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

Welcome back. I'm Larry Biegelsen, the med tech analyst at Wells Fargo. And it's my pleasure to host this session with the management team from Inspire Medical. With us, we have Rick Buchholz, the CFO; and Carlton Weatherby, the Chief Strategy Officer. It's going to be a fireside chat. If anybody has a question, just raise your hand, and we'll call on you. Rick and Carlton, thanks so much for being here.

Thank you.

Thanks for having us.

So Rick, let's start off with the outlook you provided on the Q2 call. At the time, you were comfortable with consensus in the third and fourth quarter. Are you still comfortable with those figures since they've climbed a bit, I think, since the earnings call?

Yes. Thanks again for having us, Larry. We do not see a material change in those estimates. And at the time of our earnings call, we did state that we believe Q3 and Q4 consensus revenue is reasonable. So yes, we're still comfortable with the second half of the year guidance.

And when we look at the raised 2024 guidance, it still seems a bit conservative, especially in Q3, given your aspiration to increase utilization quarter-over-quarter. Talk about what's assumed in your second half outlook for things like the Inspire V launch, competition, price -- so what are some of the puts and takes on the guidance?

Sure. So what's implied in our second half of the year guidance is our typical fourth quarter seasonality driven by the high deductible health plan contribution that leads to a strong fourth quarter as well as the footprint expansion of adding 52 to 56 new centers and the addition of 12 to 14 new sales territories per quarter. We are also hiring additional field clinical reps to help with case coverage as well as site training. So we're going to continue that. We have not assumed the Inspire V launch in our guidance at all. We are expecting pricing to be flat for the rest of the year. And we don't expect any competition until 2025 at the earliest. With that being said, we'd like to separate guidance from utilization when we have those conversations, but it is our aspiration to increase utilization both sequentially and year-over-year.

Understood. And Rick, what about the key puts and takes for '25?

It's still early in 2024, and we are just starting our 2025 planning. But as we sit here today at this point in time, we believe that 2025 revenue consensus is reasonable. But there's a lot of moving parts that give us confidence in 2025. So some of the items that we have confidence in for 2025 include our continued commercial expansion of increasing penetration at existing centers as well as adding new implanting centers. The continued targeted direct-to-consumer programs that have been very effective for us. The commercial payers continue to adjust their policies to expand -- for the expanding indications of AHI and BMI. We're also excited about our recent news on France. And so the OUS contribution of France and the U.K. will help drive 2025 revenue. In addition, we believe that there is an influx of GLP-1 patients that will lose weight and thereby qualifying for Inspire therapy on a longer-term basis. The launch of Inspire V will also -- will help in 2025, the continued progress we were making with the PREDICTOR study that Carlton will touch on. And then finally, pending any approval in 2025, we may see some competitive trialing in certain academic centers. But given the uncertainty around coding and reimbursement, we think that might be pretty limited in the early years.

That's helpful. But we'll get to PREDICTOR in a bit if that's okay. Rick, one other financial question. Probably the biggest surprise on the Q2 call was the margins and the raised guidance for earnings. We -- back into an operating margin in Q4 just under 9% for Q4 of this year based on the guidance. Is that a good starting point for 2025 in terms of profitability? Or how should we be thinking about the pace of improving operating leverage over the next few years?

Yes. Great question. So as I mentioned earlier, we have seasonality in the fourth quarter. So we generally have a stronger Q4 with the high deductible plans that reset them in the first quarter. And so I would not straight-line Q4 operating margin as a starting point for 2025. But with that being said, we're going to continue to invest in therapy adoption in 2025, but you can expect that we'll have improved profitability on an annual basis over 2024. But I'd also specify that, that does not mean we're going to be profitable in every quarter because we do have seasonality that we've seen over the past several years. And to your point on longer term, we believe that we can reach about 30% operating profit margin on a long-term basis.

No revenue kind of -- you're not paying at a certain revenue point.

Correct. Not at a certain revenue basis, but on a long term -- certain revenue level, but on a long-term basis, we expect to get there.

Right. Right. Okay. Let's switch gears to commercial activities. You're expecting 52 to 56 new centers per quarter in the second half. The recent run rate is higher. Why do you expect to slowdown in new center adds?

Sure. I'll start with that and Rick can say. Thank you, Larry, for having us, been a great meeting so far and really engaging discussions. So as we think about our sales force expansion, we don't have a target number in mind in terms of what level of territory managers will have across the country. As you know, we have kind of a national footprint. And there's ample opportunities across many markets for us to have, what I call, greenfield territory additions. And so we're still investing heavily in our sales force. Last quarter, we had a record high of 81 centers that we added. We have guidance, as Rick alludes to, 52 to 56 per quarter, which we tend to exceed and we'll continue to assess as we go into our [indiscernible] planning. In terms of why it would slow down, I think there's 2 arms of that. One is how do we think about the ample opportunity within new markets and continuing to invest in the team. The other is getting smarter in the way that we launch new accounts. And as we look across the Pareto chart of our utilization and implanting centers, we have different tiers and different quadrants that are implanting at different rates, and we're able to look at the data and be predictive and over time, kind of the patterns that we want to recognize to get smarter in terms of the new accounts we've launched. And so what we're building in criteria to ensure that we're launching the right way, and we're being more selective in the sites we've launched, ensure that they have a few things in place: One is administrative support. There's buy-in for this program to be a priority for the institution and that they're willing to make investments in people resources to continue to grow the program. Secondly is ensuring that we have this connection and a trusted partnership across E&T and sleep, both those who are doing the procedure as surgeons, but also those who are referring and managing the patients across the board, ensuring that the patients have the best experience and the best outcome. And finally, ensuring that there is a strong and robust pipeline of patients so that there is a steady flow in a cadence that ensures there's confidence and credibility and so as we build in and get smarter around what launches should look like to ensure they hit the ground running, but we'll be more selective over time. But again, given the guidance that we gave 52% to 56%, we expect to meet or exceed that going forward.

That's helpful. International, Rick, you touched upon it. You had a nice quarter in Q2. It looks -- what was the $8 million?

$8 million.

Up almost 70% year-over-year. You gave a range for the year of 3% to 4% of revenues, I think, it's a big range, actually, when you do the math. With brands coming on, do you feel like you could be closer to the high end of that range?

I'd still stick with the 3% to 4% range for OUS. The U.S. is growing so quickly, but it's hard to keep up outside the U.S. But we're very encouraged by France. We're just starting the commercialization efforts there. We have a commercial team on the ground. And so that will be -- one of the components of driving 2025 revenue is France, as well as the U.K. We're very proud of the team in Europe and they continue to do a wonderful job with execution in Germany.

Good. All right. So look, Inspire 5 is approved. So that's an exciting opportunity for the company. So why don't we talk about that a little bit. Just maybe talk about the soft launch and what you hope to accomplish?

We're equally excited, Larry, about the Inspire V approval last month. And now we're getting into what we call the commercial and operational readiness phase to introduce this new product to the market. And part of that is what we've described as a soft launch on the back half of this year and a lot goes into that. But think of this as our ability to make sure we're getting real-time feedback from users to incorporate that into the training and preparation for full launch later in the year. And so we're going through the process with our commercial leadership team selecting sites based on a number of different criteria. And then we'll be learning from them real time to ensure that we're ready to hit the ground running when we have ample inventory, and we get moving forward. But Inspire V is a valuable product for us in the market for many reasons. On one end, as you know, we've said it reduces the time of the procedure. So we're taking out this costly component of the system, but also one of the elements of the procedure that is trickier in the extent of time. And so we're going from what we say is, on average, 60 to 90 minutes to do the implant procedure to 45 to 60 minutes. And so the time saving in itself creates increased throughput over time and efficiency. On the other end, as we talk about removing that since lead which is an unnatural part of the procedure for many ENTs because you're operating in the intercostal muscles, also removes some of the cognitive angst or burden associated with doing this procedure, especially for head and neck surgeons. And so what we're hearing is this increases the willingness of many new implanters, ENTs included to now take on the opportunity to add Inspire to their practice, which is a really important part of what we think about the growth that Inspire V can drive. And so we're excited about that opportunity.

Yes. I'll add on to that from the financial perspective. Part of our operational readiness is determining the pricing. We've not solidified that yet. That's one of the several components of our operational readiness. But what we stated on our most recent earnings call is that if pricing remains flat, it will still be slightly accretive on a gross margin perspective.

When do you expect the first implants commercial?

So we'll do a soft launch later this year until we consider that in the back half, call it, Q4, but full launch later into '25 as we take learnings from the soft launch and factor those into the full launch plans.

And full launch, if you're doing this soft launch later this year, how long will that last? When can we expect the full launch?

We haven't set a date partly because we want to make sure we're taking the feedback from the soft launch and that's fully factored into every element, including clinical training of our surgeons, the training of our field teams, elements of contracting. So there's a lot that goes into that, that we're looking to make sure we have our arms around and so haven't set a date yet, but early in the year is the target.

And the reimbursement, Rick, the coding, is that -- that's all in place?

Part of the strategy that is just equally important as of the inventory side. And so we haven't nailed down what that strategy will be, but something that we're factoring in will nail down by the end of the year on what exactly is that coding and reimbursement strategy for Inspire V.

Got it. And the inventory you talked about, you expect centers that have inventory of Inspire IV on hand to work that down?

Correct. Similar to our other product launches when we went from Inspire II to Inspire IV as well as when we introduced the Bluetooth remotes and also going for polyurethane to silicone leads. Our customers don't have a lot of inventory on the shelf. And so we expect them to burn that down as we complete and start the full launch in 2025.

I can see how Inspire V increases utilization, the time savings. I've heard the same anecdotes, Carlton that you talked about, the lead, the central lead. Do you have any evidence that this will bring new surgeons on board.

We do. And a lot of this is in conversations that we can have increasing now as the product approved with some of our KOLs or advisory committees to say they're excited to have increased input, but they also are excited for their partners today who are not doing the Inspire procedure who are kind of sitting on the sidelines to now get trained and onboarded because it's less complex and shorter times in terms of the extent of the procedure. And so we do see that being an important factor, more implanters, which removes some of the capacity constraints in the account and add more patients to be able to be treated within the community.

So Rick, just before we move on, I just want to button up the coding part. You're confident that the physician fee and the facility fee, the hospital and ASC, whatever code you go with, it's not going to be meaningfully different from the [indiscernible] today.

That's correct.

Okay. You're confident in that?

Yes. That's an important point, Larry, yes, both in, again, 2 arms of reimbursement, the other facility fee both hospital and ASC and then you have the physicians, and we're confident regardless of the scenario, how it plays out, this will be at least net neutral, if not value accretive to, on both sides of the equation for reimbursement.

Potentially value accretive. Okay, interesting. And pricing, Rick, will that be determined for the soft launch or...?

That will be part of our launch plan.

Full launch?

Yes. Yes.

So we'll learn that with the soft launch or the full launch.

Full launch.

Got it. Okay. Carlton, I know you've been chopping on the bit to talk about PREDICTOR.

We're excited about PREDICTOR. It was this time last year when we had an initial subset of 300 patients, we did an analysis on, and we saw some correlation to complete concentric collapse, BMI and pharyngeal width. What we said was we wanted to add more patients to that study for validation and power. And early this year, we included closing enrollment of an additional 300 patients, and we've been doing that analysis internally. And we're excited later this month at the ISS -- ISSS meeting in Miami, we'll be presenting some data. And again, the underlying thesis, the concept here is that we have this DISE procedure that is a step in the process for most patients and providers. However, we think it's unnecessary for certain cohorts or phenotypes of patients who likely don't have complete concentric collapse. And so what we're seeing and having conversations with payers on is are there alternative measures or ways to assess the anatomy. And if so, can you remove the step of the process being a DISE procedure to get the patient to treatment sooner. And there's a lot of value to the patient. They today have to take a day away from work and home. They have to go under anesthesia. And they have to then be told after a 20-minute procedure that they're cleared for an implant therapy. For the physician, it also takes up time that they could be using to do the Inspire implant instead of doing multiple DISE procedures. And so as we talked about capacity, but also streamlining the process to get patients treated more quickly, this PREDICTOR data can help us inform and have conversations to get there more quickly. So we're excited about the outcomes and more to come later in this year.

That's helpful. So ISSS will be -- you said the full data set?

ISSS will present some data and it will be likely an abstract.

Got it. Okay. So GLP-1s, Rick, you talked about earlier -- Carl, but you alluded to it, Rick, earlier about 2025 starting to bring patients into the funnel. I guess the question is, do you think in '25, it starts to be a net positive. I mean I think we can see how it expands the long-term TAM or the long-term opportunity. The question is just timing. You think that in '25, it can be a net positive?

We do. And again, we've been consistent and over the last year of GLP-1 announcements and data and report outs. Our take has been one that it will bring more patients into our funnel and to expand it. And that there will be very few, if any, that fall out of the funnel. And so we think it will be a positive starting in 2025 as a measure of increasing awareness of obstructive sleep apnea just as a disease that needs to be treated for patients today that unfortunately aren't diagnosed. As you know, Larry, the diagnosis rate for obstructive sleep apnea is 20% on average. And so just the ability to increase the awareness and drive diagnosis is a net positive for us. Let alone see the patients today who enforced or screened out of being eligible for our therapy because they have too high of a BMI or that dreaded complete concentric collapse that we talk about a lot. And so what we're seeing already, both anecdotally, but also with data, some of which we put in the back of our earnings presentation is there are patients who are going on a GLP-1, losing weight, seeing a reduction in the lateral wall collapse and therefore, being screened as eligible for Inspire therapy and getting treated. And that just reinforces our thesis from the beginning that this will be a net positive and bring more patients into the funnel. And then we do believe that's starting now and will be a tailwind going into 2025.

You're going to see our average BMI is roughly about 29 and in those slides that we included in our earnings presentation, you can see that band of patients going under 35 BMI is increasing in that sample size. So that gives us continued encouragement that we're going to continue to add patients.

And I guess just a follow-up, why you don't expect a short-term slowdown in procedure demand as GLP-1s move into the OSA treatment paradigm?

We get that question often. If more patients are coming into the funnel, does it take longer for them to get through it now that GLP-1 become an option. And our answer there is still no and that's been validated. And the reason being is many of our sleep docs are saying, if a patient comes in with obstructive sleep apnea, they still need to address that disease, although GLP-1s can be helpful and secondarily have a benefit, they don't want to operate and just offer them that alone to likely. We'll see it offered as a concomitant therapy, both CPAP and GLP-1, which doesn't delay the funnel for us because we're still -- the next option for them, assuming that they're noncompliant to the CPAP, which is today about 50% of patients. And so no slowdown in terms of an added step in the process, just one that is -- will be used simultaneously with the CPAP from our perspective.

Okay. And nothing -- since the data was presented at ADA, there's nothing anecdotal that you're seeing in the field today. It's a little early.

Still early, and mostly just one-off comments, but increasing more data that we think is kind of validating our original position which is exciting.

That's helpful. All right. Competition, Rick, you touched upon that also earlier. How are you thinking about competition from other hypoglossal nerve stimulation technologies.

I'll start, and Rick, you can add on. Competition is -- for us help on the concept -- context that it validates the great work that Inspire has done for now over a decade, establishing a new therapy, building a new market. And as investors and innovators and entrepreneurs, begin trying to find opportunities that come into it. It just reinforces that this team continue to do great work. But we're not going to resting our laurels. And as Inspire V being one example, we'll continue to invest in innovation and focus on breakthrough technologies while also monitoring what's new and different and coming from a competitive perspective. And so there are a few competitors who are closer. We're still waiting and eager to see what their full data looks like, peer-reviewed publications that speak to core elements of what we've shown in the past when it comes to outcomes, both in terms of the reduction of AHI, but also some of the other elements that are really important, like device-related adverse events as well as explant rates. And we just haven't seen that yet so eager to see that data. And for us, it's more of a when the data comes out, what that looks like in terms of competitors coming to the market. But we're excited to continue to expand our leadership position when that time comes. Rick, anything to add?

Yes. As a reminder, we get approval in May of 2014. We got our first sizable commercial payer coverage in July of 2018, 4 years after FDA approval. And so it was not only our PMA clinical study, but it was also doing larger studies. We did a clinical study of 300 patients that was really part of what I would put in air quotes of required for commercial payers as well as we did longer-term studies, too. We had our 3-year data and our 5-year data. And then it wasn't until 4 years after we got approval when we started getting -- securing all the commercial payers that we now have today with really across broad-based coverage across the entire country.

So you don't think -- so some of these coverage decisions are for hypoglossal nerve stimulation. So I guess the question is you don't think that these competitors are going to be able to piggyback on those coverage policies. I mean...

Now you're getting out of my paygrade.

Also with me -- I mean, we've seen other categories. I can think of sacral neuromodulation when Axonics came out and they probably -- I think they probably piggybacked on Medtronic, I don't know.

It could be. But we've been in the market for 10 years. We've done 75,000 procedures. We have about 6,000 patients under clinical studies. And so we're really proud of our continued focus on high patient outcomes.

That makes sense. Do you think they'll be able to leverage the coverage?

Still TBD. And again, there's a lot of nuances as you think about like the actual descriptors of the code and how that maps to the actual product. And there's the experience that Inspire has had over the years, where you've seen that evolution as well, Larry. And so we don't want to diminish the prospect. And I like to say that Inspire's paved a way for many other players come in. At the same time, we continue to set the bar high, both in terms of having 75,000 patients that have been treated, 6,000 patients plus that have been in our clinical trials and again, launching new technologies and building a market, expanding our teams across every area of the business. And so we don't discredit the competition that is coming in, but we know that it's a hard work to do. It takes time. And the bar is getting higher and higher as we continue to expand the market and build out.

You alluded to it, Carl, earlier, about the dream trial that [indiscernible] what you'll be looking for, we've only seen kind of top line results, what specifically are you explants? What are you specifically looking for in the full data set?

I think one of the most important piece is just the true clinical outcome improvement. And we go back to our STAR trial, where the basis was based on what we call the share criteria, which is the reduction of AHI by 50% and below 20% being that baseline threshold. And so seeing that they show clinical relevance with the outcomes is really important. And then it gets into the other elements of complication and adverse events that we're eager to see. And they've shown subsets in different types of studies and some not randomized. And so we try not to overreact to data until it's comprehensive and peer review. And so again, we're eager to see it. And I think not just us, but the market, both the providers, the patients and the payers because they make the most important decision on that, how good is the data to show that this is safe and efficacious. And I'd argue the verdict still out, but coming soon. So we're excited to see it.

Well, I'm done with my -- through with my questions. You guys are very efficient. So I don't know, Rick, I'll give you or Carl the last word here.

Do you want to go first, Rick.

No, go ahead.

I'll just reinforce something that comes up in meetings is such a largely untapped opportunity. And GLP-1s, Rick mentioned that as a vector to continue to grow the market awareness, diagnosis. But there's other elements. So today, OSA is increasingly being added to the guidelines for other procedures. PFA, [hostile ablation] for atrial fibrillation is one example where patients who have that condition are now being asked to get screened and treated for OSA that brings more patients into the funnel. And today, as we look about consumer wearables, watches, more diagnostic assessment opportunities from those. Again, that brings more patients and people to be aware that this is the condition that needs to get treated. And the last thing I'll mention is home sleep studies in the past, sleep diagnosis and ultimately getting a sense of what the sleep study tells has had to go into a lab. Today, almost 2/3 of patients are going through a home sleep test, which is more convenient and doesn't rely on providers in the lab to have to take that on. And so all of these, we consider vectors that grow the market opportunity that we're leading in. So excited to see that and do our part to contribute to it.

Perfect. Thanks so much for being here.

Thank you.