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

Good afternoon, everybody. Travis Steed, the medical device analyst for Bank of America, and glad to have Inspire Medical up next. So we have Tim Herbert, Chairman and CEO; and Rick Buchholz, Chief Financial Officer. And everybody knows Ezgi as well, Head of Investor Relations. So thanks for joining us.

Thank you very much.

Tim, do you want to open up with some opening remarks?

I want to thank you for having us. I think that it's always a fun time to be in Vegas and sit in a hotel room all day and not have any fun, but that's okay. We have a lot of fun talking about our favorite subject, there's no question about it. We had quite an eventful week since our earnings call last week and had a lot of great discussions. Already look forward to have many more discussions with a lot of our partners going forward. We're pretty excited about the company. And we knew we had a little bit of a disconnect with expectations and how we delivered on the quarter. We certainly always have our high expectations for ourselves going forward as well. But we want to reaffirm, what we're all about is a commitment to the growth of the company. And we're investing heavily and not on all aspects of our company, from the R&D activity being in the high teens and the technology and the digital tools and our venture programs that we are investing in. Investing heavily of our skilling of our sales force. It's important to note that our sales team, half of those have only been with Inspire for probably under 2 years. And so we have quite a bit of education and growth with that organization to really understand, get comfort in their role and to be able to gain confidence in their -- and conviction in their communications and driving their centers and driving the growth of the company. And finally, our direct-to-consumer is one where we're continuing to invest heavily in DTC. Now we're adjusting our direct-to-consumer because we continue to learn. And we continue to change the DTC to target more of our target audience, and that being more of a younger population. Whereas before, we would do a lot of broad national TV buys, which would -- is very important, but you bring in a lot of Medicare-aged population, which is important, because we want to treat that population as well, but we need to kind of continue to focus that. What we're excited about is we have confidence going forward that we're able to do an increase in our revenue guide for the rest of the year, and we think that's very important. But we're equally excited about being able to say that we're profitable for the full year, and we intend to stay profitable going forward. And it's not because we're changing our business model to become profitable, it's because we're reaching a revenue point with our gross margin that allows us to become profitable while we continue to invest in the growth and the adoption of Inspire therapy. Because there's so many more patients that need Inspire, and we just have years of growth ahead of us. But thank you very much.

Yes, of course, thanks for coming. I'd like to talk about, starting with the U.S. growth. So 2 months ago, roughly, you kind of guided U.S. -- or I guess, globally, you said the business in Q1, you'd see more seasonality, down 15% to 18%. And this quarter came out, you were down 18% sequentially in the U.S., globally was 15%, it's kind of in line with expectations or in line with what you said. But you tend to leave a little bit more room there. So first of all, was there anything that kind of surprised you in the quarter that didn't play out? And then two, kind of why are you seeing kind of more seasonality in Q1?

Sure. I think there's a little bit of a ripple effect going back on the way to the third quarter of last year. And I think that we had our challenges with the prior authorization, and we corrected that. And we brought the prior authorizations back in-house. We were able to get a lot of those files put together and submitted to the insurance companies to be able to move forward. And what that did is gave us a strong position in the last -- in the second 2 months of Q3 last year, but we pushed a lot of implants into the fourth quarter of '23. Now you combine that with the environmental factor with the high-deductible insurance plan, which is our normal seasonality in the fourth quarter. We had a large number of implants that we pushed forward, especially late in the year. And in the December time frame that we knew that we're working Saturdays on implants and taking care of a lot of people, but we knew that it's going to be a pushback. So when we got to our Q4 earnings call, we were able to have line of sight into the first quarter. And we knew that pushback would be low implants in January. We knew we'd be able to turn that and hit our stride back in February or March. And we don't usually provide quarterly guidance. We always provide annual guidance. But in this case, it was important to be able to communicate that to the Street that we expected higher-than-normal seasonality in the first quarter. And a lot of that is the fatigue from coming through the fourth quarter. And we had line of sight to it, and as we got to the end of the quarter, sure that seasonality was there. Tightness in the United States, as you mentioned, yes, there is the ongoing challenge that everybody faces with Easter moving into March and 2 less selling days on the biggest time of the quarter for us, certainly, had a little bit of an impact. But I think what we learned a little bit is the sales team, who, I mentioned, is about half our force is still with us less than 2 years. And so we are going through some growing pains, and we continue to build awareness and educate our team to have the conviction, the confidence to speak to physicians and keep growing that technology. But I think that growing trend kind of showed itself a little bit in the first quarter. But as we get to the earnings call in Q1, we also have the line of sight going forward. And we can also see the progression of what we expect for the rest of the year. That gives us confidence to be able to increase the revenue guide going forward. We don't believe we have structural problems with the organization. We think we have some additional education we need with our young, new-to-Inspire field force that will continue to grow. We'll continue to expand on that. But it's not just the new territory managers. We now are up to 54, 56 regional managers, many of which have been promoted from territory managers. We now have 9 area vice presidents, many of which have been promoted from regional managers. We have very little turnover, but we create a significant amount of opportunity. And people want to contribute more to the organization, be able to do people management and not just continue as a territory manager. So they move up and we backfill, and it creates an opportunity for us that we need to continue to educate and build consistency with the operation of each territory. And we do that. We formed a whole new training team starting this year. But what is it that a top territory looks like? How do we emulate that across the board? And I think that is starting to play out. We're starting to see that, and you'll see that play out for the rest of the year. We also made -- I know you asked me 1 question, I keep going. We also talked about on the earnings call that, over time, we're going to take away the -- some of the guidance metrics that we provide. We're proud to say we're going to keep the revenue guide, and we're very happy to say now we're going to provide a profitability guide with earnings per share. But as we continue going forward, the metric around sites and territory managers becomes less and less. And so we announced that we're going to be discontinuing that in a year. So we're going to continue to provide that information throughout the year so people can track how we're going to grow utilization through the year. But we know when we come around to 2025, we will have to provide additional information to everybody. We've kind of coached people over the years to use utilization as a tool to build your models. So we're going to continue to have to show confidence that we have and the strength of the organization rather than us just sitting on the stage. So as we evolve to '24 and get into '25, we'll continue to discuss what kind of information we need to provide next year to be able to build that confidence. But in the meantime, you're going to continue to get those metrics throughout the year, and we continue to push hard to continue to grow this organization, grow the adoption of Inspire therapy and continue to invest in growth and adoption.

I was looking at the model earlier, your sales force has like tripled since COVID.

Absolutely.

And doubled since 2022. Like when did you feel like some of the growing pains that you kind of experienced in the sales force? When did you feel like you first started seeing that? And is that -- do you feel like that was kind of the biggest disconnect between kind of what we're seeing in Q1 versus kind of what actually played out?

No, I think there's a little bit to that. But I think it really comes back into the Q3. So remember the corrective actions we put in back in the third quarter and #1 priority is bring the prior authorization back in-house. But we also added the commission bonus for the sales reps to focus on individual patients, not just broadly on utilization. And I think that kind of showed a little bit of varying of experience that a lot of the newer patients, they didn't have the experience. Remember the old days when you used to take 3 months to get an individual prior authorization. So we need to kind of bring that back to the forefront. We continue to work through the education with our sales team and really kind of grow the consistency of operations across the territories. I think that kind of comes into play a little bit as we pushed through Q4 because there's a lot of grind in Q4 to get all those cases done. And the patients are demanding with their high-deductible plan, and then that shows with the pushback that we saw in Q1. But it also shows you the confidence going forward into Q2 and the rest of the year.

Do you think a lot of this was driven more by kind of the compensation changes in the rep model? Or is it more you're bringing in newer reps then promoting kind of very productive reps and territory managers, and so you've got like a little bit of a pocket, you're missing revenue there?

I think it's more the opportunities that we create. And I think we're up over 290 territory managers now, but up to 50-plus regional managers, 9 area vice presidents, that's a lot of opportunity. And while we do like to bring in regional managers and area vice presidents from the outside to help with cultural infusion and learn a lot more things that can make the sales force better, it still takes time for the sales team to get their footing and to get onboard. And for expert sales rep to move into a people management position is always challenging. So we spend a lot of time coaching the regional managers. But in the long run, it's going to make this organization so much stronger. And so we want to deliver every quarter, and we obviously have high expectations for ourselves. Where we wanted to be in Q1, certainly wanted to be higher than that. But I think we understand the dynamics and can see the patient flow and the demand that we have for our product. But we need to continue to be able to grow the capacity of the anti-physicians in some pockets, such as down in Florida, those area, where the antis recommended we train general surgeons. And the general surgeons are doing the cases today. So it's just another opportunity to grow capacity, and by bringing in other surgeon especially into the fold.

The 298 reps you've got now, at what point do you think kind of they'll be fully productive? Is that later this year? Or is it more of a next year thing?

Well, I think they're going to continue to be more productive every single day. And while the guide won't be there next year, talking about regional managers, we've been very consistent at the number of territory managers that we bring in on a quarterly basis, and that's a less percent of the overall total. So as we continue to grow with experience, that will continue to be more broadly disseminated across the entire sales force because you have a less and less percentage added in every quarter. So I think we're seeing it now, you're going to continue to see it day by day as we continue to move forward.

And then the second half acceleration that you're kind of seeing in your full year guidance, is that baking in that improvement in the sales force?

I think that's just natural progression of the business. So yes, the answer is we expect continued efficiencies built into the team going forward. We know we need continued expansion of ENT capacity. We know the patient demand is there. And we can see the pipeline, and we can see the time from a patient calling in to implant can run as much as 6 months. And so that shows the backlog that we have. We need to reduce that, and we need to improve that patient experience to be able to knock that down. Pre-COVID, that used to be around 4 months. And then COVID kind of had a challenge with the world, and so that's kind of extended back to 6 months, and we need to continue to improve on that as we continue to move forward. And a lot of that is building efficiencies inside the operating room. Inspire V reduces OR time, improves the physician ability to do more cases in a day. Predictor provides an opportunity to be able to not require patients to go into a sleep endoscopy, to be able to remove that part of the process that consumes time, and it does -- is not additive to the patient experience. So we need to improve efficiencies within the operating room, but also outside the operating room, where we can have staff at the ENT's office to a lot of the initial diagnostics, a lot of the education, certainly rely on the sleep physician to do all the longitudinal management, thereby creating an opportunity where the ENT can spend more time in the operating room doing procedures where they can be the most effective, and they can get the greatest amount of reimbursement to pay for the expenses of their practice.

When you're saying all this, it sounds like that the demand for the procedure hasn't changed at all. You're doing the same thing. You're still growing your reps and centers. Like why -- is there any reason why we can't kind of get back to some of the like utilization growth like the way we would track it. If you did keep disclosing the numbers or into next year, we could see good utilization growth again in this business model.

I think we're going to provide utilization for the rest of the year. And I think that you're going to see that utilization continue to grow as we go through the year. That's the focus that we have to be able to take care of the patient demand that we have. Patient demand, it continues to be as high as it's ever been. I highlight the 1 example we had with television commercials during the Iowa-LSU women's basketball game, where it was so tremendously watched across the U.S. And the amount of web activity just that day really shows the demand, and our ability to build our brand awareness. But it's not just that. It's about making sure that we educate the family doctors. Because when a patient sees, and they go to the website and they need to get educated, they're not going to do anything until they go talk to the family doctor and get their opinion or they also because of their insurance and they need a referral to see a specialist anyways. And so we need to make sure that the family practice doctors are knowledgeable to be able to talk about Inspire. We talked about existing sleep physicians who have patients who are noncompliant to CPAP, to make sure they are well versed on Inspire to be able to refer those patients to have Inspire. Pulse field ablation, big buzzword on atrial fibrillation. If you treat atrial fibrillation without addressing a patient's moderate to severe sleep apnea, there's a 57% chance of recurrence. And finally, the GLP-1 effect. When Oprah goes on TV and talks about the benefits of GLP-1s, and the web activity that comes from that and the patients that flock to the general practitioners to get a GLP-1, they're all going to get diagnosed for diabetes, heart failure and obstructive sleep apnea. That is going to just increase the diagnostics for sleep apnea and just create another value going forward. So yes, we're going to continue to push utilization going forward because the best outcomes that we have are with centers that have the highest utilization because those centers are the most practiced.

Are you good with where the Street kind of shook out on U.S. revenue for Q2 and globally, just kind of the splits? Or do you have an issue with kind of mismodeling?

Yes. I think the Q1, I think people, again, our expectations remain very high in the first quarter. We tried to be transparent. We've tried to be transparent all the time. But certainly providing some guide on where we expected Q1 to be, I think the third-party data kind of got out in front of it and kind of really had some impact on people's expectations to -- that was quite different than what our actuals were. And so we're careful about going forward and communicating with yourself. But I think that we're comfortable where people line up around Q2. We're going to be focusing on that utilization to be able to achieve that. But again, we have confidence going forward to the point that we're able to increase revenue guide for the whole year.

It sounds like utilization, given all the stuff you're just talking about, should probably improve again next year on a full year basis kind of versus this year, even before Inspire V?

We want to continue to grow the adoption. And I think the key to do that is we want to leverage same-store sales. And the reason, again, because the best outcomes come from the centers that provide the greatest number of procedures because they're very well practiced. We'll continue to scale our sales force. We'll continue to add new centers, but we're adding them as a lesser percentage of the greater whole. That means that the utilization in same-store sales is really going to continue to drive our growth, and that's really an important focus to us. So by definition, the answer to your question is yes.

That's helpful. Maybe looking at the centers, and for those that don't know, you can remind people kind of where the average is, but kind of think about where the utilization is in kind of the top quartile today?

Sure. I think the -- it's really important to understand the characteristics of the centers that we're talking about. And so in the early days when you get approval from the FDA, we're celebrating 10 years approval from the FDA and how proud we are. And having 65-plus patients have received Inspire therapy and the outcomes are tremendously strong, and we're very proud about that. And we're going to continue to focus on the growth there. As you get approval on the first centers that come onboard, the early adopters are the academic centers. And they're very important because they're the same partners that do the research. And they do the clinical studies, and they publish and they talk about. And they get on a podium and talk about the benefits of the therapy, and they're very, very important. But they also are those that can grow to only a certain level of utilization. And so when you have your software or some of your associates will have an expert call, and they'll bring in a KOL, and the KOL will say, yes, but I'm capped out. I'm maxed out. Well, that's because they're an academic center, and they still spend a lot of their time on research and clinical activity. And they only have so much time to see patients. They only get 1 OR a day, a month. And so yes, naturally, they're going to cap out as far as utilization, but it's a very, very important core part of our business. But when we all go to the doctor, we see a family practice at a private hospital. And the only time we go to the academic center is to see a specialist. Inspire has passed academians. Inspire has now grown to a point where we are general health care, and the top centers with the highest utilization are those community hospitals, right? The top sales rep for Inspire lives outside of St. Louis in a small community, generating $7.5 million by himself, right, with a couple of centers that have very high utilization because people want health care where they are. So our highest centers, the top ones, are doing as much as 15 procedures a month, and we'll continue to push that. You're going to see centers pushing higher hundreds, if not 200, this year. We have multiple centers doing more than 100% -- 100 procedures in the year. Whereas a couple of years ago, that was only one, right? And so that's going to continue to grow. And then the new centers coming through, those that have been opened up in the last couple of years, it still takes time for them to understand how their systems work, understand how each of the players within the system are comfortable with each other, how the patient flow is optimized and to build the confidence in the conviction for physicians to talk to their patients saying, I've done a lot of Inspire. I know the results of Inspire. Inspire can work well for you. And it takes time for people to mature into that level to be able to grow that utilization. So the centers that we're opening predominantly are more of the private system now more than the academics. Majority of the academics are the early adopters and have already been opened. And then the final group is most of the surgeons have a secondary set of service. And that's really used as an overflow, just if there's not OR space inside the existing hospital, that they can do that as an overflow. We never expect those sites to really have the high utilization. But the key is to get all the private centers moving all the way through, and that's really going to be the focus as we continue to move forward.

What percent of your centers are overflow at this point? And how -- what was that number last year?