exhale the pressure is lower, everybody knows that the airway collapses when you inhale. Hence, you need closed-loop stimulation and that's what the feature of Inspire has had from the beginning, and that's something that competitors don't have today or in future plans. So what we have today is a pressure-sensing lead that's separate from the neurostimulator. But what Inspire V does is it incorporates lead sensing inside the neurostimulator can. That's the #1 feature of the Inspire V is the surgeon no longer has to place that sensing lead into the chest wall. Think about it, we have ENT, ears, nose and throat surgeons, placing that sensor in the chest wall, it's the 1 part of the procedure that's a little out of their comfort zone. And by getting rid of that sensing lead, we believe there's going to be a host of new ENTs who are willing to do the procedure, and they're just a little shy to do that today because of placement of the sensor. Number two, the Inspire V is a platform technology. It's a microprocessor-based systems. So when we go to Inspire VI or Inspire VII, it is just firmware upgrades. One example is Inspire VI will have sleep detection. And so when the patient falls asleep, the device will turn itself on at night. When they wake up in the morning, it will shut itself off. Think about those patients that have insomnia and so they can relax and when they fall asleep -- they just -- the device turns itself on. They don't have to worry about the remote anymore, right? And then the Inspire V thirdly, has the ability to expand -- and so it already has designed into the circuitry a separate independent output circuit that we are going to start a program to address high-BMI patients. We know GLP-1s are going to help, but it will not solve BMI because if you stop using the GLP-1s, we know the weight rebound will be significant and quick -- and so we need to solve that with technology to be able to treat complete concentric collapse. Our competitors don't treat a complete concentric collapse. They stimulate the base of TAM like we do to move the tongue forward. They do not address lateral wall collapse. Our dual-channel device, which Inspire V already has the technology in the can will allow us to go to a dual-channel device to address not only tongue-based, but a different nerve bundle that will address pulling the lateral walls down to open up lateral walls and address high BMI. We have done acute human work and are just about the starts of chronic longer-term project, but we know that GLP-1 has really created the need for us to address this with the technology and we have the ability to do that.

It's a really interesting point, definitely would like to follow up on that as more information is available on the topic. Just, I guess my question would be, yes, I think a lot of the time, people think about potential competition and look at CCC as a large differentiator, but there also might be a little bit of a misunderstanding of the timing of when that actually becomes viable in the U.S. given some regulatory hurdles or processes that, that competitor will need to do in the U.S. before actually addressing it. So kind of in that line, how do you think about the process toward getting, I guess, CCC indication for Inspire. And is that something that you'd be interested in to open up a greater part of the TAM?

Yes. You cannot get properly treat CCC with hypoglossal nerve stimulation. Hypoglossal nerve stimulation moves the base of the tongue forward period. right? CCC is a combination of tongue-based obstruction and lateral wall collapse. Lateral wall collapse is a result of higher BMI. As you get a higher BMI, you have a larger neck circumference, you get more lateral wall collapse. You can move the tongue out of the way all you want, but the patient is still going to have a lateral wall collapse. And I think that that's what you'll see when you have people talking about you haven't seen any data on a hypoglossal nerve stimulation treating CCC. You got to have a dual-channel device, and it's got to address both tongue-based and lateral wall and that's the process that were happening. You won't see a CCC approval on a nerve stimulator for Inspire. We're going to be going after CCC directly by addressing lateral wall and we'll get that with our dual channel device.

All right, super. And then last question here on Inspire V and the eventual rollout. Just when the release does occur, how quickly do you plan to convert your customer base to the next-gen device? And I did have a question coming very similarly. Would you expect there to be any possible delays or disruption as folks need to convert to the new procedure?

Sure. Absolutely. Well, we're working interactively with the FDA right now. I think the key is we know -- if you can recall back when we went from 3 incision to 2 incision, it was a very quick conversion to that new technique. When we went from Inspire II neuro stimulator to Inspire IV, it was a very quick conversion. We expect the same to happen with Inspire V, and we're planning for that. So more so than just FDA approval, it's being operationally ready, making -- meaning we will have our production facilities up and running. We will have sufficient inventory. So once we launch that we can carry forward, we won't get into inventory challenges. And because it's not approved and because it's not appropriate, we don't market Inspire V today. We don't talk about it. Certainly, we talk about it with investor calls to keep you all informed. And certainly, our doctors are very smart, and they listen to these calls and read your transcripts as well and they're aware of it. But we do not promote it outside the community. You won't see it on our website until we're ready to go. Because of that, we don't think you're going to see air gap in patients waiting to receive -- they're going to wait for Inspire V. Our patients are very motivated, and Inspire IV has the same mechanism of action with the sensing mode and treating sleep apnea in the same manner. So no, we're going to launch Inspire V when it's ready to go when we're operationally ready and we'll announce it to the field when we launch, and there won't be a lot of preliminary discussions. So there won't -- we don't believe there'll be any air gap there.

All right. And this has been a great session so far. We only have just about a minute left. So I'll have to surpass my questions on profitability and direct-to-consumer marketing. -- which is okay. We'll save that for next time. Maybe if you can [ think of ] if there's any final thoughts you'd like to leave investors with in our last minute here?

I will grab the profitability. I think that's a very important point to get to our community. I think that's important. What we like to say is that we're becoming profitable because we're maturing as an organization. And we're continuing our heavy investment in R&D and [ our role ] last year. R&D was at about a 20% part of our revenue, but that's going to continue on, but we're getting more leverage of that as we get Inspire V and dual channel continue to move forward. DTC, we're about $100 million. We're going to continue to invest in that, they'll be more flat because we're really getting leverage from that DTC as a maturing company. And we said we're going to be profitable in the second half of the year, and we don't have plans to look backwards. So we think that Inspire V, it's certainly going to help because it's going to improve our COGS because we don't have to make the pressure sensing lead anymore. They will help some gross margins there. So I think that we'll be able to talk a lot more about this as we get further into the year. But we know a responsible mature company will be profitable, and we certainly have that on our radar and look forward to talking about that more and more throughout the year.

All right. Well, lots of exciting opportunities ahead as always. And I think with that, we can conclude. Thanks so much for joining, everyone.

Thank you very much, Brett. Really appreciate it.