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

All right. Good morning, everyone. Thank you so much for joining us. I'm Danielle Antalffy, the U.S. med tech analyst for UBS. Very lucky to have with us Inspire Medical Systems, Tim Herbert, President and CEO; Ezgi Yagci, Head of Investor Relations. So guys, thanks for joining.

Danielle, thanks for having us. It's so great to be here.

And I guess a good place to start. You did just report earnings, you had a good quarter. So maybe just some quick hits on the quarter and some of the drivers and then we can dig into Q&A.

It was a very important quarter for us to report back, and there's so much tension that we had after the end of the second quarter, that was quite a challenging quarter for us, working through the transition from Inspire IV to our next-generation Inspire V system. We made tremendous progress with that during the third quarter, had a very good pickup that showed with our results as well. But most importantly is we are able to report the patient outcomes associated with the new device, Inspire V, both in a clinical study that we ran in Singapore as well as the first commercial experience here in the United States. And that outcome state is so strong, and it really sets us up moving forward. We did work through quite a bit of the transition in the third quarter, getting the majority of the centers up and running. I think we reported -- over 98% of our centers have been trained. And we talked about over 90% have completed the contracting portion of the transition. And 75% have completed the SleepSync portion of the preparation for Inspire V. So over 75% of our centers are ready to go on V. And we exited the quarter with the majority of centers doing V. So not only with strong numbers during the quarter, but very good progress with the transition of V.

Just on that point with the transition from IV to V, do you have a sense of how much IV inventory is still out there?

Yes. That was another big concern that we had as company exiting the second quarter that centers in the United States need to burn down their Inspire IV inventory as they ramp up V. And it's really neutral overall as they burn down one inventory, they'll supplement that with Inspire V. At the beginning of the third quarter, it was predominantly all Inspire IV inventory in the field. And as we exit the quarter, it's predominantly all Inspire V. So we've kind of done the transition. We'll continue to work through that here in the fourth quarter and look to clean most of that up. And -- but there will still be some sites that will continue to implant Inspire IV even going forward.

Okay. And then maybe talk a little bit about the physician experience for Inspire V because that's a key advantage relative to Inspire IV time of procedure, ease of procedure? And is Inspire V starting to break down some of the barriers and getting more ENTs to implants?

Yes, let's start with that one. I think that is the biggest feedback that we've heard universally. In a very important part of the Inspire system is you need to sense respiration and time stimulation with the patient inhales. And we're the only system that does that. And it's an essential part of the therapy to optimize the outcomes and the key is we use a sensing lead that would be placed between the intercostal muscles with Inspire IV and a significant technology jump going to Inspire V is we incorporated the sensor inside the neurostimulator. And so the ear, nose, throat surgeon no longer places a sensor in the intercostal muscle. And that was the one part of the procedure that was most uncomfortable for ENT. And we think a factor on while many ENTs would not do the procedure or would not do many of the procedures. So now that V is out, and the clinical data did show a 20% reduction in surgical time that allows them to do more cases in the day. But I think with the 20% and without having the pressure sensing lead, we can go back to surgeons that we trained early on in the process and reenergize them saying, now without having that pressure sensing lead, it's time for them to start doing Inspire again. And for those surgeons who are used to doing Inspire, now they can stack more cases in a day, and they can grow their own volume. And when we enter talk to a new general ENT surgeons, it's a much different conversation, not having them operate outside of their comfort zone.

Yes. That makes sense. I guess one of the sort of gating factors to adoption has been ENT mind share, just getting these -- they're busy physicians. They have a lot of procedures to do. How are you guys working to continue to gain mind share amongst your current physician base? What's the playbook?

Well, I think the key is, number one, being obvious patient outcomes and positive experience. The safety profile is tremendous with 100% implants through the Inspire V with Singapore study as well as the limited market release in the United States. The confidence that when they prescribe this to a patient that, that patient is going to have a positive outcome is really the key driver to the whole thing. And so that experience a much simpler procedure kind of really takes it to the next step. But it's a competitive environment for them. And they have to take care of patients, a lot of our surgeons are oncologists, and you can't just walk away from the cancer patients. So we need to work with the surgeons so they have -- they optimize their practices, so they can spend their time in the operating room. One example is we train APPs, advanced practice providers, individuals who can communicate with the patients can provide them the guidance, the instruction of what to expect with Inspire and can be a navigator, can help them schedule the appointments they need to work through the process and thereby free up the -- so the surgeon can just focus on the surgical procedure and then the sleep physicians can do the post-op longitudinal management. So really optimizing around that. We talk a little bit about direct-to-consumer in this regard as well because patients come to the ENTs and they don't come just for Inspire, they will need numerous procedures. And so we're really bringing a patient population to these ENTs. So it's an opportunity for them to hone the rest of their skills as well and build their practice by absolutely focusing on Inspire.

Okay. And you guys have mentioned in the past sort of the service and support. So I'm asking this question less from a competitive perspective, we can talk about that later. But the service and support that you provide to these centers. So another friction point has always been reimbursement and just getting these payers aligned and regularly reimbursing less pushback. Can you talk a little bit about the handholding you are doing at these centers to help grease the wheels a little bit?

Well, we -- there's kind of 2 different avenues to that when we can talk about the support at centers, and we also need to talk about how we communicate and educate the payers as well. Maybe let's go on that pathway first because -- now that we have coverage by all the major players and Medicare and military and VAs, what's most important now is to drive consistency of the coverage policies. And if you go to all the different payers and the Medicare local coverage determinations are all pretty consistent. But there's just those little things out everything. So we want every policy that to really be uniform, so it's really consistent and makes it quite easier and so there's no confusion with -- from the physician side when they're going for coverage and identify what's important. The transition with Inspire V going to the new code, 64568, which is actually going back to the old code, as that transition has gone really well. We had challenges in the second quarter, as you all recall, with CMS not having that on their computer systems, but that was cleaned up on July 1 and has since it's really been streamlined. And most recently, that reimbursement has gone up. On the physician side, we do provide service. We are in every surgical procedure and that's really a quality control for the patient. And we want to make sure that we provide the technical expertise to make sure that procedure goes well. That being said, the people that we prefer in there -- our field clinical reps, not necessarily the sales reps, not the territory managers, right? We want the territory managers running logistics out front, patient referrals, driving capacity at centers, making sure that we have the engagement of the C-suite, making sure that we're looking to add surgeons, add centers. And the field clinical reps who get paid less than sales rep, obviously, but their job is case coverage, individual coverage in the operating room, training the centers how to do the programming and the patient follow-up. So build the efficiencies into those practices as well, not only from our standpoint, but educating centers on how to be more efficient as well.

Yes, do you have sort of best-in-class centers that are already there from an efficiency perspective? And I guess, how easy is it to replicate center to center? Can you go into a center and be like, here's a case study of how they're doing it and how much the ROI is...

Just another comparison. Academic centers really have a lot of ENTs who are dual-boarded and sleep. And so these are the surgeons, sleep physicians who do everything themselves. And at academic centers, that's great because they do the clinical research, they do the early adoption, and they will grow, they will trial new devices. But those aren't the centers that drive the growth. The centers that drive the growth are the large and community-based hospital systems. When we all go to the doctor, we go to our community-based doctor. Those are the centers that have the teams. They have 1, 2 or 3 ENT surgeons, and the patients are managed by many sleep physicians in the community. So everybody knows the role. They come in, the patients are diagnosed. They have the Inspire procedure done by the surgeon, and then they immediately go to a sleep physician for their longitudinal management. And the whole team works together with SleepSync to collect all that data so all the players of the team can track the patients, they can see the benefits that these are providing, make sure they give the feedback to their referring physicians. And we make those case studies. We make those -- these are the centers of excellence, and this is what we want new centers to emulate. This works best. The centers that do the most procedures have the best outcomes. Not a surprise, their practice. They know how the system works. So yes, we certainly -- as we continue to grow, it's about community-based care. It's about emulating the most proficient centers.

But you do continue to add new centers. I appreciate you're not giving that number anymore. But when you look at the components of growth, new centers versus, call it, same-store sales, can you talk a little bit about what you're seeing or how that's changed over the last few years as you guys have gotten much bigger?

Sure. Back up to the Q2 call again, and we talked about that in the first half of the year, we knew the transition will start, we did not want to start a lot of new centers on Inspire IV. We're just holding them to start on V. We also held back on DTC in the first half waiting for the transition to happen. Third quarter, we opened up a number of centers back to what you would call normal because we had a built-up demand. I think you'll see the same thing in the IV. We'll continue to add center. That's going to be a very important part of the process, albeit with the number of centers that we have, it's a less of a major impact, right, as a percentage of the overall number of centers. But still very important to go back and open the centers and the centers that we open emulate what we just got them talking about. They start up with a full system, and they start up with an expectation of this is how many patients a month it takes to be efficient with Inspire and to make it work for everybody. And so I think we're a little bit more selective to kind of build practices in that realm.

And when you think about the number of potential surgeons to go after, can you talk about -- I know you've framed this before or in the past, a number of surgeons that are out there that could potentially be doing Inspire, and we have a ways to go, I think.

We'll make Ezgi jump in.

We do. So inception to date, we've probably trained a little over 1,600 patients -- 1,600 surgeons, ENT surgeons. We know that there are probably around 12,000 or so general ENTs out there. About 8,000 are head and neck specialists. And historically, that's been our bread and butter and who we tend to go after. To Tim's point, with Inspire V in the simplified procedure, we think we can continue to make headway with the head and neck specialists, but also start to target the general ENTs. There's also a very significant general surgeon opportunity where we haven't even scratched the surface longer term. So that will be -- there will be more to come on that probably next year and beyond, but very excited about what we're seeing so far.

Okay. Okay. And we've talked a lot about the sort of areas of friction, but let's talk about the tailwinds right now. And actually, like I know you guys have talked about GLP-1 maybe a little bit of a near-term headwind, but actually, it seems like it's just really increasing awareness of, I would say. You talk to SleepMed physicians, and their waitlist are just growing and growing and growing. So maybe talk about as best you can, like what you guys are seeing at the start of the funnel and how much bigger that has gotten over the last 2 years?

I can put a comment and hand off to Ezgi. I think what GLP-1s have done to the sleep market has really just changed the way sleep physicians conduct their practices. And that's what the real positive is. And if you just go back 5, 7, 10 years to a sleep physician, the world was a CPAP period. And if you're diagnosed, you're going on CPAP. If you don't use your CPAP, try harder, you can use your CPAP. And that was always a challenge that we had. With Inspire with the data that we've had, we started to change that and influence the sleep physicians to understand that patients are not going to be compliant, there is a viable option with Inspire. Now what GLP-1s have done with an indication for sleep apnea, now patients will go to their family practice doctor, and they want to have a GLP-1 because they want to lose weight. They want to feel better. But if they get a diagnosis of sleep apnea, they might get their insurance company to pay for it. So the sleep physicians are getting requests to do these sleep studies, but sleep physicians are not going to do that. They're going to make sure that these patients are taken care of. And they're bringing the patients in. They're conducting full assessments and doing sleep studies. And for those patients that have moderate-to-severe sleep apnea, they're not allowed to just go on a GLP-1 alone because it could take a year and the compliance isn't necessarily where it needs to be to show that it's going to be worth a while to make sure they properly take care of that moderate-to-severe sleep apnea. So they put them on CPAP concurrently. But in order to maintain the insurance coverage, you got to track those patients. So we're actually going to identify patients who are not compliant to CPAP sooner. And so this is a new phenomenon. What really is important about this is the sleep physicians now look at treating sleep apnea with an array of tools and not one favoring the other. They know that CPAP will go first, but they can look at what patients are good for Inspire. How do we get patients on the GLP-1 to lose weight to qualify for Inspire because we know they're not going to use the CPAP anyways. And so it really is going to come full circle, and that's what we're excited about. And I think it's really going to be a positive for the patients having access to the therapy, and we'll continue to lean in on that.

And one of the parts of the story that's always been compelling to me is the fact that I appreciate the ENT mind share, that's an issue, what have you. But if the patients are coming, and I hear that the patients actually, once they're in the funnel are very, very motivated to stay in the funnel and get their Inspire. You go to an ENT, that ENT is like, I don't have time for this, but they'll get treated somewhere, right? Like why is that these -- is that thesis wrong?

No, it is not. But the key to it is understand the baseline how they all started. And it's kind of -- you have to think about people who have sleep apnea. This is moderate-to-severe sleep apnea. They don't sleep well, they do not get restful sleep, right, and come to confidence. If you stay out too late, you're not going to get restful sleep. The key to it is they get diagnosed with sleep apnea, they try a CPAP. They feel better, they just can't benefit from CPAP long term. They are motivated to find a solution to their sleep apnea because they know when they feel good how well they can operate. And that's the premise of the whole therapy. When we do our outreach programs to patients, we rely on that. We rely on patients who are looking for a therapy. And then they come in, they go to the website, they get educated, and they can say, you know what this might be for me. So they find a way to a doctor. We like them to call the -- our ACP, Advisor Care Program, which is a call center because we can directly help them get an appointment with a health care provider. And a lot of times, patients will say, you know what, I can see what my family doctor is going to say, so they go to their family doctor first or they need a referral with their insurance, or they go to their family doctor. Many may have a sleep physician, so they go to their sleep physician, but they find their way, and they're motivated to get their way into the practice. Now this time of the year, you add the factor in that they may have a high deductible insurance plan and they just got through their payment. And so they want to get their procedure by the end of the year because their high deductible will reset. That's our seasonality period, and that's why we're so busy between Thanksgiving and New Year's is probably the busiest time of the year for implants, really to take care of those commercial cases before they reset. So patients are really motivated and then they hear more and more about Inspire and they hear about the ambassadors talking about the benefits and the positivity around the therapy. And yes, that kind of builds on itself.

So you did talk on the call. So with all that said, you talked on the call a little bit about how to think about top line growth for next year, you sort of level set everyone in the low double-digit range. I think you guys said 10% to 11%, but -- yes. So maybe talk about what the components of that are, given all the tailwinds we just talked about, but balanced with the headwinds from Inspire IV inventory still being out there and getting centers...

I think the keyword in that discussion is just balance. And I think that while we didn't provide early guidance, we did provide an early indication. And that's kind of important. We did say that we would provide guidance in January. But the -- we reaffirmed our revenue guide for the rest of this year and things are progressing very nicely. We love the transition that we have going on with Inspire V. There's a lot of questions about what about next year. And we know that, that was a debate that was on the street, both with the analysts kind of looking at what they should expect with a lot of investors and discussions. And we thought it was really important to kind of level set everybody and say let's give everybody an initial indication where everybody can zoom in on and we can grow from there and look at what are the puts and takes around each of those items, everything that we've just talked about with the benefits of Inspire V and how the GLP-1s are continue to evolve. Do we have any competitive threats? And so we kind of made sure that we kind of built that in. And as we finish the year and build our plan going into January when we come out with formal guidance, I think everybody is now kind of together now on a level set for that discussion.

And it sounds like that -- I don't want to put words in your mouth, but it sounds like that would be like worst case, that is base case for you guys not...

Well, again, we don't want to put out guidance now, and it's just an early indication. But I think we wouldn't necessarily want to go backwards, right?

Right.

And so we're going to be careful as we do our assessment to look at what it is that we want to do in 2026. We know our goal is just to continue to take care of patients, and we know we are so lightly penetrated in our overall TAM. So our opportunity is still in front of us.

Right. Right. Okay. And the other important point out of the call was on the OpEx and the spend and you guys really crushed the EPS number. And I guess one of the questions coming out of the call was in Q2, you cut EPS guidance. In Q3, you're raising EPS guidance. Maybe talk about -- a little bit about what changed between Q2 and Q3 to make you more comfortable with how you are spending, how efficiently you were spending and...

I think the key -- coming out of Q2, we just had a lot of onetime challenges that we had to address. And we got those all out on the table that did require us to back down our EPS guide. We have remained disciplined all year. That being said, we're investing in growth. We significantly increased our direct-to-consumer spend. We have a whole new ad campaign that we're running, that's really kind of fun helping patients sleep, they sleep so well they can dream again. And so we are continuing to invest in the future, but we're being disciplined in the rest of the organization. And we get a little bit of a gross margin boost when we go to Inspire V, I get back to that we don't have to make that pressure sensing lead anymore. So yes, a little bit of nice bump to EPS in Q3, and we did give us the ability to increase our guide for the rest of the year. And we're going to continue to be more disciplined with our spending, invest in growth and continue to remain profitable going forward.

Okay. Got you. And maybe talk a little bit about the commercial organization. You guys are also changing your approach to territory managers and how that is impacting the commercial execution side of things?

I think that the territory managers are what we call our sales reps, and they're really the high end. They're the front end of the practice. They represent us with the centers of physicians, and it's their job to drive capacity at centers to be able to make sure that we have sufficient number of surgeons, to make sure they have the system with the sleep physicians, make sure the referral networks are sound, make sure that if patients are coming through the call center to make an appointment, that doctors have appointments available in the practices. What we do not want those -- that group of people to do is do the case coverage, to do in the operating room, to do the training of titrations of individual patients. We have field clinical reps that we want to handle that. So the good news is what we're going to do is we're going to modify our field ratio. Right now, we're maybe 3 territory managers for every 2 field clinical reps, you're going to see that grow closer to 1:1. One example, on the Q3 call, we didn't bring in new territory managers. And we did promote some field clinical reps to territory managers, but we hired 9 field clinical reps to start to build that forward a little bit and then we are going to continue to have some more efficiencies in the field going forward to really leverage that. And if you think about the cost efficiencies with that, we get the proper care for the right part of the elements at centers in the field, yet we can do this in a next efficient manner and still don't leave any patients alone, make sure patient outcomes remain our #1 concern, but we have different individuals who can focus on what their jobs are and to grow the overall capacity of Inspire.

And on the capacity point, can you talk a little bit about ASCs and what role they play right today, but especially going forward because reimbursement is actually improving in the ASC?

We are still at the very beginning of ASCs and just probably 20% of our implants remain in an ASC setting today. If you look at what we were talking about earlier about looking to go on more general ENT surgeons, many of these private practice surgeons, they spend their entire time in an ASC because they own part of that ASC. They're part of the overall business. And they would love to do Inspire. It would be an important part of their business. It's got -- but it's got to make sense. And I think going to the new code 64568 really increases the reimbursement to ASCs. I think the national average Medicare reimbursement starting January 1 goes up to $28,000 with 64568, that creates an opportunity to really start leaning in a little bit more on ASCs. And especially within Inspire V back to not having the pressure sensing lead again, it makes it a more straightforward streamlined procedure that really lends itself to ASCs. So it's about time to really start looking at building a program and starting to lean in on that because that is the opportunity -- that's really the untapped opportunity that's still in front of us.

What would be the -- how is the go-to-market strategy different at an ASC versus a hospital? Or is it not different?

Well, it starts with outcomes, right? And the key to it is as long as you can show that you have the strong outcomes and the confidence conviction that when they introduce this practice that vis-a-vis what they can expect from a patient outcome and they're going to take your patients. That's always the check in the box no matter what. But two, it does get into the economics. And as long as we can show the Medicare economics are good, commercial economics are always far better than the Medicare reimbursement. And that makes a big difference. So we can combine those 2 key elements. It's a pretty cool procedure for ENT to conduct, right? It's not just general ENT surgery. It's bringing technology and it's taking it to the next level. That's always been the attractive part. We just had to make the economics work. And the new code kind of introduces that along with the simplicity of the Inspire V procedure as compared to IV.

Right. Okay. All right. Another question I get quite a bit is on the DTC advertising, how do you guys sort of measure ROI of your campaigns? And what are the metrics without you -- you want to give us -- if you want to give us the metrics [indiscernible] them, but...

Generally, how do we tackle it?

Yes.

We usually work backwards as we kind of look through. We know DTC campaigns. We know what kind of activity we're going to get on the web. From the web, we know how many patients will spend time to become kind of highly qualified leads. And then we kind of know also from that how many will reach out and attempt to make -- find an appointment either through the ACP or through one of the other referral channels. And we track that. With the ACP, we actually can track how many of those patients get an appointment, and we can extract how many of them go on to implant. So we know our conversion rates all the way through. And then what we can do is we can reverse back for the cost of acquired patients. So we do run our metrics that way, knowing that when we set our expectations or our guidance that we don't look back and we know what we want that DTC to be. We know with the Inspire V, we are reenergizing the awareness campaigns. We have the new campaign that has started out. And so we track that very, very closely.

Okay. Got you. So capital allocation, you guys did buy back some shares. How are you -- as you look ahead to ending this year, entering 2026, balancing share repurchase versus investment -- organic, inorganic investment. Maybe talk a little bit high-level strategy there.

Yes, absolutely. I mean our first priority is organic investment and you've seen we've continued to scale our sales organization and invest in both innovation and patient and medical education, all of which have been really important and have good returns for us. In addition to that, correct, we do have a $200 million -- well, we had a $200 million share repurchase authorization. We've completed $50 million of that, about $150 million is still remaining. We do believe that our stock is undervalued, and we'll be opportunistic about share repurchases going forward. In the past, you have seen us announced some partnerships that can help us accelerate the adoption of Inspire therapy. Usually, these are technology advancements that we can partner with to help either patient education or clinical efficiency. So I think you should anticipate that we have a very strong business development function that looks at everything that's out there and assesses the landscape. So I think you should assume that we're continuing to do that.

Okay. And this might -- this is kind of a long-term question. But as you think about the R&D and investment in technology, innovation, et cetera, where do you see Inspire therapy going? Like what is -- what are the next innovations from here? And I don't want to force you to talk too much about your pipeline just what you're comfortable sharing.

We're excited about our pipeline because it's about driving patient outcomes, making it more comfortable for the patient and making it more comfortable for the end user. And so what Inspire V is, how many times did I say pressure sensing lead removal today. That is really a significant change for the ENT surgeon make it such an easier procedure. What's so important, though, closed-loop stimulation is essential for high outcomes. That's #1 premise of Inspire therapy. You have to know when a patient is inhaling to provide stimulation synchronous with aspiration to optimize the outcomes. Inspire V sensing is better than Inspire IV and we showed statistical significance with our Singapore study that Inspire V is better than IV and our ability to synchronize with the respiration is up to 85%, if not higher. And that really makes a difference in patient outcomes. The next step is if we can get patients to use the therapy all night, every night, that just takes outcomes a step higher. Inspire VI is intended to have automation. So when the patient falls asleep, the device turns itself on. And when the patient wakes up, it will shut itself up. We're working on Inspire VI as we speak. Now we're going to have strong outcomes, and then we're going to take therapy adherence to the highest level. Think about CPAP. The challenge with CPAP, these people don't use it. Now if we have a device that can provide outcomes with high utilization, that's really important. One last point on this, at the ENT conferences, 2 papers came out, that showed significant improvement in cardiovascular health with patients using Inspire. This is a large database of over 4,500 patients and over a 10-year study, independent of Inspire. So these are independent centers doing this research. If we can show improvements in cardiovascular reduction in the comorbidities and improvements in cardiovascular health and ischemic stroke and there are several other elements in that paper, that's a game changer. Now you're driving health outcomes along with quality of life with treating obstructive sleep apnea. Now we're taking it to the next level.

And is that the kind of data that is going to help with payers and getting them more, like you said, uniformly covering this?

Well, 2 things. Payers always will say outcomes are first, but also there's always an economic element to it. Well, if you can show improvements in cardiovascular health, that's overwhelmingly powerful argument for the economic side as well. And as we have support today from payers, that only further reinforces that.

All right. We did it in time.

Good way to end on that one.

I know. I was going to ask you if you wanted to summarize, but we're out of time.

We just did it with cardiovascular health. Thanks, everybody. Thanks, Danielle.

Thank you.

Thanks, Danielle.