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

I'd like to welcome everyone back to the KBCM Healthcare Forum. My name is Brett Fishbin, MedTech analyst, and I'm pleased to be joined this afternoon by Inspire Medical, who is represented today by Tim Herbert, the CEO; Rick Buchholz, CFO; and Ezgi Yagci, Vice President of Investor Relations. I'll start us off with Q&A. Just for anyone who's attending their first meeting today, there is a question-and-answer box below the screen and you can feel free to submit questions to me, which I can then relate to management if you have them.

So just to get things started here, getting a little bit further into 2025 compared to your fourth quarter earnings call. I was just curious if you guys could kick things off with maybe a high-level update on how you're viewing the underlying environment around procedural activity as well as trends around physician contact and website traffic.

Absolutely. Well, first of -- thank you for hosting us and having us join your event, and I want to thank everybody, all the other investors that we've met with through the day. So a very organized event, and thank you very much for hosting us on fireside chat here. Great lead-in question. I think the -- it's always exciting starting the new year, especially with a lot of the key elements that we have going into this year. And we're very excited about Inspire V, we've been talking quite a bit about them. I know we'll talk a little more about that on this call. The year started well with the team, and we know that we come off a strong Q4 as we had our earnings call right there, and we work with our seasonality. We have so many -- so much activity in late in the fourth quarter, especially in December between the holidays. So we really kind of fatigue the physicians and our staff. And so when we come into January, as people need to have a little bit of a refresh. We do our national sales betting in January and then people hit stride. So while January always starts a little bit slow, we really hit stride as we get through February and March and proceed into the rest of the year. So very exciting as we continue to make great progress with Inspire V and just taking care of patients with the amount of web activity and the demand that we see for Inspire therapy.

All right. Great. And just turning back to the fourth quarter call, a couple of weeks ago. I know you came out and reiterated the guidance that you provided at a conference earlier this year, specific to the revenue guidance, $940 million to $955 million. Just wondering if you could unpack that a little bit and just talk through some of the bigger like puts and takes behind that range. I guess my question would be, is the range mostly tied to when Inspire V fully launches? Or are there some other factors that you think are bigger swing factors for this year?

Well, I think coming back to our new thing at Inspire V is an exciting time for us. And we think that we don't market it today. It's not on our website. And so centers continue to take care of their patients with Inspire IV today. We don't see any kind of air pocket per se with that as we move through when we get into the second quarter. Yes, we'll talk a little bit about the inventory with Inspire IV. But most centers don't have that much inventory to burn down and the top centers that do have a more significant amount of inventory they do some of the impacts on a monthly basis up to over 20 impacts in a month. So they can work through their inventory relatively quickly. We looked at the overall guidance. So I think Inspire V is pretty exciting. Our ability with our DTC to be able to reach patients and bring them our website, and we're going to spend a lot of time this year helping and working on our tools to help them make that first appointment. And that conversion has always been a little bit of a challenge in the past. But one example is we've talked about as the digital scheduling has really shown to be an effective way to help the patients communicate and get their first appointment set up with their centers. So they don't have to go back and forth with e-mail or go back and forth with trading voice mounts with a center to get that first appointment made. So we're making good progress with that earlier in the year. And you will hear us talk more in the year about developing our digital technology as well. We do look at some factors, GLP-1s, it's hard to see how that's going to really come into play in 2025, and we talk to our physicians and are they going to be prescribing GLP-1s to help patients lose weight to help them with their sleep apnea. And that's a question that still remains out there. And I think that's going to get pushed back to the weight management centers as well as to the family practice doctors to help kind of weigh -- help people lose weight, and therefore, qualify for Inspire. We'll talk a little bit about competition. I think we did put that there may be some trialing at academic centers. But again, not looking too significant. You have that, but certainly wanted to recognize that. With the success that we've had, we will see competition in the future. We know that. But I'm not sure it's going to have much of an impact in 2025.

All right. Now that makes a lot of sense, and we'll keep our eye on some of those topics as the year progresses. Just maybe turning back, I think you commented a little bit on -- you make a very big push in fourth quarter every year and usually comes in quite strong and then 1Q is always the softest quarter, just thinking about how procedures are done. Maybe if you could just expand a little bit or elaborate on how you're viewing seasonality in 2025 compared to the past several years. And just like specifically, given the midyear timing of the potential Inspire V launch?

Yes. Good question, Brett. So we have typical seasonality since we've gotten approval 10 years ago now that we're really excited about, that we have seasonality. The vast majority of our business is commercial payers versus Medicare. And so we see a real busy Q4 with the high deductible plans then they reset. And as Tim alluded to, our seasonality is really in the first quarter, specifically in January because we really fatigued the system with procedures in the fourth quarter. People take vacations in January, meaning our surgeons. And if a lot of those centers have one implanting surgeon, we can feel the impacts of seasonality. We have our national sales meeting. So we have the sales organization out of the field for a week and then we get going, and then we kind of resume back into February and March. So we have seasonality. We also have the year strengthens throughout the year given that stronger Q4, and with the Inspire V launch, we have assumed that in our guidance, but we've not assumed a dramatic or significant change in utilization with Inspire V but with that being said, with the moving parts of the launch, it could be a little bit more heavily back-end weighted in the second half of the year.

Yes. For sure. I appreciate that color, Rick. One other interesting topic this year just with guidance and how folks are thinking about their modeling assumptions, you're making some changes to the reporting metrics, which you've been telegraphing for over a year now. But just kind of following up on that topic, wanted to ask like why you decided to make those changes. And then like specifically what metrics investors should expect like will be provided on a go-forward basis each quarter?

Well, I think we started at the top and the key metrics or what we're going to get to what's really most important is obviously revenue on the top line. But last year was a first out year being profitable, very proud of that. So that's a new guide for us as is giving earnings per share to let people understand while we're investing for growth going into the future, we're certainly doing that as a profitable company, and that's very exciting. Second, I think we get a little bit too focused on the individual centers. And we know that the top 2 quartiles of the centers that do the majority of the volume, and that's where we see the utilization growth. And so we wanted to kind of get away from that level of detail and focus more on a macro level. And we're still going to come back and make sure we provide people with a number of territory managers that we have. But we're adding more to that too to kind of enhance that. We're also providing the number of field clinical representatives that we have. Now remember, a field clinical rep is an individual that they do the case coverage. They're in the operating room. They do the training on how to do the patient programming and do patient follow-up to the centers. And so they can help the procedures within the center. And therefore, the territory managers can help their own macro items such as patient flow, right, or being able to find additional capacity within the centers. We'll find additional surgeons at a center that thereby can add capacity, right? So we really want the territory managers to be cultivating their territories and really the field clinical is to really be focused on patient flow and efficiencies within the center. That takes the onus of just the specific number of centers and utilization. We're still going to be focusing on same-store sales and growing the utilization at the top 2 quartiles of our centers that have the ability to grow. This is community-based health care at the hospitals in our community still really love the academic centers. There's still going to be a very important part of our business, still going to continue to fight to grow our business, do their early clinical research and help us navigate our next-generation activity. But the community health is really where we see the highest volume centers that can take care of patients in their own neighborhoods in their own communities. So that's why it's so important that we just provide a number of territory managers, the number of field clinical reps and in general, we want to maintain basically the same ratio of territory managers 2 centers. So as a rough estimate, people can still be comfortable. We're not really changing our business, but just providing different information.

Yes, makes sense. I guess maybe just a little bit of a follow-up. Is it partially that you're viewing like revenue per territory as more relevant? I know there was like one consideration that you have implanters who are opening second centers, which takes away from their time and weighs on like a same-store metric. Is that part of the thinking? Or anything else?

Well, I think we know that 25% of our centers are secondary sites of service. Those are like the quartile 4 centers. And yes, that is a dilutive element they're calculated as part of the calculation. But it's really not focusing on those centers because it's good that those doctors have secondary sites of service. So if the primary hospital is full that they do have an overflow to be able to take care of the patient. So that's a necessary element. We like those centers, right? Some of the academic centers, while they're so important, they're not going to be doing the high volume because they have a lot of other responsibilities in their jobs. And they're limited on the number of procedures that they're going to do on a monthly basis. So that's why we want to kind of move away from centers that really just focus on the territory managers.

Sure. And one other question I had just on this year and some of the procedure trends. Like a pretty big topic. I think it was around 1Q and 2Q of last year were some of the issues with prior authorization and like the process around that. You guys have gone in and made some changes in how you're going about doing that. And I was just curious if you could discuss like how those changes have worked? And I think if you're seeing improvements to patient -- overall patient access and efficiency to get the therapy that they need.

Yes. Well, let's take everybody back a year till -- and what the intent was is we were doing a pilot to see if centers could do their own prior authorizations that Inspire was at the level of care that could be standardized within the prior authorization teams of existing practices in several sites, we were successful with that. And they continue to do their own prior authorizations today because they have the teams to be able to do that. But what we found in general, incentives just are not ready to take that on with the payers yet. They -- we need to continue to provide support to their centers and the preparation of packages. So when they submit them to the insurance companies. They have a higher chance of a consistent that can drive approvals. So we pulled that back in and worked with the centers to make sure that the prior authorization process is done consistently and proper to maximize those returns. And I think that, that really has shown itself well in the third and fourth quarters and all the way through 2024. And we're going to continue to improve this process, and we'll be looking to do technology enhancements, even part of the steeping system to really help automate that process and make it easier for centers to get approvals with the health care providers and a consistent message to the health care providers also is so important that they're recognize this further. They're able to see the indication around the specific patients, the coating that will be used in this procedure and then to be able to provide an approval in the short just 2- to 5-day period. So I think that we've come a long way with that, and it's really about streamlining the process, as you say, how patients receive therapy.

All right. Let's shift gears a little bit and talk about Inspire V, which is the big upcoming product launch that everyone is really excited for. Just curious if we could start maybe give an update where you currently stand with the limited market release. How many -- how many centers currently have the device? And what's been the latest feedback over the past 3 or 4 weeks?

Sure. I think the excitement is we started out in Singapore they've completed the arrangement. I think they completed their 44 implants. And all of them were successfully completed. Those patients are being titrated and we've had several sleep studies already with those patients. Very exciting. I think the idea is that some of the data from those patients will actually be presented in June at the AASM meeting, American Academy of Sleep Medicine to really show the benefits of Inspire V. So that's really exciting. We also did the first implants in the United States back in 2024. And since then have opened several more additional limited market launch centers as we continue to build up inventory, and we'll continue to open up more in waves as we continue to proceed forward and be able to capture additional data going forward. But the feedback from the physicians so far has universally been very strong feedback, number one, in not placing the pressure sensing lead. That's the whole point of developing the Inspire V system was really to give it in that pressure sensing lead and incorporate that using accelerometers who we can sense from inside the can and we don't need that external sensor, which again was placed in the chest wall, which is just not where ENT, ear, nose and throat surgeons operate on a daily basis. So really great feedback from that standpoint.

Great to hear. And just a quick follow-up, give this one a shot. You've talked about a full market launch at some point in 2025. I know at one point, you thought it would be earlier in the year now to sometime in the year. Are you able to provide any more color or specificity around when you possibly move into a full market launch?

Well, our manufacturing facility, the first one that's qualified is delivering product. We're building our inventory. And so that's really exciting for everybody, especially the patients, as you say. But we're going to continue to go on ways and continue to open up centers in the limited market release. And when we get to the point that we have sufficient inventory to be able to support the broad launch, we will proceed to do so. But again, we remain committed to be fully converted by the end of the year.

Were there any like surprising challenges that took place with this early manufacturing ramp that is currently underway. Just thinking about like a little bit of a change in language for full market launch? And if so, are those kind of in the past? Like how have you been able to address like any issues that might have come up?

It's a brand-new production line with new state-of-the-art technology to provide not only a high yield, but a high material throughput. And so it's not unexpected challenges. It's the normal course of debugging a production line and to a point where we can start to turn up to throughput. And now we're in Stage 2, which is really adding stations to really take the throughput to the next level. So like what we see from a qualified production line that is in control and can be consistently monitored and managed and delivered consistent product flow but then really bring the value add in to be able to increase the overall throughput and at the same time, start working with our second and third partners to be able to get their production lines qualified and up and running. And the second part of the Inspire V program was we were going to have redundancy in our manufacturing to be able to have security or comfort in our product supply. And again, that's the limiting factor. We're just being a little bit careful to make sure that we have the sufficient inventory before we do the full lodge, but things are progressing quite nicely right now.

Yes. No, it makes a lot of sense, and I'm guessing those manufacturing partners are also just as eager to kind of kick it up and get more production flowing.

[indiscernible], no question about it.

Had one question come in from the audience, if you guys care to comment on how many U.S. cases have you performed so far in this LMR?

Yes, we're going to be a little careful about that. And also with the number of centers just in respect of all our participating centers in the United States. So we continue to bring waves in and work with our advisers and some of the centers of excellence to a and gain more information but not getting really specific on the numbers.

All right. Fair enough. I'm guessing that you've been asked this question today in some of the meetings. But maybe just trying another way what we've already heard people ask. I think there's just this sense of concern around like an air pocket or potential a couple of softer weeks ahead of this full market release. I'm just curious maybe if there's any like strategies that you can employ to try and limit the extent of that if it does happen.

Sure. For the most part, I think you talked a little bit about inventory burn down of existing inventory and also patients waiting for the new technology. Those are kind of the 2 elements of the question that we've been hearing quite a bit about is take them one out of time. Inventory for the most part, most centers only have 2 or 3 units. And so for them to burn down the inventory, it's really not a significant burden. Even those centers that have the highest utilization they tend to keep a power level or a certain number of units on the shelf, even if it's 8 or 10. These are the quartile 1 centers that are doing anywhere from 10 to 20 implants on a monthly basis. So even for them, but it doesn't take a lot of time to be able to work through their existing inventory to be able to move on to 5. So we'll monitor that closely as we start moving into the full launch. But I think it's quite manageable. And the second side to that is we have experience. We've done that before. We've gone from the Inspire II neurostimulator and Inspire IV stimulator and worked in the inventory went from the old remote to the bluetooth remote, went from polyurethane leads to silicon-based leads. So we've done this in our short history, and we know how to kind of work through these are issues as we launch the new products. The second side really comes down to patients waiting for therapy. And we talked about it at your conference here and investor conferences. But it's not on a website. We don't market Inspire V yet. It's not broadly communicated out in the field. And as people are listing in and they read their investor comments, they listened to our transcript, they're investigating Inspire so they really do their homework and learn and if people want to wait for V, that's fine and I know there are people out there that are excited about V becomes available on their community and they may do want to wait for that. We think that's fine. But I think there's enough of a backlog too that the physicians don't want to give up their OR slots. They're going to continue to practice medicine. They're going to continue to see patients as we move forward and they're going to continue to imply right up until the time Inspire V becomes available. So again, we're going to monitor the transition period, but we think that physician is going to continue to provide Inspire IV, which is a wonderful product. It's been around for many years and it really is a safe and efficacious therapy. But again, I'm sure they're excited to go to V as well.

For sure. And you kind of hinted at it, you're not currently like advertising this product or going out of their way to tell potential patients about it. Just thinking ahead a little bit, like are you thinking about changes to the marketing strategy, not necessarily dollars spent, but just in terms of kind of like indicating what these incremental features and benefits are maybe to patients who had heard of Inspire, but had certain concerns or like any overall change in messaging to the public that you're thinking about?

Sure. When we do the full launch, and we're going to have a web page update, right? And we'll, at that point, talk about the benefits of Inspire V [indiscernible] in patient outreach, you may hear a little bit more about Inspire V. Over the years, we've had a significant number of patients come to our website and provide us their contact information to keep them informed of advancements in our technology. So we'll do an e-mail campaign to make sure that those patients know that the new technology is now available in their community as well. So sure, there will be many avenues what we'll be able to communicate the message of Inspire V. And this is inclusive. We have a lot of activities working right now regarding communication with cardiovascular physicians, with general practice, family practice doctors to let their know about Inspire and where to refer their patients, even the sleep physician community. So there will be some work out there to make sure we get the message out there on V.

I think the most obvious feature that stands out to everyone has changed from the second lead to the accelerometer, which has extremely obvious benefits for the implanter. Just thinking about from like a patient perspective, do you think that there's other features that maybe don't get as much discussion from the investment community that are like maybe more incremental or like patient experience oriented that like you'd share or just like other benefits to the patient outside of kind of simpler procedure and maybe some of the remote software updates?

Well, initially within V, as I said, we just recently published our new quality report. It's available on our website, and it gives update very few revisions or removals that patients would experience with Inspire. But of the small number of revisions, the majority of those today are a result of the pressure sensing lead. So it's a reduction of risk for the patient of needing a revision procedure. So that's really just the first step. The second is the future. because V is not only just we move in the pressure sensing lead, which is so important. But it also is a platform technology. It's a microprocessor-based system that allows for upgradability. One example is we're already working on Inspire VI, which is going to have auto activation. So when the patient follows the sleep, the device will turn itself out at night. When they wake up, they will turn itself up. Future adaptations will even get into automaticity of the device or auto programming. If you think about a CPAP or AutoPAP device at auto programs, the pressure. We also are billing the thought of automaticity in the Inspire system as well. And if you have an Inspire V, a lot of those upgrades can just be downloaded into your device as a future upgrade, right? That's really exciting, being able to move forward with it. I think the other key to it is the whole digital program really led itself to improvements in patient management for the state physicians but also for the patients. So they have a very strong app on their cell phone to be able to monitor their own procedure and how it's helping out with their sleep and be able to communicate more directly with their practitioners. So really advancing technology and Inspire V is just kind of the start of that platform.

I think it's super exciting. You're getting the implant and you know that from that point going forward, it's only going to get better with new features. Almost like getting a new phone and being able to do software updates in 1 year, you have a new feature. I think fleet detection stands out as something really exciting for the patient and...

I'll just say, and there's more. I just want to add on to that, too. Think about the patients who received Inspire 11 years ago and their batteries are coming around for replacements and it's reverse compatible. And so when they come in with an Inspire II device that they get upgraded to it Inspire V and can have those benefits going forward and how exciting that is for those. And this is -- we got approved in 2014. This is really the start of the replacement where the replacement cycle is just starting right now and how incenting it would be if we can offer Inspire V disease patients who have been with us prior all these years.

Yes. No, absolutely. Just one other question on Inspire V, and it's come up on the earnings call and a couple of other calls is just the change in reimbursement coding. I was hoping you could just recap for people who might not be as familiar with the changes specifically what's changing? And then my question is just assuming that the doctors are going to be making a comparable amount per minute of procedure time, is there less of a selfish incentive for them to push through more procedures, if they're not necessarily making more money per minute spent?

Oh, I don't think doctors think that way. I think that -- well, let's back up. Let's talk through this. From 2014 to 2022-ish. We always use 64568 as our base code, but we had that pressure sensing nature. We needed the add-on code. It was a +04660 right? Ironically, back then, it paid $400. Then what we did is we move forward and we went to 64582 which is the new code for Inspire that we've been using for a while. And in that process, doctors, the professional if you went on $200 because 64584 was based on a rec survey on the amount of work it took in the number of RVUs to be able to implant the Inspire IV system. Now that the pressure sensor lead is there, it reverts right back to the original code 64568, and we don't need the add-on code. And so it's a reduction in the amount of work that the surgeons need to do, but therefore, there should be less RVUs. And the reimbursement for those procedure is appropriate. And when you look at amount of reimbursement on a per minute basis, that competes with any other ENT procedure that they do. So what we need to do is focus on the efficiencies in the physicians' practice to do more cases in a day, which generates additional revenue for the practice to help them pay the overhead, the salaries. and everything else came their practice going forward. But what's important is if they do additional procedures in a day, they're really driving revenue for the site of service. And if the surgeon happens to be owner of an ambulatory surgical center, the reimbursement of the new code 64568 for $516 is $1,000 higher. And so now we provide an avenue to be able to increase the number of procedures at ASC. So I think all in all, surgeons are going to be too worried about the individual professional fee. The pressure sensing lead going away is the true benefit of V and that allows them to do more cases in a day because it reduces the operating room time for each procedure.

All right. Got it. And we have just maybe 2 or 3 minutes left, I'm going to try to squeeze in a couple of questions here. Just one on competition. From your point of view, it's been relatively quiet. I think we've gotten some directional news from one of the competitors. But I mean just open-ended for you guys. Have you seen any big developments out in the field? And then just like how are you thinking about the risk of competition as it relates to the 2025 plan?

Answer to the question, no. We're not seeing any impact. I think it's very early we need to see if the FDA approval comes through and when that comes through. But that's just the start of the project. Then you have to start worrying about reimbursement. And it's not just identifying a code and if that is the proper code, but then you need to have peer-reviewed publications to work with the payers to get coverage. So yes, we're very aware of the technology. We're aware of the company itself. And I think the key that we always stress is we want -- we know we're going to have competition with the success we've had. There's no question about it. But we want that competition to be additive to growing the adoption of the technology on the market. And for that, we expect patient outcomes and safety and efficacy to be at least at par with Inspire. And so we set the bar high, and that's the expectation and to feel that they had effectiveness will be that high. So we know what our competition. We know that the -- some of the academic centers will do a trial in this year, but we'll continue to monitor with everybody. But our job is to keep our technology advancing from 5 to 6 and our digital tools and continue to grow our same-store sales.

I'm going to try and squeak in 2 really quick ones to finish it off here. One from the audience. I think you guys addressed this at least during earnings, but do you feel generally comfortable with how the Street is modeling the cadence of revenue this year based on the guidance?

We talked about that on our last earnings call. We provide annual guidance, but in the context there that we said the quarterly guidance wasn't unreasonable.

All right. And then last one, you had a little bit of news come out around the CIT and loss claims. Just are there any updates you're able to share on that? And if not, are there any like key milestones that you have visibility to as we work toward the resolution there?

Very early on, and I think that we have retained our counsel. It's being managed out of the jurisdiction here in Minneapolis. Our counsel is also in Minneapolis with direct experience working with the DOJ. So they're in communication right now to refine what information that DOJ is asking for in the very early stages of a review. So not a lot to add to that. We do know from others who have done some analysis on these that they take quite a period of time to be able to resolve and with varying levels of results. What I will say is we have full confidence in our policies and procedures, we operate our business in a very compliant and ethical manner, and we are not making changes right now in how we operate. So we're going to continue to provide patients with the best possible therapy to get the best possible outcomes, and we'll continue to do that in a very compliant and legal and ethical way and we will be fully transparent and cooperative with the DOJ as they do their review.

All right. Tim, Rick, Ezgi, thank you so much for taking the time to join us today. Thank you to everyone in the audience for tuning in. And have a great rest of the day.

Great. Brett, thank you so much. Great to be here.

Thank you.