Inspire Medical Systems (INSP) Earnings Call Transcript & Summary

All right. We're live here, so we're going to get going. Welcome to the 2025 Piper Sandler Healthcare Conference. My name is Adam Maeder. I'm one of the Med Tech analyst here at Piper. Very pleased to introduce the team from Inspire Medical. With us, we have Tim Herbert, Chairman and CEO; and Ezgi Yagci, from Investor Relations. Thanks so much for joining us.

Thank you for having us. It's great to be back here again for the -- I don't even know how many years it's been.

It's been a couple.

You got to be pushing and getting close to 20. So that's great.

We're thrilled to have you. So maybe just to kick things off, I wanted to touch on the implied Q4 guidance. The Q3 print, nice bounce-back quarter, you beat the top line, you crushed EPS numbers. You did reaffirm the full year guidance for 2025 on revenue, which implies a decent step up quarter-over-quarter. And I guess the question is, it's not a typical year for Inspire. And so just how much visibility do you have in the business? Just give us some confidence that you're going to be able to achieve the Q4 implied guidance.

Very good. Yes, we are very happy with the third quarter. we knew the beginning of the year is always the challenge as we're launching Inspire V, and there's challenges with that, and we held back on opening new centers in the first half of the year kind of held back a little bit on direct-to-consumer and building awareness to give us time to get that product out. The Medicare challenges with 64568 got cleared up on July to allow for people to use that code with Inspire V. That really kind of kick started Q3, and we made very good progress in converting all the centers from Inspire IV to V. And then the fourth quarter is just a continuation of that and really cleaning up the transition of the rest of the centers, but we wanted to just reaffirm that revenue because we already had a significant step-up from Q3 to Q4 in revenue. We also had some cleanup on the earnings per share, which was really positive as well as so we did increase our guide on earnings per share for the rest of the year. So team is working hard. We do have the visibility that we see. We know December is always the busiest month of the year for implants because everybody has their high deductible insurance plans that they want to make sure they get the procedure done by the end of the year before that high deductible or out-of-pocket resets on January 1. So yes, we continue to progress through the quarter and working hard.

Okay. Perfect. And Tim, inventory levels, how should we think about those in Q4? I think you're transitioning from the Gen 4 to the Gen 5 system, working through some inventory, is it net neutral in Q4? Is it a headwind? Is it a tailwind? Just kind of what's...

There are 2 different inventory things. What we're talking about is field inventory and inventory that people carry. I think it's going to be a little bit more net neutral. We will continue to burn down the Inspire IV inventory, but it tended to get replenish with Inspire V. So it tends to be a little bit of the net neutral. And I think, well, we should have most of that taken care of by the end of the year. There will be some carryover into next year, but I think that a pretty minor impact going forward. And and we've been pretty successful at transitioning everybody into V.

Yes. And that's a great segue into the next question, which is the transition for the Gen 5 system. You finished Q3 with more than 75% of U.S. accounts doing Gen 5 procedures. Where is that number today? Where do you expect to finish the year?

I think the training is complete with the surgeons in the United States. And then obviously, we'll continue to train additional surgeons as we go. I think the contracting is well over 90%. The SleepSync is over 80%. And so we're really able to kind of transition. I think the 2 key elements of this whole Inspire V launch, one, having proper inventory to support the launch and number two, getting that Medicare software or CMS software updated for 64568 with Inspire V was really kind of the key that let us get through the logistics of contracting training, SleepSync and transitioning. Once July 1 when CMS updated the software, then it's just go, and I was able to really kind of lean in and get that conversion. And that's why we're in pretty good shape right now as we finish out the year and transition next year. I don't know if this will really be a topic we'll be focused on V.

Okay. Fantastic. One other kind of temporal dynamic wanted to touch on patient warehousing. I can't recall if it actually came up on the Q3 call or not, but what is the status there of some of those patients that were maybe warehoused earlier in 2025? Have they been treated? Are they going to be treated? Or are they on the schedule? Just what's your take on the warehousing dynamics?

Bringing that back a little bit for everybody. When we talk about patient warehousing, we're talking about patients who are aware that the fifth generation is available. And they want to wait to receive therapy until they can get the Inspire V rather than receiving an Inspire IV. So we think that phenomenon is pretty well cleared up. I think the patients who wanted to wait are in the queue if they haven't already received the Inspire V device, and again, that's the second to left probably there will be time we'll be talking about this as well as we kind of work through the year, and that patient warehousing is pretty well complete.

Yes. Okay. Perfect. On the Q3 earnings call, you did give an early indication of top line growth for next year, 10% to 11%. Maybe just unpack that for us, walk us through the key puts and takes on that framework, both on the tailwind and headwind side of the business.

I think we wanted to put a message out there to kind of get everybody on the same page to be able to have a starting point for where we saw 2026. It wasn't our formal guidance, but we want to put out an early indication for what to expect, and then we did comment that at a competitor's conference earlier in the year, I think we'll come out and preannounce our revenue for the year and give full year guidance at that point. But we just want to make sure that we give our early indication for everybody to get consistency and a point to be able to move from.

Yes. Okay. Perfect. I feel obligated to move on to reimbursement, which is the subject du jour. So very nice reimbursement change for CPT code 64568 for calendar year 2026, double-digit bump for physician reimbursement, but the bigger change, the new Tech APC for the facility moving to 1580, 40% to 50% year-over-year increase for the facility reimbursement using round numbers for simplicity. How do you think about any potential impact to the business? What are you hearing from customers about the increase?

Well, the excitement. I think that's pretty important CMS and we're working on this for full year. And we just got done talking about how CMS was already transitioning Inspire V to 64568 and updating the software in July, Inspire V New Tech applies well into the New Tech APC. So not a lot of surprises. I think the end game, I think, is people want to have a Level 6 APC ambulatory procedure classification. Right now, it was in Level 5, but there's always a little bit of a cost differentiation that just didn't work. So -- but I also think that someone else was looking at it with Level 6, there wasn't enough data, enough volume to be able to justify that today. . So the New Tech APC is a nice tool that allows a bridge to be able to collect additional data, to be able to kind of lean in and probably the end game several years down the road will be a Level 6 APC. But for the meantime, this new tech APC really works well. It's great for the hospitals. It's wonderful for the patients to be able to gain access to therapy and improve the economics with Inspire. So yes, we're very happy about it. Customers are happy about it. We're spending a lot of time now to make sure all the customers are aware of that as they update their contracts with the commercial payers and will have an effect across the board.

Yes. Fantastic. In pricing strategy, to ask it bluntly, does this change Inspire's pricing strategy? Will you look to increase price? Or is $25,000 still a good assumption for U.S. ASP?

I think that we know how the calculations work. And we know that we need to be supportive with that. So we know that there's going to be benefits to the hospitals, but the hospitals also understand how the economics work and when -- at the end of the year when they look at the number of procedures proposed or conducted in the past year at the different cost points. It affects that costing. So the team is looking at this very closely right now on what our strategy will be moving into next year, but this is obviously an opportunity, something that we need to look at closely. This does take effect January 1. So at times of the essence to make sure that we're leaning in on that and that we're already working the awareness with our sites. So more to come on that. But yes, we understand how the system works and where we need to be.

Okay. Fantastic. You mentioned this earlier, Tim. new tech APCs are kind of these are my words, but transitory vehicle collect additional data. How long do you expect to be in the New Tech APC? Where do you think reimbursement for your technology kind of shakes out over the long term?

Yes. I think it will stabilize over several years. I would expect us being in that New Tech APC for quite a period of time, at least 3 years probably before they established a Level 6 APC, and that's kind of the new thing, a new Level 6. So -- but it's been in the works for some period of time. And -- but I think it will be a while before the things kind of stabilize all to get the right reimbursement levels. And ideally, it's going to be right where it is right now.

Yes. Okay. Fantastic. Maybe just one more. commercial payer rates. Does the New Tech APC have any influence on kind of how your commercial payers pay for the technology, cover the technology?

I think a lot of the Medicare Advantage, which are the commercial payers are triggered off the Medicare payments, and a lot of the commercial payers are also just triggered off that as well. I think several of the hospitals will have to go and update their renewals with their own contracts with commercial payers, but it's up to us to make sure that they're aware what that medical reimbursement rate is to be able to work from. But everybody knows that commercial pay rates tend to be a multiple of Medicare. So it kind of ripples through the entire system.

So it sounds like it is fair to assume that commercial payer rates will likely increase.

Will likely increase as well, for sure.

Okay. Fantastic. Maybe switching topics here. Gen 5 utilization. You gave some statistics early in the year, I think it was the Q2 earnings call about the centers that adopted the Gen 5 device. They have seen 20% plus volume increases on a year-over-year like-for-like basis. Wondering if you have any updated figures, similar statistics that you can share as the rollout has continued to progress or even just any anecdotal color on the utilization topic.

Yes. I think that we plot that, we track that closely and we do see those centers that are fully transitioned to Inspire V do have increased growth over those, that are with IV. Now that also the higher utilizing centers are the ones that transition to V first, and they do see the benefit and can move forward with it. Let's talk about V though, the positive acceptance of Inspire V is pretty universal. And number one, it starts with a ear, nose, throat surgeon, not placing the pressure-sensing lead between Intercostal muscles. And that really is impactful part of the process. It makes it much easier for the surgeon to do the procedure. We've been showing a 20% reduction in surgical times from the data from the clinical studies that we've run with Inspire V. But more importantly, the outcomes with the Inspire V have been very solid as well. Not to mention the safety performance has always been very strong. So the acceptance of V across the board has really been universal. And now, of course, with the reimbursement, that really is a tool to be able to lean in on further.

Fantastic. And just a follow-up there would be new surgeons, trained. And I've always kind of thought about the low-hanging fruit for Inspire is to add a second or a third implanter at an existing center. Is Gen 5 helping with those efforts? Are you seeing progress there? How do we think about a number of kind of surgeons training going forward?

Yes. I think we'll look at this in a couple of different fashions. Number one, the reimbursement is going to have a positive impact, too, because of the margins that hospitals can receive for proper reimbursement. And that allows them to do more procedures and train more surgeons and kind of lean in. The challenge we've had with current reimbursement levels, it's very difficult to do Medicare cases in an ambulatory surgical setting. And when we have ear, nose and throat surgeons, a lot of the ENTs the private practice, they want to spend their time in the ASC, and they don't want to be in the hospital. So it's a whole new group that this reimbursement change brings into play. Not to mention Inspire V not having that pressure sensing need it really yields itself for procedures done in the ASC. So we've already formed ASC Tiger team. It's going to be a big push next year to bring in new surgeons from private practice and those that have their own ASCs, now that we have a reimbursement level that can support that across the United States, not just in the higher paying geographic areas. So I think that we're going to really be looking to increase number of surgeons trained to drive utilization and really going to be a big push to kind of excite ASCs to kind of accelerate because today, it's only 20% of the procedures performed.

Right. And I know there was a lot of focus on ASCs in past years and maybe hasn't quite materialized and perhaps that's reimbursement related. This procedure seems very well tailored for an ambulatory surgery center. Where do you think that mix can kind of go over time? And would you expect ASCs to have higher throughput than hospital outpatient department?

Yes, and I think we can look at some of the comparables that we have in neurostim and we can see percentage is 40%, 50% of procedures done in an ASC. And I think that's achievable. And I think what kind of works for the surgeons because they're partial owners and they help control the schedule and they have just more flexibility in ASC. And some of our top sites will have 2 rooms, for Inspire procedures, where they're completing procedure as they clean that room, they go across the hall to a different room and going back and forth. And that's where we see sites doing double-digit procedures in a given day. And I think that as we go to ASCs that provides that flexibility to be able to really let them increase the utilization and obviously, the reimbursement really kind of opens the door to be able to go down that ASC pathway. And that's what's really so exciting about it.

That's great color. Switching topics again, replacement curve. I haven't -- have to admit I haven't taken a lot of questions on this recently, but you first commercialized in 2014, I believe. Batteries last maybe 10, 11 years, if I'm remembering correctly, how do we think about a replacement curve opportunity that's on the come -- patients coming in for a second device...

Kind of overshadowed by this reimbursement news, is the reimbursement for replacement devices actually went from a Level 4 to a Level 5 APC which is wonderful, right? And so that means when patients come in, they can -- most patients coming in now from 2014, '15, they have an Inspire II device, right? And they'll have that replaced with Inspire V device. We'll leave the sensing need behind and only the stimulation lead plugs in because naturally, the sensing is now incorporated as part of the Inspire V. We're already seeing replacements starting to tick up, and that's exciting, right? And we're still expecting a high replacement rate of up to 80% of patients who received therapy coming back and the battery life has been shown to last 10.5, 11 years. And so those patients from 2014 and '15 are just coming through right now, and that's just a new revenue stream that we'll continue to add as we continue forward.

Okay. Perfect. I feel obligated to ask the question on GLP-1s. So let's maybe tackle that. The Q2 earnings call, I think, was the first time I heard the company talk about GLP-1s impacting the funnel or maybe being a near-term transitory headwind. I thought the commentary on the Q3 call somewhere recently was a little bit more balanced, upbeat in terms of the impact on the funnel. Did I interpret your comments correctly? And what are you seeing in terms of the impact of the funnel today? Is it headwind, net neutral tailwind?

No, I think you interpreted it correctly. I think that after the Q2 call, we went out and did our own work, we went and interviewed all the sleep physicians and wanted to get a feel for how are they changing their practices around GLP-1s and other tools to treat sleep apnea. And that's kind of the nice environmental change that we see, is sleep physicians now have tools to be able to treat obstructive sleep apnea. People go to their family practice doctor to get a GLP-1 to lose weight and feel better, look better, right? . But if they get a diagnosis of obstructive sleep apnea, the insurance company may pay for it. And so what the sleep physicians are seeing is an increased diagnosis rate of sleep apnea. Well, that's driving their business, right? They have more patients coming in. It's just expanding the overall pie for patients diagnosed and who need to be treated. And we know that these patients are not going to just get a GLP-1 and left on their own for a year to see if it takes care of the sleep apnea. They're going to be put on a CPAP at the same time they receive a GLP-1, and if they're not compliant to the CPAP, they're going to be looking for alternative therapies. So I think it's going to be a strong favorable tailwind for Inspire in the future. Today, it's still in the early days of GLPs coming out and being prescribed and insurance companies reimbursing. But I think we're having overall transition period with Inspire V and we have a big backlog of patients that we're really not seeing too much of it right now. But I think that will turnaround near future and continue to be a tailwind. We already talked to our practices who are already seeing patients on GLP-1s, now receiving Inspire therapy. So we think that's really going to be a positive Going forward.

Yes. Okay. Fantastic color there. And maybe switching gears to the device competition. There is a second player on the market that's starting to launch their technology. What are you seeing from this new competitor? How do you think about competitive dynamics going forward? How are you thinking about any impact in '26?

Yes. I think centers will try the new technology. I think that's okay. I think that's their job to try new technologies. And we just make sure the expectations are there that they're going to have the same level of outcomes. When they implant Inspire they know that there's consistency there. They know what the procedure is. They know the expected outcomes, the safety is unmatched and that they know what to expect, they know the support that they're going to receive. We just put out new data from 2 independent universities that talked about the impact of cardiovascular health. And it showed over 4,500 patients over 10 years in a government database, TriNetX, that they showed improvements in health outcomes of Inspire over CPAP and certainly over nontreatment. That's probably a bigger impact than even the reimbursement impact. When we can show true health outcomes and the impact that, that's going to have. And that just shows the stability that Inspire has, and we set the bar very high for what the expected outcomes are and what customers should expect out of Inspire or anybody else entering into the field and we're going to keep developing new technologies like Inspire V, we're already working on Inspire VI and beyond. The digital programs we have with SleepSync are making it much easier to manage the patients going forward. So yes, we're going to continue to set the bar very, very high and it's important that all the physicians have that same level of expectation for whatever therapy they prescribed delivers.

Fantastic. Ezgi, maybe one for you on the P&L. I'm going to kind of leave it a little bit open-ended here, but any quantitative or qualitative color that you want to share, whether it's gross margin, OpEx below the line items as we think about 2026.

Yes, absolutely. So I guess starting on the gross margin line, as you all know, the transition to Inspire V has been accretive to our gross margin. This is a -- we got rid of the pressure sensing lead, which was a very expensive and complicated SKU to make. So as we get rid of that, there's some upward bias on the gross margin line. When we think about OpEx, we will continue to support our DTC initiatives and most likely increase our DTC spend, but there are a lot of other areas where we're being much more disciplined. So you should anticipate that operating margins will increase next year on a GAAP basis.

Okay. Fantastic. About a minute left here, I'm going to try and get through 2 more questions. I guess the first is a long time CFO, Rick Buchholz, who is here somewhere, not on stage, but here somewhere, I think, the room or the building, stepping aside at the end of the year. Just any update on the CFO search and when we should expect that role to be filled?

No. We have several good candidates. We did a nationwide search to find somebody who has that experience to really take it to the next level. And we're in the interviewing process right now with several candidates, and we're really making a very good progress there and hope to make an announcement very soon.

One last one, pipeline. I wanted to ask about CCC because the competition -- emerging competition, it feels like they're kind of targeting these patients. with the respective technologies in one way or another. Inspire's contraindicated today, it's 20%, 30% maybe of patients with moderate to severe obstructive sleep apnea. What is the strategy for CCC? And how quickly can we get there?

Well, we're going to separate this out and talk -- complete concentric collapse. Really, what we're talking about is a combination of tongue-based collapse and lateral wall collapse. And Hypoglossal Nerver Stimulation moves a tongue forward and addresses tongue-based collapse, all competitors. And nobody addresses lateral wall. That's a different muscle group that you need to stimulate. And so we do have dual channel stimulation going to address not only tongue-based, but lateral wall. The good news is the GLP-1s do help patients lose weight and reduces the neck circumference, and that helps the lateral wall collapse. And I think that -- so that's why GLP-1s and Hypoglossal Nerver Stimulation work in concert with each other. But all the technology is still moving the tongue forward. But we're taking that to next step to go to a dual-channel device and we're making very good progress with that, and we look forward to reporting back on that.

We'll stay tuned. Well, we covered a lot of ground in 25 minutes, and we'll wrap there. But thank you again for joining us.

Very good. Thanks for having us.

Thank you.