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

All right. Good afternoon, everybody. My name is Mike Sarcone. I'm an analyst, and I'm the U.S. Medical Supplies and Devices team. And this is the session with Inspire Medical. With us from the company. We've got Tim Herbert, CEO; and Ezgi Yagci, Head of IR. So thank you both for joining us today.

Thank you very much for having us. It's been a pleasure coming to London for the first time at this conference. So thank you.

Yes. We're excited to have you. So I guess just to start, Tim will start high level for those in the room who aren't familiar with the Inspire story or those listening in. Can you just give us a brief overview of the company, your mission and talk about how you think Inspire is positioned to capitalize on the large market opportunity?

Absolutely. We're going to go back a little bit and talk a little bit about what the premise is of starting the company in the first place. And there's a numerous -- everybody, I think, is aware of CPAP or continuous positive airway pressure, which is the standard therapy for treating sleep apnea, where you wear a mask and it blows constant pressure to shunt the airway open and prevent obstructions during the night while you sleep. But we also know that's uncomfortable for a lot of people. And so while CPAP is a very effective and cost-efficient method, we needed to find a different approach for those patients who couldn't benefit from it. And literature shows it's as much as 50% of people just cannot benefit from CPAP. So that was the whole start of Inspire years ago inside Medtronic. And it was using the core Medtronic technology, which is a neurostimulation. And that's to stimulate the hypoglossal nerve, which will hold the airway open. So doing the same thing as CPAP, except instead of using pressure, we're using stimulation on the natural physiology of the body to stimulate a muscle and hold that forward. So after doing a first-in-man trial in the late '90s and early 2000, Medtronic went a different way and they didn't fund it. I was working on the project way back when. So yes, I've been working on Inspire since 1996. Not exclusively, but that's when I did start with the project. So after shutting it down, we worked with Medtronic to find a way to get this started again, and we determined to start a new co -- a new company, and that's when we formed Inspire Medical Systems in May of 2007. We spun the technology out. We already have the technology developed. We already had the first-in-man trial. So what we needed to do then is do our secondary trials in our pivotal study to really show the safety and the efficacy of using Inspire to treat obstructive sleep apnea. Since then, we conducted a series of trials. We got FDA approval in 2014, launched the product in the United States and over that period of time, developed reimbursement, the coverage and the payment with virtually all commercial payers in the United States, with Medicare, with the military and with the VA. And here we stand today with close to 1,500 employees. We have treated well over 85,000 patients with Inspire. And we're a public company. Of course, we rang the bell in 2008, have been quite successful. And now we're just at the point now of launching our fifth generation device since starting the company. So really, what we're focused on is continue to treat sleep apnea, those patients who are unable to benefit from CPAP and providing the highest level of outcomes with a safe procedure that patients use at a very high adherence rate. Did I miss anything? Please introduce yourself, Ezgi. Yes. So I am Tim Herbert. So yes, I've been with the company since the beginning, been working on this since 1996, I'm an engineering background. That's how I kind of got into devices. I'm awkward at these meetings, so I needed a very strong VP of Investor Relations to join the company and help guide us along, and I recruited Ezgi. And please introduce yourself.

Good afternoon. Thank you for having us. This is actually our first Jefferies London Healthcare Conference. So we're really excited to be here. My name is Ezgi, I head up Investor Relations for Inspire Medical. I started in the company in August of 2022. So just wrapped up 2 years there. Before that, I was actually a buy-side analyst for many years in your seats. So great to be here.

Awesome. That's great. And thanks for the overview. Tim, 10 years since approval, a lot of success and a lot of growth. And when we look at the annual opportunity, we're still only mid-single digits penetrated here. So it could be a long way to go. If we look out over the next 5 to 10 years, where do you think U.S. market penetration can go? And what are the catalysts to get us there?

I think the key to it is -- since the approval of 2014, there's no shortcuts. You have to earn your way all the way through. And reimbursement, you need large studies, you need 5-year data to be able to get the approval with the insurance companies. And we have obtained that and always maintain strong patient outcomes because that's the one thing that can just be disruptive to reimbursement, and that's the key driver. But now that we have reimbursement in place, we changed medtech a little bit. And here at the health care conference, but focus on the medtech side to it. Instead of using just the classic medtech marketing, what we introduced is direct-to-consumer. Because we know there's been a lot of patients that have been diagnosed with obstructive sleep apnea. They've been given CPAP device, but now it sits in their closet and they're not in the health care system. So you can't get the classic medtech marketing. We need to go out and reach out and find these patients. So we started doing just a little bit of radio. And after that, we started doing some local television. And now it's even evolved, so we do national TV buys, and we realized that we're not really hitting our demographic. So this year, we even changed and we've gone to more targeted digital streaming and targeting our message to build the awareness, build our brand. Yes, we want to make sure that we bring patients to our website who can get educated and want to pursue Inspire. But it's really about growing our brand and growing awareness. We're at the point now where you can say every sleep physician in the United States now knows about Inspire. Yet probably only half of them are referring patients. So we still have another gear to go to be able to educate our physicians. But again, as you mentioned, we're only small single-digit penetrated in our overall target market. And what's the limiting factor that we have is, we can bring patients to our website. We had over 13 million people come to our website last year. Just a tremendous model. Yes, we only did about 27,000 implants. That's incredible. Our limiting factor today is we only have so many surgeons that are in the operating room doing procedures. We need to grow that capacity. And if we can get the number of surgeons moving, increasing their utilization on an annual basis, that's really going to let us take that next step in growing the adoption. And we have years ahead of us, just in growing the target market that we have. We're about to -- we'll talk about Inspire V, we're just about to launch our fifth generation system that reduces the OR time, improves the procedure for the patients. But now we have research into other areas to even expand our indication further, really expand our target market. So years ahead of us. Touch on one other thing. We are a profitable company now, but that doesn't mean we're giving up on growth. And we're really heavily invested in growing the adoption of Inspire therapy. We're here in London, we've started to grow the adoption here in the United Kingdom, which is fantastic, and Europe is growing at a nice clip as well, but just years of growth ahead of us.

Okay. Great. And yes, the next topic I wanted to hit was Inspire V, and that dovetails well with the capacity topic. So you've already got FDA clearance.

We do.

Right. I guess can you talk about timelines? I think you're targeting a limited launch by the end of the year. And what you're doing now and as you ramp to the full launch?

Absolutely. So what Inspire V is. A key -- the key point to understand with Inspire therapy. To properly treat sleep apnea, the only time your airway collapses is when you inhale. So when you inhale, that kind of pulls air in and your airway can collapse when you're sleeping. So CPAP uses pressure to hold your airway open, but they also have what's called BiPAP or bi-level pressure. So when you inhale the pressure is high, when you exhale, the pressure is low, and that helps comfort a little bit. We do the same thing. But in order to do that, you have to know when the patient inhales. So we have a sensor that goes between the intercostal muscles with Inspire IV. But that's kind of an uncomfortable part of the surgical procedure for ENT, right? Ear, nose, throat doctors aren't used to putting sensors into the chest wall. So what we've done with the fifth generation, we've taken that sensing capability and put it on a circuit card inside the neurostimulator, similar to a cardiac pacemaker, a rate response of pacemaker. When you go jogging, your pacemaker goes faster. That's because it has an accelerometer inside measuring your aspiration rate. We're doing the same thing. Now the new fifth generation uses that accelerometer technology to measure respiration. So when patients inhale, we can provide stimulation. So the ENT surgeon no longer has to implant that sensing lead. Well that can -- the average implant time of Inspire IV today is between 60 and 90 minutes. Not having that sensor that immediately reduces the operating room time to about like 45 to 60 minutes, significant reduction in OR time. But more importantly, it removes the 1 kind of uncomfortable unnatural surgical aspect of the procedure. For the patient, the patient no longer has that sensor between their intercostal muscles. And while our safety is very strong, our revision rates are small single digit, but the majority of those revisions are due to that pressure sensing lead. So we're seeing an increase in reliability when we go to Inspire V. It's 1 less device in the patient's body. So it's a win for the patient. It's obviously a win for the surgeons because they don't have to implant it and it's a less OR time. They can do more procedures in a day. But how about us? And how about our investors? We're able to convert that sensing lead production line to make more stimulation leads so we can add to our capacity, and that's 1 less product that we have to manufacture. That gives us a reduction in our COGS, and we're going to be able to see an improvement with our gross margins by not having to manufacture that sensor because it's actually a quite expensive product. So fully approved by the FDA, what's limiting our launch today is we're no longer small. So we need to make sure that we have proper inventory to be able to launch this. We have the production lines up and running. We're manufacturing components. And when we have sufficient inventory or capacity to launch a product, that's when we will. But we will do a soft launch yet this year to be able to get a little bit of experience with it before we go into the full launch. But we're very excited about going -- taking this technology into the future. One of the things I want to mention on this is this is a platform technology. It's a microprocessor-based system. So as we go to Inspire VI and Inspire VII, it's only software upgrades to go to the next level. One example, when we go from V to VI, we're investigating using sleep detection. So it's my Christmas joke, right? Well, the device will know when you're sleeping, it will know when you're awake, right? It will automatically turn itself on when the patient falls asleep. That takes therapy adherence to the highest level. Again, as we talk about everything we do is about patient outcomes, and patient outcomes are driven by the utilization. CPAP can work if people use it, but we know the majority of patients just won't use it every night. But if we have a device that's inside the body and it turns itself on when the patient falls asleep, they don't know it's even working, and it's working all the time, and we can take outcomes to the highest level. When we get to Inspire VII and Inspire VIII, we're going to use our own AI, artificial intelligence, to determine what the proper signals will be and have a device that will auto program itself. It will be able to detect if patients are having apneic events. So pretty exciting times with the new platform that's just coming out now very soon.

Definitely, that is exciting. I guess one of the other things we've spoken about with this as well, given that it's a platform system, is given that you only need firmware upgrades to get to your next gen, do you think you're going to see faster cycles of innovation, shorter timelines between iterations on the product?

We can do -- well, certainly because developing the whole Inspire V platform, that takes a long time to be able to do that. With the firmware upgrades, depending upon the level of change, determines on the level of clinical evidence you need to be able to get the regulatory approvals. And so some are going to be shorter than others. But certainly, our intention is to have just a steady cadence of technology upgrades to help the patients and even improve outcomes even further.

Understood. And reduce procedure time helps with the capacity issue. And then one of the other things you're working on is finding an alternative indicator of CCC, or complete concentric collapse, right, rather than having to do a DISE before the procedure, which a lot of surgeons complain about is a constraint. So we saw some data from your PREDICTOR study a month or 2 ago. Can you comment on the efforts you're making there?

Yes, let's kind of ground this a little bit when we talk about complete concentric collapse. Remember, we talked about Inspire stimulates the hypoglossal nerve that moves the tongue forward. That's -- the hypoglossal nerve innervates the genioglossus muscle, which is the tongue muscle. So when you stimulate that, that moves it forward. The challenge we have is a lot of patients who have sleep apnea have a higher BMI. And when you get a larger BMI, you get a larger neck circumference. And the fat pads are on the side of the neck, if you will. So when they laid on, they fall in from the side. It's called the lateral wall collapse. If you take a lateral wall collapse and a tongue-based collapse, that is called complete concentric collapse. So while we can move the tongue forward, hypoglossal nerve stimulation just does not address the lateral wall collapse. Patients need to lose weight. Ironically, if you go on a GLP-1, everybody has kind of heard the discussion on GLP-1s over the last couple of years. The benefit that that has for patients and to help them lose weight, when they lose weight, it reduces their neck circumference and reduces the lateral walls and identifies those patients that have the tongue-based obstructions. And that's what Inspire teaches today. We don't believe GLP-1 is going to solve all the world's problems. So therefore, we need to have a device that can treat high BMI. So we're going to have a device that does 1 channel. It stimulates the hypoglossal nerve to move it forward another channel, will pull the strap muscles down and open up the lateral walls and allow us a dual-channel device to be able to treat high BMI patients. The Inspire V device being a platform already has both channels in the device today. We need to change the firmware to be able to access those and put another connector block, but we already have research going to be able to start our process with a dual-channel device. So very promising to help a whole another group of patients that are not included in our TAM today.

That's great. Have you told us which number Inspire device that might be?

We haven't identified yet, but for lack of a term, we'll say 5.5. Yes. But it's not -- it's a different variant that's a dual channel Inspire.

Got it. And then I did want to touch on the competitive landscape. You've been the only player in the U.S. market since 2014. We do have a competitor who you compete against in overseas markets who will be coming to the U.S. in 2025. And then the third competitor who announced some data recently, and maybe they're around 2026. But just give us your thoughts on what the changes to the competitive landscape mean for the market and for Inspire?

Well, I think that sleep apnea is just a tremendously large target market that we're chasing. It's -- we've been very successful in the growth in Inspire. And with that, we're certainly going to get competition. We know there's going to be people trying to emulate it. We know that there are a number of companies in development, and many are going to be several years or many years away from coming to the market. But first entrants probably will come relatively soon. I think there's 1 in review with the FDA. And if they get approval, will look to launch in the near term. I think there's -- we'll continue to take care of our patients, continue to develop our technologies and focus on those areas that we know are essential to be successful, such as sensing and closed-loop stimulation, I think, is one of the features that are really -- significantly differentiates us from any of the competitors. We have a device that is single battery and lasts 11 years without the need for any kind of recharging, which is inconvenience for patients that we don't want to go down that pathway. Ironically, we are -- first [ commercial use ] was 2014. And now 10 years later, the first patients are actually starting to come back for the replacement devices. So it's a whole new revenue stream starting up. So we welcome competition. We are going to continue to be very sharp on our continued R&D activity. We have a whole digital program, which is a cloud-based patient management system called SleepSync that helps physicians manage a lot of their patients. And it's -- when new products come into the market, again, there's no shortcuts. They're going to have to show the clinical evidence is equal to Inspire. They're going to have to show their peer-reviewed publications, and they're going to have to convince all the payers to be able to provide coverage. And they can't use Inspire data, they need to really show that the therapies that they're presenting are going to be able to warrant the same level of coverage from the insurance companies, and that takes time.

One of the things I have heard that competitors speak about is when they did enter the German market, and we're the second player there, that they actually, by their estimates, market growth accelerated pretty meaningfully, like maybe a near doubling. Is that something you think we could see in the U.S.? Not necessarily a doubling, but...

I think that's what you want with any competitor. You want them to have the level of sophistication that they can actually come in and help grow the market, not just come in and try and compete for share. And so that's what we would expect for these competitors to really kind of not come in and just say, I'm going to take Inspire share, but we're going to come in and continue to educate about the market, continue to educate around the use of electrical stimulation or hypoglossal nerve stimulation for the treatment of sleep. That does grow the market because it builds credibility to the core technology. I think in sleep, if you kind of look at the new companies, ResMed and Respironics, they grew together because they created an awareness around the use of CPAP and then need to treat sleep apnea. And that's what we kind of would count on with competitors. And again, they got some time before they get to market and get to the -- be in a position to contribute like that.

Okay. We've got a little more than 5 minutes left. I just wanted to check if anybody in the audience had any questions. All right. We'll keep going. We can shift to profitability. Actually been pretty amazing what we've seen this year. I think you started the year saying you might have $0.10 to $0.20 EPS, then it went to $0.60 to $0.70, now $1.20 to $1.40, which is a pretty significant rise. Can you talk to us about what's driven that sharp increase in profitability and how we should think about kind of the go-forward improvements?

Yes, I'll take that one. So yes, we're very pleased with our operating leverage and our profitability this year as well as the strong cash that we have been able to generate for our shareholders. When you think about this year versus last year, keep in mind, in 2023, we expensed about $5.7 million in Inspire V prelaunch inventory, which was booked through the R&D line. That did not repeat this year. We also had a little bit of a dip in stock-based compensation between Q2 and Q3. So that helped a little bit. We're able to keep DTC spend flat year-on-year and with the way that we've reconfigured the business. So 50-50 TV-digital versus more heavy reliance on TV in previous years. We're able to get some savings and operating leverage there. As you look ahead to next year, I think you should assume that DTC spend will be flat to slightly up. We will continue to leverage our sales and marketing team. So we're going to continue to hire -- continue to take up R&D. We're going to continue to invest in growth, but you should expect that we will show improvement in operating margins.

Got it. And I guess, we'll just kind of hop around a bit. But we talked about the efforts you're making to improve capacity on the surgeon side, but a lot of what we see are some of the best volumes come from centers where you have an ENT and a sleep doc working together. So maybe can you talk about some of the efforts you're making to improve capacity and simplify the process for sleep docs?

Absolutely. I think the key is we know there's great demand out there for the therapy. We know there's a tight window to help them get through the surgeons to have the procedure. And when we solve the capacity issue we have with surgeons and we will, it identifies the next step, which is the sleep physicians have to manage all these patients. So we're developing the SleepSync system, again, cloud-based patient management system, to be able to handle all this information. Today, patients can go to another phone, they have an app with Inspire, the information from the implant via Bluetooth and the remote goes to their app on their phone, which goes to SleepSync in the cloud. The new physician programmer with Inspire V, physicians will use their own laptops and actually log into SleepSync and have the programming screens download to the computer. So any change they make is automatically stored into SleepSync. And as we continue to monitor patients' quality of sleep after an implant, that information is now provided into it. So our SleepSync system will be to a point where it can monitor how the patient is doing and send notifications to a center if a patient isn't using their therapy or if there's something not correct that maybe the physician should call the patient and check in and see how they're doing. And I think there's going to be a value to that. And if we can get to a point where we can show value to the physician, we can -- we believe that will introduce our subscription model for SleepSync. And to be able to make sure that we maximize therapy utilization. We maximize patient outcomes, and that's going to help grow -- further grow the adoption of Inspire, yet make it easier for the sleep physicians to manage the larger number of patients that they will be required to manage as we move into the future.

Got it. And I think you also have some efforts around -- I don't -- I may butcher the acronym, but advanced practice program, was it APP?

Well, part of the whole -- getting patients through the surgeon is we kind of optimize the surgeon's time. And we can do that both in the operating room by making Inspire V a shorter procedure, but also look at what do the surgeons do outside the operating room in the office. And if they're spending an hour, 2 hours talking to an individual patient about what is Inspire, what to expect in doing some of the work to prepare for a prior authorization, well, we can teach to APP, what we call an Advanced Practice Provider. A very experienced nurse, if you will, that can provide the information and education to the patient in the first visits, help them get through the prior authorization process, thereby offloading the ENT surgeon so the surgeon can spend more time in the operating of doing procedures, which is the restrictor for our growth today. We need to kind of continue to expand a surgeon's ability to do more cases in a day. We highlighted the surgeon a couple of weeks ago did 9 cases in a single day, right? Had 2 operating rooms and was able to go back and forth between the 2 rooms. We highlight that not because it's an amazing accomplishment. It's a great step. But that's really kind of where we think the future is, is having surgeons to spend more time in the operating room to do more procedures in a day. And then count on the people around them, APP to help the education, the sleep physicians afterwards to be able to manage the patients. And that way, we can maximize therapy outcomes, yet continue the growth in the adoption of Inspire. So it starts flashing at you when you're at 0.

And they've given you the hook.

I got the guys in the back.

All right. Thank you very much. That's all the time we have. So Tim, Ezgi, thank you for being here.

Thank you for having us. It's lovely to be here in London.

Great. And for the audience, thank you for your interest.