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

Okay. Good morning. My name is Mike Sarcone. I'm an analyst on the Jefferies U.S. Medical Supplies and Devices team, and this session is with Inspire Medical. With us from the company, we've got Tim Herbert, CEO; Rick Buchholz, CFO; and in the audience, we've got Carlton Weatherby, Head of Strategy; and Ezgi Yagci, Head of IR. So thank you for joining us today.

Well, thank you very much for having us. Really quite a privilege to be spending time with you and with all the meetings today. Thank you very much.

Great. So I guess just to start, we've seen a lot of volatility in the stock with some pretty rough performance following the 1Q print. So I figured you could just start off and give us -- I'll give you an opportunity to talk about how you think Inspire is positioned today to capitalize on the large market opportunity and what you view as key growth drivers for the company.

Fantastic. Absolutely. I think the primary that gets us up every day is the therapy works. Our outcomes are stronger today than they were when we get approval from the FDA 10 years ago. We just celebrated our 10-year anniversary as being able to market the product here in the United States. So very proud of the outcomes. The other key factor is we're very lightly penetrated in the overall target market and just a low single-digit percentage. So the opportunity remains in front of us. And what we're also confident is, is the fundamentals of the company are very strong. Continue to grow our distribution team in the United States, continue to open new centers and continue to grow the capacity at each of our centers. And so the fundamentals remain very, very strong. We have significant technology advancements forthcoming. So the future looks really bright for us.

Great. We just saw you in Houston. You had a big presence at the Sleep Conference. Can you just give us your takeaways from the conference, booth traffic, conversation with physicians.

Yes. Absolutely. We had a great meeting. It was the meeting of the AASM, American Academy of Sleep Medicine, the annual meeting in Houston. We had a significant presence with our booth. What's most important is the amount of research that has been conducted by centers, independent of Inspire initiating or sponsoring. It's really the sleep fellows and the sleep students and researchers conducting their work and publishing it. We had a significant number of posters that were presented to show different elements of the Inspire procedure from economics to efficiencies and safety. And so we're really impressed by the breadth of the research that is being committed to Inspire and that really is going to help the long-term prospects. As far as our own activities, we're able to host a significant number of people in our booth. We had several symposiums. The key one on Tuesday with [indiscernible] Symposium was standing room only with a very strong panel to really be able to answer questions that people have. A key example of that, that we really highlight is one center is really run by the sleep physicians. And they talked about how busy they are and they're going to add a third ENT, meaning the sleep positions are really the drivers of the opportunity. So it really was a profound meeting that we had, and we really enjoyed it and had just a tremendous amount of attention by the sleep physicians.

Great. Shifting gears, there's been more market discussion around potential sales force disruption, around territory splits and incentive comp changes. Can you take some time and give us an update on the state of the union with the sales reps? Have you noticed any change in rep productivity or sales rep turnover?

Absolutely. I will just kind of walk through. It's been kind of a highlight a little bit this week. I think we brought it up a little bit during the Q1 earnings call that we know that we're growing up as an organization and there may be some growing pains out there, but let's kind of highlight what came up more so even this week and a couple of things. So first up, I want to address them one at a time. Let's talk about territory splits. We got approval back in 2014. I think the initial sales team was, maybe 10 sales reps that we have. Today, we're well over 290 territory managers. Subtract those 2. What that means is we have successfully conducted 280 territory splits in the 10 years since approval. That's part of the process. That's how you grow. And what we want is we want to make sure that the territory managers are able to develop their territories to get them to a certain point where we can divide and have that sales rep share in the commission of the new territory, but serve as a mentor for the new territory manager that enters that so they can both be successful moving forward. So territory splits is really such a very, very integral and important part of our business, and we're really good at those territory splits. Second thing I want to talk about that came up a little bit is rep comp and we talked about this as well. So back in the beginning of 2023, we talked about the compensation. The reps have a base comp and then the majority of their commission is generated from revenue and implants and a smaller point on the top is for individual patients. We used to call them patients expecting therapy or PET. Beginning of '23, we changed that to highlight on site utilization and really focus on that. And as everybody aware, back in the third quarter of last year when we had a challenge with our individual prior authorization, and we brought that in-house, we also reinstituted that individual prior authorization incentive. And the reason was we wanted that attention to those prior authorizations to get them back in-house, and it really was quite effective. And then we did that across the United States, and that remains in place today. We haven't made any changes since that time line. Third point came up was with turnover. On our ESG report, we put out that our corporate turnover is only about 5%, very low. The field force is reflective of that. We have very, very limited turnover. Now we do create opportunities for our territory managers because we are now well over 50 regional managers, we're up to 9 area vice presidents. So there are opportunities for a successful sales rep to become a territory manager, the regional managers can be promoted to area vice presidents. So there are promotional activities. We created a new training team this year with the focus of educating the field team and driving consistency across the territories. Well, who better knows how to teach the territory managers than the most successful people. So we really create opportunities for our sales force. Very few of our territory managers leave for reasons. Unfortunately, a great percentage of them are involuntary and they don't quite work out. Last point that was brought up in this week was in regards to a site that has limited ENTs because that ENT has been designated as the Inspire doctor. And that's the one thing we're trying to change across the board. We can't have an Inspire doctor. We need 3, if not more, ENTs at a center to handle the capacity and the demand that is there. We really focus on those elements. So if you kind of look at it, everything in there is actually a positive and it shows an opportunity for us to be able to educate and drive consistency across the sales team as we continue to scale and as we continue to recruit new territory managers. We also have about 200 field clinical representatives, and these are the individuals that do a lot of the case coverage today, but it's also a bench. And what it is, is those are individuals who have the opportunity to be promoted themselves to move into the territory manager positions. So our field team is very, very strong and we're able to still recruit the top highest talent in the United States to be able to build the sales team. So really, everything kind of brought up is a positive, and we're really leaning in on that.

Thanks, Tim. And when you think about looking forward, how do you think about the cadence of kind of new territory additions going forward, similar to what we've seen historically? Or...

Well,, I think so. If you kind of look back at our cadence that we set up over the last 3 years, it really hasn't changed. And what we like is to have a very steady cadence, additions of new centers and a ratable number of new territory managers that go with it because we try to control the ratio of centers per territory manager so we can really focus on the activities of that center and really drive utilization. And so when we look at what is making up our growth as a company and the majority of our growth today is coming from same-store sales. We want to make sure we drive utilization because what we know is the sites that have the greatest utilization, also have the highest patient outcomes. That's intuitive, right? Think about that. That is centers that see the most patients. Everybody in that practice is well versed in the job that they do, from the surgery, to the device programming, to the patient selection, to those that do the coding and the reimbursement to make sure they get the proper reimbursement to the center and to the physicians. So we want to keep a very steady cadence of growth, and we'll continue to do territory splits. So that's a very important part of our business, and we'll continue to really rely on top talent in the field.

Great. And at the Sleep Conference, I thought you guys did a great job of giving the investment community access to a whole range of sales professionals, a bunch of different people in your commercial organization. Do you think you could kind of highlight some of the efforts that Inspire is making and helping to improve efficiencies for providers?

Absolutely. I think it was great to have everybody have an opportunity to be in the booth, and we have the virtual reality where you can put the goggles on, and you can pretend you're doing surgery. And so there's a lot of fun with that, too, and people get good experience with really what Inspire is and how we communicate with the physicians. And we had a chance for the team that was there to talk individually with the Vice Presidents of the sales organization and not have Carlton, Ezgi, Rick or I up there talking [indiscernible] talk all the time, but to have really an opportunity to talk directly with the field team. I think it was really an opportunity. I think when we look at the ENTs, that's our limiting factor today. And we need to clean up their practices a little bit, meaning build the efficiencies with how they operate in their practice. We know that where they get their best reimbursement is when they're in the operating room performing surgical procedures, specifically Inspire procedures. And we need to work with other professionals in their staff to handle the office base part of the practice, meaning when a patient comes in, they want to spend 30 minutes talking to somebody about what is Inspire? Educate me about this, what should I expect? Will my insurance pay for this? How much will it cost me, right? When will my next appointment be? But that can be done by a PA or APP, an advanced practice provider. It doesn't necessarily have to be the surgeon. And even the postop follow-up after surgery, the PA can look and it's just an incisional check to make sure everything is healing fine. That doesn't need to be done by the surgeon. We can build efficiencies into the ENT practice. Therefore, they can spend more time in the operating room doing more procedures. And inside the operating room, we're going to have our own efficiencies, right? We talked about the predictor study to be able to minimize the number of patients that require a sleep endoscopy that can save a lot more time where a surgeon can spend on doing implant procedures. When we launch Inspire V, that's going to reduce the OR time. Therefore, the patient -- or the patient -- the physician can do more cases in an individual day, thereby generating additional revenue for their practice as well. So a lot of initiatives are ongoing, and we formed a specific field training team just to educate the regional managers and the territory managers on best practices for what is the best way to manage a region and optimize efficiencies to thereby drive higher utilization.

And can you leverage SleepSync as well to drive greater efficiency?

Absolutely. And I think SleepSync brings a lot of different benefits to patient management down the road. First off, all patients -- while patients have the opportunity with new remote that they can download the Inspire Sleep app. You can go to your Apple store, type in Inspire Sleep and download that, give it 5 stars. But as you register, that will communicate with the patient remote via Bluetooth, and we'll take the information inside the body and the neurostimulator and transmit that to SleepSync. And eventually we'll have some diagnostics that can be uploaded to show the quality of a patient's sleep. And we can track patients from when they come to the Advisor Care program, to when they go through the prior authorization, to when they receive Inspire therapy and then manage them long term. The message being that once we solve the surge in capacity and we will, the next step is we have to make sure we have enough capacity with the sleep physicians to be able to manage all these patients. And SleepSync is designed to be able to be the conduit to allow them to efficiently manage a host of patients in a growing number of patients very efficiently and they can now start doing that remotely. And as everybody has heard, the RTM code -- or the RMT, the remote monitoring codes, that they can use to gain reimbursement, to monitor the performance of the procedure. We are working on technology to allow remote programming of the Inspire therapy using the same patient communication with their implanted product. So a physician can do device programming from their office to the patient's home and there are CPT codes for them. So there's reimbursement for the sleep positions as well. So SleepSync is really meant to be able to provide an ongoing monitoring of patients and certainly provide the opportunity for communications and such activities as remote programming down the road as well. SleepSync is going to be a key factor for our cloud-based patient management system.

Got it. And maybe we can loop Rick in here. So you've guided to 24% to 26% sales growth for this fiscal year. Can you just talk about what's incorporated from a center utilization perspective, what you're expecting through the year? And then just maybe comment on some of the drivers of that utilization?

Sure. We talked about our guidance philosophy, and that's not changed. And with our -- the same visibility we had in our Q4 earnings call when we talked about more pronounced seasonality, we have that same visibility going forward through 2024. We have good visibility on website visits, highly engaged visits as well as patients expecting therapy with prior authorizations. And so that same visibility, we did increase guidance and we expect to increase utilization on a quarterly basis throughout -- and on a sequential basis throughout the rest of 2024.

Got it. And when I think about other potential utilization drivers, Tim, you had mentioned Inspire V. There is some concern that is there the possibility or risk that patients or doctors could defer procedures, with the current Gen implant as we approach Inspire V. Could you just give us some commentary about how you view that? Maybe talk about the difference between Inspire II to IV versus IV to V. And then the second part of the question is how quickly -- or what does the transition from current Gen Inspire to Inspire V look like for the accounts?

Absolutely. Inspire IV, going to Inspire V, people are concerned that, jeez, won't patients and doctors wait for the next generation. We don't expect that to happen. One example we give is exactly what we're talking about there going from our second-generation device to the fourth generation device, it was a device that reduced the size almost by half, and it also introduced the ability for patients to have an MRI. And so a very significant change and we did not see a transition there. In fact, it was a normal transition and patients continue to receive Inspire II until the time where it was dominated by or completely transition over to Inspire IV. We expect the same is going to happen when we go from Inspire IV to Inspire V. In this circumstance, from a patient perspective, while the Inspire V device has the sensing capability inside the neurostimulator, Inspire IV has the same sensing capability, and we still provide the algorithms to provide the same level of therapy. So we don't see a big air pocket of patients waiting to receive therapy, especially if you think about later in the year when we talk about seasonality and patients having the high deductible insurance brands, they kind of want their therapy right now. They're not going to want to wait for that. And even from a physician standpoint, the third piece from IV to V isn't that significant in itself that they want to stop doing procedures and lose all the revenue that they receive as well. They want to continue have a continuous flow of patients and a continuous treatment for the entire organization. So we really don't see any kind of air gap in there. We haven't seen that with any of the products that we've launched, and I think that this is one case that will go. As far as the transition goes, I think that there's a lot II going from IV to V, not just we always compared it to when it went from 3 incision down to 2 incision, although that was really a function of training all the surgeons but it didn't have any other logistics. When we go to IV to V, there are contractual documents that we change with every center with our pricing agreements. We do have our operational readiness. We will do their full training with all the physicians in the field, and we need to make sure that we have the proper inventory to be able to support the launch. And we know that when we launch it, there is going to be a demand for that product because it is a nice product. So we're going to be careful on how we continue to prepare for that, and we're going to be very excited to be able to do that full launch.

Great. And I guess with 5 minutes left, I'm happy to open up for questions if anybody in the audience has any. No. Okay. Another bright -- or one of the bright spots coming out of 1Q results was you now expect profitability for the full year 2024. So maybe you can comment on what's driving that versus, I think, your prior expectations for the second half of 2024. And then as we look forward, I think you said you don't expect to go back. You're going to remain profitable. How do we think about the ramp in profitability and what are the drivers?

Yes. We were very pleased to announce the fact that we announced full year profitability for 2024 from just the second half of the year. And so I think a big takeaway from that is our profitability is coming at a revenue level where we're growing revenue, we're not saving our way. We are focused on profitable growth, and we continue to invest in our business. R&D is running high teens of our percentage of revenue. We are getting leverage on a quarterly basis with our SG&A line. And so we're going to continue to focus on growth. We're very low on the penetration of the number of procedures as well as the number of centers. So we're going to continue to focus on growth. Profitability has come just given our level of revenue and the fact that we're at about 84% gross margins. Those incremental sales over time with those margins, additional dollars drop to the bottom line and creating more leverage. And so we don't expect to see a step function in continued leverage and profitability, just a nice ratable profitability as we continue to grow the top line.

Great. That's helpful. Again, I mean, you mentioned SG&A leverage. Are there opportunities for eventual R&D leverage?

Yes. Over time. Short term, we are focused on our R&D initiatives. So that will continue to be the case. But as our revenue continues to grow, that could come down, but we still expect to be in the mid- to high teens of R&D for quite some time.

Okay. And Inspire V, what kind of impact will that have on the margins?

Yes. So with Inspire V, we are going to remove the sensing lead which is an expensive component of the overall system. The -- so we're going to reduce and eliminate that cost. The microprocessor is a little bit more expensive, but net, we will have accretive improvement to our gross margins.

Great. And then I guess, Tim, utilization in 1Q came up as a concern for investors. I guess, can you talk about what you saw in 1Q in terms of center utilization. And I know you've commented that you're starting to add more community centers. So maybe talk about the different types of accounts and the different types of utilization that you're expecting over time?

All right. We have 59 seconds to jam this in, but it's important. I think we knew that from the third quarter last year when we had the prior authorizations, and we didn't utilize our capacity with ENTs in the third quarter to the latter half of the third quarter. So we pushed a lot of implants into the fourth quarter. Combine that with the usual seasonality with the high deductible insurance plans, we did a lot of implants in the fourth quarter. And specifically between Christmas and New Year's, we had all the ENTs working strong. We're doing implants on Saturday and the pushback was going to be we're going to have a fatigue factor in January, which we saw. And so we knew that we were going to have limited procedures early on in Q1. We got back to our rate as we got to February and March and as we knew going at the Q4 earnings call, we make sure people were aware we're going to have mid- to high-teens seasonality in the first quarter, and there was obviously a disconnect there that was challenging. We certainly always want our utilization higher. But as we got into the quarter, we also see the progress being made and with the same data points, we had confidence to be able to increase our revenue guide for the year 2024. So we do see the utilization growing throughout the year, and we're very excited with everything that's happening. And again, the fundamentals of the business remain very, very strong as we continue to scale and take care of patients, and that's driven by the high demand for our therapy as well as the strong patient outcomes that we're able to receive with Inspire therapy.

Okay. I think we're out of time. Tim, Rick, thank you very much.

Thank you very much. Very good.