Inspire Medical Systems, Inc. (NYSE:INSP) Q1 2024 Earnings Call Transcript

Inspire Medical Systems, Inc. (NYSE:INSP) Q1 2024 Earnings Call Transcript May 7, 2024

Inspire Medical Systems, Inc. beats earnings expectations. Reported EPS is $-0.33783, expectations were $-0.63. INSP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is [Dilem], and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Inspire Medical Systems First Quarter 2024 Conference Call [Operator Instructions]. I’ll now hand the call over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Ezgi Yagci: Thank you, [Dilem]. And thank you all for participating in today’s call. Joining me are Tim Herbert, Chairman and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the three months ended March 31, 2024. A copy of the press release is available on our Web site. On this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including without limitation, those relating to our operations, financial results and financial condition, investments in our business, full year 2024 financial and operational outlook and changes in market access are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. Please see our filings with the Securities and Exchange Commission, including our Form 10-Q, which we filed with the SEC earlier this afternoon for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information and speaks only as of the live broadcast today, May 7, 2024. With that, it is my pleasure to turn the call over to Tim Herbert.

Tim?

Tim Herbert: Thank you, Ezgi. And thanks, everyone, for joining our business update call for the first quarter of 2024. We always start our earnings call by reiterating our commitment to delivering strong and consistent patient outcomes. Our mission is to put the patient first and we are thrilled that over 65,000 patients have been treated with Inspire therapy to date. Last week, we celebrated a major milestone with the 10-year anniversary of the FDA approving Inspire therapy. This is only the beginning. And in the years ahead, we look forward to advancing the technology and growing therapy adoption for the many patients with untreated obstructive sleep apnea. With that, let’s review our results. In the first quarter, we generated revenue of $164 million, representing a 28% increase compared to the first quarter of 2023.

First quarter US revenue totaled $155.8 million, a 25% increase over the same period last year. This revenue growth reflects increased position in patient awareness, increased market penetration in existing centers as well as expansion into 66 new implanting centers in the United States and 11 new US sales territories. Outside the US, revenue increased 141% to $8.2 million. We’re very happy to report a strong rebound in Europe and primarily in Germany since receiving derogation late in the fourth quarter. The derogation process has allowed us to continue to grow the adoption of Inspire therapy. Finally, we continue to work diligently to obtain EU MDR approval, which we expect to receive in mid-2024. On our last earnings call, we indicated more pronounced seasonality of mid to high teens in the first quarter, and the team worked diligently and delivered revenue growth within the expected range while holding seasonality to 15%.

With this strong start and our outlook for the remainder of the year, we are increasing our 2024 revenue guidance to $783 million to $793 million, which represents 25% to 27% growth over 2023 revenue of $624.8 million. Our net loss for the first quarter was $10 million compared to the $15.4 million in the prior year period, representing a net loss per share of $0.34 compared to $0.53 in the first quarter of 2023. As our business continues to mature, we expect further operating leverage and now expect to be profitable for the full year 2024. Therefore, we are initiating first time diluted net income per share guidance of $0.10 to $0.20 on for the full year 2024. Switching our discussion to a few key market developments. First, the SURMOUNT-OSA trial results reinforce our view that GLP-1s will be complementary to our market opportunity and may provide a mechanism for potential patients to reduce their weight and qualify for Inspire therapy.

As a baseline, Inspire therapy is currently designed to treat tongue base collapse with stimulation of the hypoglossal nerve. Patients with a higher BMI are more likely to experience lateral wall collapse of the airway, which is not effectively treated with hypoglossal nerve stimulation. If they experience lateral wall collapse, these higher BMI patients, such as the patients in the SURMOUNT-OSA trial, who had a mean BMI of 39, generally would not qualify for Inspire therapy. Therefore, with the headline results of the SURMOUNT-OSA trial, we believe many of the patients who experienced significant weight loss, including those who benefit from the use of GLP-1, are likely to experience a reduction in their lateral wall collapse, which would allow them to qualify for Inspire.

We look forward to reviewing the detailed study results when they become available. On a related note, with regards to the sleep endoscopy procedure, which is used to identify patients that are candidates for Inspire therapy, we have completed the enrollment and quality assurance portion of the PREDICTOR study that is intended to identify a new approach to replace sleep endoscopy for a subset of patients. We are early in the data analysis phase and we are identifying the populations that have predominantly tongue base obstructions. Without surprise and consistent with SURMOUNT-OSA results previously discussed, our initial focus with the predictor study is on patients with a lower BMI who may not have significant lateral wall collapse and, therefore, not require a sleep endoscopy.

We will continue the analysis and move forward with — towards a peer reviewed publication, enabling us to work with payers to update their policies. Staying with our R&D activity, we are happy to report that the Inspire V submission is in review with the FDA and assuming approval, we are on track for a soft launch in 2024 and a full launch in 2025. The team is focused on our operational readiness, which includes ensuring proper inventory levels prior to full launch. Further, we continue to make enhancements to our technology as evidenced by the commercial launches of our silicon based leads and Bluetooth patient remote, the ongoing investments in our SleepSync digital platform and most recently, the FDA approval of our new physician programmer, which connects directly with the SleepSync platform.

Highlighting our market development activities, we continue to advance our medical education programs and year-to-date, we had over 100 sleep doubles and close to 200 ENT residents attend our Inspire training programs. Further, we continue to increase our presence at primary care and cardiology conferences to drive increased awareness of Inspire therapy. Our direct-to-consumer awareness programs continue to be excellent and provide a strong pathway for patients to connect with the proper health care providers. Key to our success is our continuous improvement of our tools to assist the patient journey. It is important to note that we have the first and only FDA approved closed loop neurostimulation system to treat obstructive sleep apnea and over the past 17 years have built very strong clinical evidence with nearly 6,000 patients worldwide and detailed compelling real world evidence, including over 280 peer reviewed publications and a strong reimbursement presence with over 260 million covered lives in the United States.

We continue to advance therapy adoption and clinical evidence, including expansion of therapy indications to increase the number of patients who can benefit from Inspire therapy. At Inspire, we have built a world class team, including a direct commercial organization in the United States and numerous global markets. We have also invested heavily in research and development, commercial infrastructure, reimbursement, direct-to-consumer campaigns, medical education programs and clinical trainers to drive continued awareness and adoption of Inspire therapy while focusing on and improving upon our strong patient outcomes. In summary, we remain focused on the patient to continue the growth and adoption of Inspire therapy. We will continue to execute our growth strategy of increasing utilization at existing centers while adding capacity by opening new centers.

As we celebrate the 10 year anniversary of our FDA approval, we remain excited about our future prospects and are confident that we have the appropriate strategy in place to drive long term stakeholder value. With that, I’d like to turn the call over to Rick for his review of our financials.

Rick Buchholz: Thank you, Tim. And good afternoon, everyone. Total revenue for the first quarter was $164 million, a 28% increase from the $127.9 million generated in the first quarter of 2023. US revenue in the first quarter was $155.8 million, an increase of 25% from the $124.5 million in the prior year period. Revenue outside the US was $8.2 million, which is a 141% increase year-over-year. The global average selling price was consistent year-over-year and with the previous quarter, and we expect ASP to remain at this level for the remainder of 2024. Given the potential of new entrants in the future, we do not expect to continue to report this metric going forward. Gross margin in the first quarter was 84.9% compared to 84.4% in the prior year period.

The increase was driven by improved manufacturing efficiencies and higher volumes. Total operating expenses for the first quarter were $154.5 million, an increase of 21% as compared to $127.5 million in the first quarter of 2023. This planned increase was due to the expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. Interest and dividend income totaled $5.9 million in the first quarter compared to $4.3 million in the prior year period. This higher income was driven by higher interest rates on our increased cash and investment balances compared to a year ago. Net loss for the first quarter was $10 million compared to $15.4 million in the prior year period, representing net loss per share of $0.34 compared to $0.53 in the first quarter of 2023.

The weighted average number of shares outstanding for the first quarter was 29.6 million. We expect the full year diluted shares outstanding to be 30.4 million. Our total cash and investments were $469 million at March 31 and was consistent with our December 31 balance. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers while training and opening new implanting centers. We continue to expect to generate positive cash flow for the full year 2024. Moving on to 2024 guidance. With the strong trends we are seeing in our business, we now expect full year revenue to be in the range of $783 million to $793 million, representing an increase of 25% to 27% compared to full year 2023 revenue.

We expect full year gross margin to be in the range of 83% to 85%. We continue to expect to activate 52 to 56 new US centers and established 12 to 14 new US sales territories during each remaining quarter in 2024. While we are early in our adoption and we’ll continue to expand our footprint by opening new centers and territories, we believe profitability is a more relevant metric in tracking our financial performance going forward. With that said, starting in 2025, we will guide to revenue growth and earnings per share. And as such, we will no longer provide center or territory guidance metrics. Given the strong momentum in our business and our improving leverage, we expect the diluted net income per share for the full year 2024 will be between $0.10 to $0.20 per share.

In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2024. With that, our prepared remarks are concluded. [Dilem], you may now open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And I show our first question comes from the line of Danielle Antalffy from UBS.

Danielle Antalffy: Just a quick question on the US performance in the quarter, 25% growth, very, very strong. But it did come in below expectations. I guess I don’t know if you could comment a little bit on with this Street modeling, I mean it looks like the sequential decline in utilization was actually less in Q1 versus Q4 than it has been historically. So that’s great to see. But maybe some of this dynamic on Medicare versus private pay mix? And most importantly, anything you’re seeing from the private pay side, for example, UnitedHealth and the dynamic with them and potentially requiring some sort of documentation around oral appliances. Sorry, that was a lot, but just any more color on US performance.

Tim Herbert: We did talk a little bit about the seasonality expected in the quarter. We did have a strong Q1 last year offset with some of the silicon lead inventory that we’re shipping and we knew we had a strong Q4 coming in as well. So we expected the higher seasonality. The team did well. The team held tight to come in where we expected to be with a 15% seasonality. And we do see the utilization continuing to be strong as we move forward going into the year, and therefore, we have confidence in being able to increase our guidance. We do understand the concerns over some of the private pay and the prior authorizations and specifically UnitedHealthcare with oral appliance therapy. We are tracking that very closely. And with United as we work hard to document the prior authorizations going in and we don’t see any significant pushback at this point.

Don’t believe it has any impact on our business. Again, we feel we’re in a good position moving forward for the rest of the year.

Operator: And I show our next question comes from the line of Robbie Marcus from JPMorgan.

Unidentified Analyst: This is Alan on for Robbie. I had, I guess, a bit of a follow-up to the first question on the US. Despite the US experience and this heightened seasonality, you did end up raising the guide by, I’d say, a fair multiple of the largely driven by OUS. So what are you seeing that gives you confidence into the second quarter to raise guidance by this much? And should we think about that as something from utilization, dock ads, center ads?

Tim Herbert: I think it’s all of the above. I think we do see good demand for the therapy across the board. We do see uptick in utilization as we move through the year. I think we did have confidence to increase the guide focusing more on the latter half, but have confidence going forward with the demand for the product within the United States with the increased number of centers that we opened up and continue to drive utilization.

Operator: And I show our next question comes from the line of Travis Steed from Bank of America.

Travis Steed: I guess why do you think US center utilization is slowing? It’s kind of about — even if you exclude the new centers this quarter, it’s kind of in line with the second half of last year, which is when you had some of the prior auth issues. I just really haven’t seen the improvement there. So just curious, is there something going on with the new centers you’re adding or older centers maturing or any kind of rep changes going on? And also curious why you’re no longer going to report kind of the metrics we use to track utilization?

Tim Herbert: I think that the utilization continues to be our focus. And I think if you kind of look back to where we were back on the first quarter, we’re pretty consistent with where we were a year ago when you take into effect the inventory shipments with silicone leads. We know we always have seasonality as we come out of Q4 and moving into Q1 and we tend to start ramping back up and that again gives us the confidence to be able to increase the guide as we move through the second half of the year. I think as we kind of look at — as we start maturing the company and we focus on reporting on revenue and now we’re very happy to start reporting on and committing to profitability for the company as we mature, I think it’s become less important for us to report on a number of centers and the number of new ads and there’s also some proprietary reasons for to be able to do that as well.

But I think that we’re making sure that we provide the proper information for people to really be able to model the business and really feel profitability is going to be a key to helping people out there.

Operator: And I show our next question comes from the line of Adam Maeder from Piper Sandler.

Adam Maeder: I wanted to start with a guidance question. So the raised guidance, I wanted to just better understand. Are you guys attributing that primarily to the OUS business, is that — should we spread it across both US and OUS? Just help us kind of, I guess, think through that. And then any color, Tim, that you’re willing to provide on Q2 trends thus far into the quarter. I have the Street at $188 million for Q2 consensus revenue. Curious if you’re willing to give a comment there as well, and then I did have one follow-up.

Tim Herbert: I think that when we look at it, we’re seeing good progress in Europe. We did have a little bit of a rebound effect with the derogation in Germany, which is strong, but we’re seeing strong momentum going forward there, too. So the European team is performing very well as is the team in the United States. So well, I think there is a complementary element to some growth in international revenue, which is wonderful.

Rick Buchholz: I’ll add to that, too. So historically, we have experienced seasonality in the first quarter. And then as far as the composition of our full year revenue that generally builds throughout the year. So I would say the increase in the guidance should be mainly seen in the second half of the year.

Adam Maeder: And guys, I apologize. I guess I’m a little confused. So the guidance raise is attributable to both the US and OUS business going forward, which you kind of spread it across both those geographies. Is that correct?