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

All right. Perfect. We're going to get started here. My name is Adam Maeder, I'm one of the med tech analysts here at Piper Sandler. Very pleased to introduce the management team from Inspire Medical. With us, we have Tim Herbert, Founder, President, CEO and Chairman; and Rick Buchholz, the CFO, and Ezgi Yagci from Investor Relations there in the audience. So thanks so much for joining this team.

Thank you very much. It's great to be here again. We love coming to Piper every year for the tree lighting, and it's fantastic to be here and it's just a great set of meetings to talk to everybody. So thanks.

Of course. We're thrilled that you can make it. Maybe just to start, I wanted to ask about the Q4 guidance and some of the puts and takes there. You had a very strong Q3 print. You beat the top line, I think, by $5 million. You crushed numbers on EPS. But the full year guidance raise was only about $2.5 million at the midpoint and the implied Q4 guidance does suggest a deceleration in growth. I think you called out hurricanes, IV solution shortage, perhaps some just kind of typical conservatism. But maybe just unpack the Q4 outlook for us in a little bit more detail.

No, sure. Briefly, we'll just really touch on, I think, we just had some concerns about the impact of the hurricanes, albeit they're regional. We had a lot of employees affected by that, physicians and certainly patients. And it has an impact, not only front-end appointments through the sleep endoscopy, the implants and follow-up. So we're being -- kind of make sure that give those people a chance to get things back together. We have enough time to try and get a lot of that scheduled in those regions. But until we really got a chance to really kind of lay that out fully, that's why we kept the top end where it was and we just increased the lower end that provided the confidence in the guide going forward, but recognizing that, that impact regionally was there, and we're trying to work through that. IV bags, less of an impact. I know there are still centers that are delaying elective procedures. But you go back to the COVID days, we're treating sleep apnea, we're able to get our cases scheduled. So I don't think the IV bag is really going to have too much of an impact. We're working hard to try and get those regional cases in the Southeast rescheduled.

Okay. Perfect. It's that time of the year. I think you referenced the tree lighting, Tim, but I'm going to ask about 2025. So I think on the Q3 earnings call, you said you were comfortable with where the consensus stood for 2025 revenue. I think that's $950 million or so. Is that still the case today? And then just high-level puts and takes as we think about the top line for next year?

I think the terminology we used was -- it was not unreasonable. Is that how we said that? And I think that, that's -- we stand behind that. That's true. We're not putting out our guidance right now. We'll be talking about that soon, but we do think that people are in line right there. We do have a lot of activities coming out in next year, which we're so excited about. I know we'll talk about Inspire V. And so that's coming up. And depending upon the timing of the launch of that, I think we will see a little bit more of a back-end loaded 2025, if I go to that much detail. But I think that's pretty traditional for us anyways, but with the launch, probably has a little bit of an impact. But in the grand scheme, I think that we don't -- again, we don't think that overall number is unreasonable.

Okay. Perfect. And I guess a similar question on 2025 P&L expectations. I have the Street modeling GAAP EPS of $1.95. Hopefully, that's a good figure. Any reaction there? And obviously, the leverage this year has been fantastic. Just how do we think about leverage in '25 and going forward?

Sure. I'll take that one, Tim. So we are a growth company. We have been a growth company, and we've now transitioned into profitable growth, which we're really excited about, the profitability that we've seen in 2024. But we're going to continue to invest heavily in our business to help support the top line revenue growth. But at the same time, we expect that we'll have continued improvement in our profitability and our cash generation on an annual basis and on a go-forward basis.

Okay. Let's move on to Gen 5. Obviously, a lot of questions there. And I guess the first question that I'll throw at you guys is where are we in terms of launch at this point? You have FDA approval. Have you officially commenced the limited launch? Have you done any implants? How is it going thus far? Just any comments there?

Let's back up a little bit. Let's talk a little bit about what Gen 5 is and the Inspire V neuro stimulator, our fifth-generation Inspire platform. What we've done with it in the past, everybody knows we're a closed-loop stimulation. So we sense respiration and we provide stimulation to the hypoglossal nerve to move the base of the tongue forward when the patient inhales, thereby preventing obstructive events. And we have a stimulation lead that goes to the hypoglossal nerve, a neuro stimulator. And previously, in Inspire IV and prior, we have a sensing lead that gets placed between the intercostal muscles and our surgeons, tend to be ear, nose, throat, doesn't talk about placing a sensor in the chest wall. So what we've done with the fifth generation is taking that sensing capability and putting it inside the can of the neuro stimulator using an accelerometer, very similar to what you'd see with the cardiac pacemaker in where a responsive patient, where it senses respiration and adjusts pacing rates. We're doing the same thing, except we're sensing that respiration and being able to provide stimulation synchronous when the patient inhales. So really excited about the V. We submitted the data to the FDA along with our qualification. FDA has approved it. And so we are just gearing up for launch right now. It's really about operational readiness. The limiting factor for us right now is making sure that we have proper inventory levels to be able to launch in the United States. So we're building our product as we speak, and we're going to be targeting that for full launch in 2025. The good news is we will be doing our soft launch yet here in 2024. We're very excited about that, and we'll be able to talk about that more in the very near future. So everything looks good. We're gearing up for V. It's going to be a game changer, when it comes to market, and it really brings a new platform of technology to allow us to springboard into Inspire VI and VII and VIII beyond that. So pretty exciting and more to come in the near future.

Okay. Great. So it sounds like, Tim, no comment on soft launch, whether that started or hasn't started.

In the U.S., we haven't started the soft launch, but it will start yet this year.

Okay. Perfect. One of the questions that we often get on Gen 5 is just reimbursement strategy. Specifically what code you're going to use, now that you no longer have the pressure sensor lead, which you just talked about. So anything more that you can tell us at this point in time around reimbursement, coding, strategy?

I think that there's a little nuance in the language that we're working through with CMS and the MACs and the commercial payers, and that is all coming to a head pretty soon as we're getting into the soft launch part of it. And the key is making sure that we have the proper code to be able to support the patients. And it's not only the hospital reimbursement, but also the physician reimbursement. We don't think it's going to have a real material impact either way on the way patients are treated or our business going forward. But we're going to continue to get this work through with the MACs and the payers, and we'll be able to talk about that after we start the soft launch. But again, we don't have a great amount of concern on the final coding strategy, but we want to make sure that we vet that with the payers before we kind of come through and release that with all the investment community.

Okay. Great. And I think you've said you're not going to take price with Gen 5, but you've also said that gross margins should benefit from the Gen 5 system accretive to margins. Rick, maybe just any finer point that you want to put on that commentary?

Yes. I mean it's correct. With pricing being flat, consistent with our current system. It is still gross margin accretive. And then as we have the full launch in 2025 and over time, we expect to see continued gross margin improvement.

Let me add to that, if I can. I think that's key -- us not having to manufacture that pressure-sensing lead, there is obviously a key manufacturing savings right there from a cost standpoint. But it's also the #1 cause of patient revision. We're going to see a significant increase in the reliability of the product because patients don't have that sensor. And the physicians obviously don't have to implant that sensor, too. So a lot of benefits are going to be coming with that as we move forward.

One of your earlier comments, Tim, is around kind of having inventory levels ready to kind of push firmly out of the gates. I'll try my luck here. I know it's a 2025 event, but any finer point that you want to put on it? How is kind of the manufacturing of the system going? Are you happy with it? Or are there potential bottlenecks there?

No. We're going to a redundant system. We procure the neuro stimulators from our partners, and we're going to have multiple parties being able to manufacture this Inspire V device. That certainly helps with patients to ensure that we have product available, but it does give us capacity as well with having multiple vendors making the product. We are working through the manufacturing right now on the first vendor, getting that up and running. We're not small anymore, so we need to make sure that we have sufficient inventory to be able to support the lot. We don't want to do a start/stop. And so that's really kind of the key part of the operational readiness. Second part of it is, while we didn't do a price increase, the system level pricing is the same. So it's still talking $24,800, but that is moving a lot of the cost of the sensor into the neuro stimulator. And so there is a contract update with all of our centers. We will train all of our centers as well as train our own internal team. And so it is a process to be able to launch going from 4 and launching into 5. But I guess the real key is make sure we have the proper inventory prior to doing the full launch.

That's good color. I wanted to talk about another tailwind that, I think, could impact the business in '25, and that's PREDICTOR and removal of DISE from the funnel, at least for some patients. So I guess a multipart question here. Are you happy with the data that was presented at ISSS a couple, I guess, months ago at this point now? Do you see opportunity to further improve those figures? And then you have had a couple of payers remove DISE from policy. So maybe just double-click on kind of where you stand and how quickly other payers could convert?

Absolutely. Yes, yes, and the last one I need explanation. No, we are happy with the data that we've seen. And it was backed up at the AAO meeting, American Academy of Otolaryngology, the ENT Society meeting where we presented some of this data along with the International Sleep Surgical Society meeting that ran in parallel with that. The data is good. We want to be able to help patients who have a lower BMI. They just don't have a lot of value in having a sleep endoscopy. And there are other ways that the physicians can assess whether those patients will have the lateral wall collapse or what's known as complete concentric collapse. And patients, really, with a BMI less than 32, from the data, really don't need to have a sleep endoscopy. And so those patients don't really see a value in having that added procedure in the middle of it. So what we've done with this data, and there was a couple of other abstracts that came out complementing that data at the same meeting is go to the payers. And because the policies that the commercial payers and Medicare have is that patients must have a drug-induced sleep endoscopy. Well, that's not necessarily required in the policy. It's important that the physicians assess whether the patients are proper for receiving Inspire without predicating what procedure they used. And so what we're doing first step with the payers is having them remove the specific requirement to say you must have a DISE. And so a lot of payers have already done that, and we're making good progress with having them remove that from the policies. Now the ENT can do the assessment of if the patient is proper for Inspire and then submit the prior authorization request to the payer with the method that they use to make that determination. And if it's not a sleep endoscopy, so -- we have the data to support that and we're just in that transition process right now. But the message is patients with a BMI less than 32 don't necessarily need to have a sleep endoscopy because again, they don't have a large neck circumference, the likelihood of having lateral wall collapse is really low. And so that really streamlines the whole patient process. It makes it more efficient for the ENT surgeon, gives them more time to do additional surgical procedures. And our limiting factor today is we don't have enough ENTs in the operating room to be able to do procedures. We can get the operating room time. We can get the OR suite. We just need more attention from the ENTs to be able to do more procedures to handle the high demand from the patients that we have. And sleep endoscopy is just one more method that we can really help the patients and streamline the process.

That's great color. One follow-up there would be, so Tim, I think you said patients [ with ] BMI of less than 32, most likely do not need sleep endoscopy or DISE. If you were to look at kind of the clinical literature that's out there, I mean, what proportion of your kind of target patients does that comprise? Is it 50%? 70%? Any thoughts?

Yes. It's probably more -- so based on the insurance policies than it is on the literature, in the early clinical work, the STAR trial, we actually limited BMI to 32. Since then it kind of moved up to 35. When we received approval from the FDA in 2014, there is no BMI restriction in there. It's all about the physiology of the patient and is it complementary to an Inspire implant, but the FDA did not even specify DISE. So when the insurance company started writing the policies, they often put a limitation of BMI at 32 or BMI at 35. Right now, we have the warning with the FDA is up to a BMI of 40. That doesn't mean we implant patients up to 40. It means they're eligible if they have the proper anatomy. But over these 10 years then, the majority of our patients all have a BMI pretty much below 35. So it's -- a great percentage of our patients are BMI 32 or less that going forward will not necessarily have to have a sleep endoscopy procedure. So it is going to be quite impactful, especially for the volume of implants that we do today.

That's good color. You touched on one of the limitations to your business right now, capacity constraints related to number of surgeons. And there's a lot of demand for this procedure. That's clearly not the issue. It's getting more surgeons trained. Just talk about kind of the initiatives that you're pursuing to kind of train more docs. I think you're focused on training more residents, more ENTs more broadly. Just talk about the progress you made there. And does Gen 5 help with making the procedure more attractive to ENTs?

Yes. I think we start with the surgeon themselves and look, where do they spend their time, and how do we maximize their time in the operating room. So as an example, when a patient comes in for the first visit, they're going to want to sit down with a surgeon. They're going to want to understand what the therapy is, what the expectations are, will my insurance pay for it, how long is this process going to take. Well, we've been training advanced practice providers to be able to provide that service, to really help build efficiencies, to really help educate the patients who deserve to have that communication, but it doesn't necessarily have to be the surgeon that provides that information. And APP can actually serve as a navigator. I think we've trained over 250 so far. We still have additional training yet this year and bring the total to well over 500 or 600 of APPs who are helping the overall process. So step one, be more efficient with the ENTs outside of the operating room. Then we get inside the operating room, where we really got to become more efficient, too. Number one, experience works. The more cases that you do, the more proficient you are and it reduces the OR time. We're always talking about, on average, our times right now are 60 to 90 minutes. The top surgeons will do it much quicker than that. We have 2 surgeons set the record, they did 9 Inspire cases in 1 day, right? And they did it with 2 OR suites. And so as they're cleaning one room, they go to a different suite. We highlight that not because of what a great accomplishment is, but what the trends are going forward. You're going to see that more and more. And that's with the Inspire IV device. So as we go to Inspire V, we're going to get a significant reduction in OR time because they don't have to implant the sensor. That's going to build efficiencies and allow them to do more cases in a single day. And go back to what we just talked about with the sleep endoscopy. If they don't have to spend time doing sleep endoscopies for the majority of patients, that's more time they can spend doing implants. So it's really focusing on the ENTs. Inspire V has a different element to it. Again, we mentioned ear, nose, and throat. That doesn't talk about putting the sensor in the chest wall. Once the sensor has gone with Inspire V, we think there's going to be another group of ENT surgeons that weren't necessarily prepared to do the procedure with the sensing lead, and that will bring a new group of surgeons into the mix. And at some point with Inspire V, we can start training oral surgeons as well as some general surgeons. We have samples that, that can be a very effective group of surgeons to be able to implant the device as well. So we know the significant patient demand that we have. And our job is to solve that and work with the surgeons to build efficiencies to keep growing their capacity, and that's really what's driving our growth.

Very helpful response. Thanks for that. About 5 minutes left, a couple more topics to hit. Maybe we can switch over to competition. I'll actually ask you, Tim, about LivaNova. We saw some recent data from their hypoglossal nerve stimulation trial, just snippets of it. But Tim, any reaction, thoughts on the data of that technology that you want to share at this time?

Well, I think we need to see the data. I think that you've just seen real top-level data. The primary end point is a randomized trial. So that's really important that LivaNova did run a randomized trial. I think that's great. STAR was a randomized trial, too. And that's really important to grow the evidence of hypoglossal nerve stimulation and let all the parties grow the overall market. And I think that's kind of an important thing. So being a randomized trial, I think that helps. The secondary endpoints of just talking about AHI reduction, it's pretty preliminary. So we need to dig into the data. And I know a company will -- you can ask them about this, but I know they're going to watch the data going forward, and we'll see how that kind of plays out. We'll kind of look a little bit about what the inclusion criteria was and how the patient populations align. But again, a lot more to come. We just got to really see that data as they progress towards work with the FDA.

Yes. Okay. That's totally fair. I feel obligated to ask about GLP-1s. Anything that you're hearing from customers, at this point in time, regarding GLP-1s around funnel disruption, elongation of the funnel or nothing really to speak of at this point.

No, I think everything that we hear is positive. I think that we know that hypoglossal nerve stimulation doesn't affect the lateral wall collapse. When you get a higher BMI, you get a larger neck circumference, the fat pads on the side, they collapse it from the side and that's the lateral wall collapse. All the hypoglossal nerve stimulations move the base of the tongue forward. And so we're going to need the support of the GLP-1s to really help the high BMI patients come down, lose weight and qualify for Inspire. We think that's important. In the study, there were several patients that were on a GLP-1 that had their sleep apnea resolved. Well, that's because they didn't have tongue-based obstructions in the first place, and they're not part of our TAM, right? But I think that we've put evidence into our deck showing the number of patients that already have presented to the doctors who are actively on a GLP-1 and now qualify for Inspire. So I think the GLP-1 is really going to help the overall awareness of sleep. Everybody knows the key pillars, a light diet, exercise and a good night sleep. I really emphasize the GLP-1s. People are going to go to their doctor to help lose weight and they're going to be assessed for diabetes, heart failure and sleep apnea. So the awareness of sleep is going to continue to grow. Your Apple Watch is going to continue to identify patients who have sleep apnea. And so it's our job to make sure that we continue to develop our technology, maintain the strong patient outcomes, but certainly make sure patients, if they fail at DISE because of that complete concentric collapse, possibly refer them back to weight management to get on a GLP-1 to lose some weight and come back in. So again, we think GLP-1s are going to help the overall market size, and it's going to really help patients lose weight and come into our funnel.

Yes. Very clear. Maybe one question for Rick, just to work you back into the fold. So remind us of kind of the key lever points for P&L leverage going forward. And one of the questions that I had is just direct-to-consumer spend. What are you spending in '24? How do we think about spend in '25? I know that's been a source of leverage.

Sure. Top line revenue growth, right? And then we're going to have gross margins are going to be accretive with Inspire V release. We continue to spend in DTC. 2024 is going to be flat over 2023, where we spent $100 million. And we expect in 2025, DTC will remain at that level, maybe slightly increase. R&D is going to continue to run mid- to high teens of our revenue. And so the real driver of our profitability and cash generation is going to be in that SG&A line.

Perfect. 30 seconds or so left. I guess I'll kind of just slip it over to you, Tim. Anything that we didn't touch on today that you're particularly excited about or that you want to communicate to the audience?

No, I think we're very excited about Inspire is excited as we have been since the launch of the company in 2007, the approval in 2014 and the growth that we've seen, the number of patients that are being treated continues to grow. We focus on outcomes, and we keep raising the bar on outcomes. And with the advent -- the launch coming in with Inspire V and our SleepSync patient management system, we just continue to invest in our growth going forward. And we're at a level now with our growth that we can be profitable. And so it's a pretty exciting time to be at Inspire and, really, thank all the providers and certainly all the Inspire employees for all their hard work to take care of the patients. So thank you for having us.

Perfect. Well, that's a great place to stop, and thank you again for coming.

There you go. Thanks Adam.