Inspire Medical Systems, Inc. ($INSP)

[Audio Gap] Conference.

And we'll start out with you and, kind of, new CFO at Inspire. And how should we think about kind of the guidance setting strategy and kind of your handle on the CFO at Inspire.

Yes. Yes. Well, first of all, thanks for hosting me. It's a great conference. Glad to be here. Thanks, everyone, for attending this morning. I'm excited to be with the company. Obviously, we're in a period of transition right now. But with the kind of market, the kind of product we have, what we do, very excited about the future. One of the things that as we've gone through this more current trend of top line challenge is I've been able to come in and help us really focus on some of our cost discipline and not necessarily how much we're spending, but what we're spending on and do a lot of prioritization. We want to continue to recognize the top line situation we're in this year, but we're still investing for the future. We're still investing in revenue growth. We're still investing in product development. And I think there's lots of opportunities for us to continue to get more profitable. And as we move through this kind of transient period of reimbursement challenge, get back into strong growth, we're going to be able to come out of this kind of leaner and meaner and be able to manage our spending, I think, really well. And I'm excited to be able to bring some of the experiences that I've had doing that and excited to learn a lot about the business and kind of see how I can plug in and help continue to improve.

And Tim, I think we've been on the stage 7 to 8 years in a row or something like that outside of COVID. And I think for many of those years, you were probably one of the highest growth companies [indiscernible]. And a lot's happened in the business maturity as all businesses do. There are a lot of factors though that externally you haven't controlled that kind of came out of nowhere. Maybe I'd just start at a higher level, like what have you learned through all this last few years have been a little more challenging? And how does that kind of set you up for the go forward?

Well, I think that's a great question to start with. I think what you really got to understand is what you can control. And what all the team, all the employees really focus on is patient outcomes and the product that we deliver and making sure that the outcomes are as strong as they can be, both safety and effectiveness. And we're publishing new data now on the Inspire V, showing just the highest standards. But also over 10 years, we now are publishing evidence of cardiovascular health. So in other words, Inspire is really making a difference for people, not just in their quality of life, which they are, not just in reducing the severity of their sleep apnea, but also long-term health benefits, and that really has a long-term implication for not only the individual patients, but health care companies watch that very, very closely. So the team really focuses on that and focuses on the growth. Yes, if we go back through those 8 years and look at everything from COVID, in fact, I remember having to cancel 1 year because of COVID myself. But the COVID, the GLP-1s last year, we had challenges manufacturing enough Inspire V to launch that in a timely manner. We were able to do that at the end of last year and really showed really good momentum. We had 10,000 units delivered to patients last year using one code. And this year, that code gets pulled out from underneath us. So it's a test of resiliency. And I think the lesson that we learn and share to everybody is it is about positive persistence. That is the motto of the company. That's what we value most. Things happen during the day. And as we are really a one therapy product, we're susceptible to those elements, and we just have to work through those and understand it. And coding is the topic of the day, obviously, but it's a clear process that you need to work through, but it takes time. And so the confusion that's created in the early part of the year, we need to work through that, educate centers and then work towards our long-term solution. We can help control that, but we have a lot of external forces on that, too, with several government agencies, physician societies and input from our centers and our physicians as well. So it's really about just staying true to who we are and staying committed to the patients.

Maybe kind of transition to the 2026 outlook. So set a guide 3 months ago and then kind of changed, lowered the guide this time. Maybe just walk through kind of what changed in the last 3 months in the market in your business that made you adjust the guidance.

Well, I think the -- I'll comment and I'll ask Matt to comment on it as well. The demand and the excitement of the patients wanting therapy hasn't changed. Our ability to deliver that has changed because the coding has upended. And so what we saw in the beginning of the year is early on Medicare being able to use CPT code 64568, that transitioned over to 64582 and the debate on with or without a modifier. And I think everybody kind of played out that story. So as we transitioned through the first quarter and we kind of looked at the leading indicators that we have, which primarily is prior authorizations, we're so involved with that, helping centers prepare the prior auths. We can see that the dip in the prior authorization submissions in the first quarter. That's because centers want clarity on the coding. They want to make sure they understand what risks do they have, not just Medicare but commercial Medicare Advantage. And so they kind of calm everything down, tap the brakes and say, let's make sure we understand that before we start to ramp back up to it. As we transition through the quarter, more changes happened because we're able to get the C-codes with CMS. That was a positive. We saw several of the MACs come forward getting -- adopting the C-code and specifying 64582 without a modifier. And most lately, we did have a MAC come out with a modifier. And so now we have to kind of work through all those key elements. The key to it is centers are getting more and more comfortable. We're educating centers one at a time on their coding strategies. There's variance from center to center. But we're seeing indications of the prior auth coming up. And that's why when we put our guide out, we know that second quarter is going to be the low point because there's about a quarter shift in prior auth. But with the indicators, we can see that improving through the year. Anything you want to add to that?

No, I think it's very much what Tim said. It's -- you're getting new information introduced and then you're getting time to understand how everybody is going to react to that. And like Tim said, when we started the year, it was more of a focus on the modifier that's shifting now to what we're seeing trends in prior authorization and how people are interpreting and applying the new coding guidance that's out there. And so we're trying to use the data that we have. We can see a lot more clear in the next 3 months and then use some reasonable estimates to extrapolate the rest of the year.

There was a little bit of a -- it's hard to kind of reconcile the Q1 to the Q2 guide takedown. It was like a 20-point lower in Q2. So -- and then from there, it's also hard to reconcile kind of usual sequential seasonality in Q3, but you're assuming the stability. So can you help us first like understand why such a step down in Q2? Is that conservative? Are you just taking a reasonable approach to setting Q2? And then why the confidence to get better in Q3?

Yes, yes. So the big impact between Q1 and Q2, as Tim mentioned, is we see the rate of prior authorizations in Q1 declining. And we typically see about a quarter lag of impact between that rate decline and the impact to revenue. So we can see what that Q1 experience is and then we translate that into revenue for Q2. That's the biggest change from Q1 to Q2, bringing that down. We said 9% to 11% decline on the top line. And then at the midpoint for the rest of the year, the implied guide for the second half of the year is about a 9% year-over-year decline. So if you do that, it still implies that sequential revenue gets better from Q2 being kind of the low point for the year into Q3 and then Q4, but from a year-over-year decline, only really slightly better as we move through the year.

And how do we go from down 9% in the second half to growth in '27?

Well, I think we stay focused on the patient, as I mentioned before, and we know the demand is there, and we improve our ability to help the patients get that first appointment. But what's most important is we gain experience with the centers using the codes. And we educate centers one at a time. We start with the highest volume centers and make sure we have meetings so they understand coding what's appropriate for Medicare, what's for commercial, what's for Medicare Advantage. As we gain experience and centers gain experience and confidence and understand their risk profile, they're able to expand and bring more patients in. We know the patient demand is there from our leading indicators from our website and our calls are the ACP, the Advisor Care Program and setting up appointments. So we still work those elements of it to make sure that we build efficiencies there. And so we, again, focus on the demand, but get the experience with the centers with the coding. And as we progress long term, we'll work towards a full-time solution with a new code, of course.

The only thing I'd add to that is just, obviously, we're expecting that decline to be pretty significant in Q2, Q3 and Q4. So eventually, you're annualizing that and you're building off of that, and we're assuming that the industry gets more experience and gets better from there.

And I don't know if you can help quantify what growth means in '27 or if you look at where the Street shook out and any kind of color on what growth in '27 means?

No, we didn't specify that. It's really early. I mean, it's only mid-May right now. So we have a lot of time. We have to go through our strat planning for next year. We do track all the TRx for the GLP-1s. We track all the CPAP new starts. We track claims data, our own prior auth data. So we look at all of our leading indicators. We do know where Street settled out and I'm a little hesitant to comment on sell-side estimates in a public forum, but I think everyone got the message that while we are anticipating a recovery in revenue, that does not mean a new double-digit growth rate, right? So I think people got that message.

Okay. That's helpful. And then the modifier, like even since the quarter, it was like one of the MACs came out and said use the modifier. So can you just help us understand what's going on with the modifier, why is it important that there's consistency there and kind of what it means that there's different MACs saying different things.

Yes. It's debated by many agencies from the MACs, which are the regional medical carriers, of course, by CMS, which is the whole Centers for Medicare and Medicaid Services as well as the AMA. All have weighed in a little bit in discussions on that, and there's concerns about even using that modifier because it's anesthesia-based and using that as a full-time solution is just not what modifiers are set up to be. So a lot of the -- 3 of the MACs came out without the modifier. In fact, one of them actually took any reference from modifier out of there to be clear. Most lately, one MAC came back and said, yes, let's put the modifier in there. The key is we're now using 64582, which is a CPT code that has the pressure sensing lead that's part of Inspire IV. As we go to Inspire V, that sensing lead is now internal to the neurostimulator and the code doesn't perfectly describe it. But if you look at the way the valuations are set up, it's not just the OR time, it's all encompassing from office-based time to various calculations. And so just a minimal amount of time is really impacted by going from 4 to 5 as far as RVUs, relative value units associated with the 2 CPT codes. And if you look at the national average Medicare difference between 64582 and 64568, it's only $63. So while it is an improved procedure to not put in the pressure sensing lead in the big picture, it doesn't change that much. So we educate the physicians, in this one case with this MAC, there's 6 states involved with that. We educate the surgeons on how to bill it. There's a separate information tab that goes in, that gives the full justification of what would be the appropriate reduction. And we believe it should now be between 0% and 10% because that's the experience that we've seen as we've gotten to this point in the year, and with all the discussions that we've had. So again, it still provides -- it's still a level of confusion out there, and there's variability from site to site, and that's kind of how we're navigating through this.

I think there's maybe some that have suggested like a 50% cut in pro fees. Are you seeing that though?

No, we haven't. We've seen just a couple of examples of people using a modifier and it's been in the 10% range. If you Google [indiscernible] 52, I think it will pop up and say 50%. But if you look at the 2 procedures, Inspire IV to Inspire V and not just surgical, but global, there's just not that much difference in there and the MACs certainly understand that.

Okay. And then why are we seeing kind of an impact on the commercial side as well? And I think that was a little bit of a surprise this past quarter.

The administrators like to go and instruct their coding people to use one code for therapy. Well, we don't have that. We have a decision tree now, right? If you're Medicare, you got to code of the C-code and 64582, and if you're [indiscernible] state, you do have to do a modifier. If you're commercial, the good news is those are prior authorized. And so you can get the code and clarity upfront, but they want to slow down. And what we saw in the first quarter, centers want to understand this is our coding strategy. This is what we're going to do. There's been some large payers that have said, no, we're going to do everything one way, and we're going to get prior authorized this way. And can you prior authorize 64582 for Inspire V? Yes, because that code is in the commercial policies as well as 64568. So centers do things slightly different. Our job is to provide the education so they're comfortable that they can code and get paid. There's 3 legs of the stool: coding, coverage and payment. And what's really not being discussed is coverage. We have coverage with all the payers, with all the MACs. Everybody understands this is a very viable and necessary therapy for the patients who are indicated. And with the code 64582, we know it's a Level 5 APC, the C-code pays the same. And so there's consistency there. We just got to get them comfortable in understanding how to instruct their coding people in the hospitals to properly bill it.

Can we dig into that a little bit in terms of like kind of center by center, like how are you getting centers comfortable on how to bill? And are you seeing any evidence of like once you do get them comfortable kind of volume returns, prior authorizations return kind of the leading indicators are heading the right direction?

So we have ramped up our market access team because this is obviously the big challenge. And it's not just our in-house team. We've hired more market access, market access, reimbursement people in the field to be able to support these cases. And we have a coordinated program to list the centers and proactively schedule business reviews and education reviews. And not only are we talking about the no coding, but we want them to audit the cases that they have done. We want them to see what payment are you receiving? Is it appropriate? Did you bill it correctly? And so we can do a corrective action at that time as well and start at the top and work all the way through. And early on, we see signs that, yes, prior auth is changing and people want to get the coding laid out. As an aside, we do have Inspire IV offered for all centers. If they want clarity of coding and clarity of payment, Inspire IV is still there. And we're able to offer that because it's a differentiated product at a slight discount, so they can be able to handle that if they want to really be risk averse and not go down that and have clarity on coding. But I think what we're seeing is people want to figure out the V, and they want to figure out the coding and they're going to keep fighting to do that.

Yes. Why not just to be like, hey, let's hold off Inspire V. Let's wait until we get our CPT code and then let's do all Inspire IV until this figures out and it's kind of business as usual.

We have that ability with Inspire IV, but people have experience with V. They know what V is. They know the outcomes. They know the comfort of doing that implant. It's really about ENTs not having to put in that pressure sensing lead. We talked about that way back. That is kind of one of the key benefits of Inspire V. So they want to fight through it.

That's fair. On the CPT code, I guess that's kind of the ultimate goal here is to get the new code. Can you help us walk through kind of the pathway and kind of what you do know and what you don't know at this stage?

Well, we do know that it was submitted and reviewed. We do know that it was discussed at the AMA CPT panel last week or a couple of weeks ago. We do not know the results. That is a different vote. But there's still another window, another cycle in this annual cycle. So if it's accepted, it goes to the RUC committee and the RUC committee does the valuation come up with the RVUs for that procedure, and it becomes effective January 1, 2028. If it's not accepted, we get feedback to answer some additional questions. And there's another meeting in September that still holds the same January 1, 2028. So let's -- we're just going to wait and the minutes are to be out soon. It's a long-term solution, so it doesn't affect anything in the short run, but we'll at least get clarity to be able to respond to that, and we'll be back in with another submission in June if it doesn't go through or the AAO will be doing a RUC if it does go through.

Do you have any color on what happened in May, the meeting at all?

We were certainly there. We presented. They asked the normal questions, we think, and then they took a vote.

You don't know what the outcome because you can't see what the outcome?

I don't have access to that outcome. But the key is make sure you understand both sides to it. If it goes through now we got to make sure that they do the RUC properly and get a proper valuation. If it doesn't go through, make sure we understand what were the debates or what were the questions that were asked, so we can provide feedback on that as it goes back for the next review. So either way, we're still running the program.

So you have one more -- if it doesn't go through from this May meeting, you have one more chance to keep the same time line?

September -- yes, there's 3 windows in the same time frame. The November -- so that's September, the November meeting actually goes to the next year.

Okay. So if you don't get it in May or in September, then it's a year delay. So it's 2 chances?

Yes, if you got to go back to November, yes, it would be another year delay.

Making sure we understand kind of the timing.

That's the way AMA works.

Okay. Helpful reminder. And then in terms of the RUC analysis, like what's the confidence that you actually get the dollars that you need for this procedure?

Well, I think the physician society looks at the reimbursement of the code and even though it's been established for some time, I still -- they feel that it should probably be a little bit more for the amount of work that it takes for an Inspire case. And I think that's probably one of the concerns as the AAO wants to make sure they're ready to do a RUC and they get a fair valuation for the work to be performed. But they're very experienced in doing the RUC surveys. They know how to do those surveys fairly. The good news between now and back in 2018 when this code first came out is we just have so many more surgeons, right? We have over 1,500 surgeons that have skilled in Inspire IV and Inspire V. And so they just have a greater sample size to be able to work from. But that's the AAO. They know how to do these surveys.

Like do you think in terms of -- they kind of see this as an unusual circumstance, like there's -- there needs to be clarity here. Is there -- one, is there any ability for them to accelerate the process and do something unusual that's not typical from a time line perspective? Or does it maybe give you a little more confidence that you're going to get a better outcome or higher probability of a better outcome because of kind of the unusual circumstances?

No, the society was involved from the beginning, and they've been very proactive. They communicated with the MACs, they communicated with AMA, they communicated with CMS. They wanted 64568 for obvious reasons. They are okay with 64582, and they put mentions out on the modifier and how to be able to establish the proper payment if you did use a modifier. And they do want a long-term solution for their membership. They're actively engaged, and they really know that this is an important factor to make sure that we get this right. As far as changing the AMA schedule, that doesn't happen. AMA has the same schedule that's been years and years. And you know there's 3 meetings for each annual cycle, and we're right in the middle of it. There's one more meeting in September for that cycle. And becomes effective January 1, '28.

Okay. That's fair. WISeR, I think one question is you've talked about WISeR, but we're not hearing it in other places from other companies. And so I don't know if you have a view on why you think it's impacting you more than other companies or why you're seeing it more?

No, I think it's in 6 states, it's impacted with the prior authorizations in those 6 states, I don't want to sound like a broken record, but the #1 issue upfront is coding. And so initially at the beginning of the year, we were doing WISeR with 64568. Well, when that changed over, the WISeR systems, and there's 6 independent systems, they all had to change to 64582, and they don't allow a modifier because there's only -- it's an electronic portal. They haven't included the C-codes yet. So there's -- we're kind of affected a lot by the coding aspect of it as well. And then it does go through and there's different prior authorization reviews for each of the 6 states that are involved in the WISeR program. We are learning quite a bit. The systems are getting updated with the proper coding right now. So as we have more experience and the centers have more experience, as we mentioned on the call, we can see this improving as we move through the year, but it's just a tough start-up with it, with the coding variations and just the prior authorization variation state to state.

I think WISeR is in a pilot stage now. When does it move to a broader stage? And what's the impact when that happens?

No, I think this is all opinion now. I think the government will look at that and is it effective in these 6 states? And do all the therapies that are in the pilot stay in the pilot? Or does it show consistency? And does it go away or does it expand? I think it's kind of really anybody's guess right now. The good news is people have experience with it now. So if it expands to additional states next year, people at least know what it's like and they know how to educate centers to manage it.

Maybe help us walk through kind of why there's a bottleneck with Wiser and what are the things that you can do to kind of push patients through faster?

Well, I think it's really just centers. WISeR introduced the concept of prior authorizations at centers and Medicare cases have never been prior authorized. So really, the whole bottleneck is those patients have to be through the prior authorization process and centers need to make sure that they put the proper information into the WISeR portal. It is an AI system that reviews those. And if they are rejected, we do know how to do the appeals and the appeals are peer-to-peer. And so once we get to the humans, we are able to get those approved. But that's a time lag. Ideally, if we can get those approved right upfront, that really streamlines it. So get the coding clarity first, then make sure we understand centers have the proper documentation to be able to get through the prior auth. And that's what we believe will streamline as we get through the year.

Okay. And then you did call out GLP-1s. I don't know how much of the impact was that, but I think it kind of leads me to even wonder, you've got all these kind of different pressure points. How are you kind of quantifying how much is WISeR, how much is coding, how much is GLP-1s and how much of that is the GLP-1 impact?

We track our leading indicators. We do know our web activity. We know how many people go to the call center for appointments and really, as we discussed, tracking the prior auth. And so we can kind of get a good feel for what impact is from the coding, which is the majority of it. And we have discussions with every center. Our territory managers are closely involved with each center. So we have a pretty good feel for that the coding is really the key impact right now. We always highlight GLP-1s. We do think long term that it will be a benefit for patients with sleep apnea, increasing the diagnostic rate, and you're hearing that from other companies by CPAP prescriptions. And I think that's going to help our business in the long term. Again, what we always highlight with GLP-1s, it is a different mechanism of action. It addresses the lateral wall where we address the tongue-based obstructions. So we always want to highlight. We're aware of it. We know sleep physicians are now active in prescribing GLP-1s, but I think they tend to be prescriptive. They know the higher BMI patients should go on a GLP-1 because they're going to have a hard time passing the sleep endoscopy and qualify for Inspire as is. But we also know there's patients who go on a GLP-1 lose weight and do qualify for Inspire.

And what are you assuming or seeing on the competition front?

I think they put out their information yesterday. I think it's very early on. They don't have a significant impact right now. I think they're having -- our centers will trial their device, of course, and I think that's probably what you saw yesterday. But we need to stay focused with our centers, make sure they work through the coding issues. And going back to what our opening comments were, our physicians know the outcomes you're going to get with Inspire, especially with Inspire V with the new data out there, we're setting the bar on safety and efficacy that the physicians know what to expect. And I think that works as the baseline. So they're working through the coding with Inspire V in mind. So we're going to keep running our game and keep improving the product to make sure it works best for our patients. We know we're going to have competition. We're okay with that. I think that is healthy for the overall market, but we're setting the bar high for what those competitors have to be as far as safety and efficacy and what patients should expect from such a therapy.

And then as growth has slowed, how are you thinking about profitability and spending? And you talked about spending more on some of these market development reps and you've got DTC advertising you have to think about as well. Like how should we think about margins and the impact? Can you continue to keep profitability where it is?

Yes. Well, I mean, kind of in conjunction with the revenue takedown, we did take down our operating margin target for the year, but we're very focused on delivering that, and we were able to overperform in Q1 on the bottom line, and that's a lot of focus of the team. We're continuing to focus on that and prioritizing, right? So we talked about on the call, we're going to spend less in DTC this year than last year, mostly because in the second half of last year, we put some additional investments in there, but we want to make sure that we're keeping a foot on the accelerator there, keeping patients in the funnel. We've got a lot of projects to continue to improve our conversion rate through the funnel. But right now, we want to also invest in education that we have in the field around coding. But we're making really strategic choices, I think, are going to help set us up for the long term as we continue to grow, we'll be able to improve our profitability over time.

Great. Anything that I didn't ask you want to cover?

No, we really want to make sure we covered our outcomes to make sure we cover the response that we had to the Inspire V system. We're so proud of the team for developing that product and the impact it has. And we have to work through the coding because we can't really highlight the true benefits of what Inspire V is and what that sets up for our pipeline in the future.

Great. Thanks a lot.

Thank you very much. Appreciate it.

Thank you.