Inspire Medical Systems, Inc. (NYSE:INSP) Q2 2024 Earnings Call Transcript

Inspire Medical Systems, Inc. (NYSE:INSP) Q2 2024 Earnings Call Transcript August 6, 2024

Inspire Medical Systems, Inc. beats earnings expectations. Reported EPS is $0.322, expectations were $-0.14.

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 Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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 3 and 6 months ended June 30, 2024. A copy of the press release is available on our website. 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 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, August 6, 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 second 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 now have over 75,000 patients treated with Inspire therapy to date. With that, let’s review our results. In the second quarter, we generated revenue of $195.9 million, representing a 30% increase compared to the second quarter of 2023. Second quarter U.S. revenue totaled $187.8 million, a 30% increase over the same period last year. This revenue growth reflects greater therapy adoption as a result of increased market penetration in existing centers as well as expansion into 81 new implanted centers in the United States and 12 new U.S. sales territories.

We now have 1,316 active U.S. centers and 310 sales territories. Outside of the U.S., revenue increased 27% to $8.1 million. We saw strength in Germany, Switzerland, the Netherlands and Belgium, as the derogation authorizations allowed us to continue to grow the adoption of Inspire therapy. With this strong start and confidence in our outlook for the remainder of the year, we are increasing our 2024 revenue guidance to $788 million to $798 million, which represents 26% to 28% growth over 2023 revenue of $625 million. Net income for the second quarter was $9.8 million compared to a net loss of $12 million in the prior year period representing net income per share of $0.32 compared to a net loss of $0.41 in the second quarter of 2023. Given the strong performance we have seen year-to-date, we are raising diluted net income guidance to $0.60 to $0.80 per share for the full year.

We would like to highlight some very important business updates. First, we are excited to announce EU MDR certification in Europe, which includes full-body MRI compatibility. This is a very significant milestone as approval requires a stringent review and operations, quality and regulatory compliance, and we are very proud of our team for this achievement. As a reminder, we obtained derogation in several European countries to help ensure patient access to therapy and product continuity. With this EU MDR certification, we may now submit for approval of the Bluetooth patient remote, the updated physician programmer and the Inspire V neurostimulation system. Second, we received countrywide reimbursement in France at levels consistent with other European countries.

France is the second-largest OSA market in Europe. Our local team is already in place, and we are ready to start reimburse Inspire cases. And just last week, we received FDA approval for the Inspire V neurostimulation system. This is a significant accomplishment highlighting many years of development and evaluation and we are incredibly proud of the hard work across the organization. We are focused on operational readiness and building sufficient inventory to support a soft launch on May ’24 and a full launch in 2025. The Inspire V neurostimulation system incorporates respiratory sensing capabilities into the IPG, eliminate the need to implant the pressure sensitivity. This will provide benefits to the patient with one fewer component to the position with reduced surgical times and to the company with reduced production costs and complexity.

Turning now to market access. We continue to make good progress with the PREDICTOR study and analysis. As a reminder, the initial focus with the PREDICTOR study is for patients with a lower BMI who may not have significant lateral wall collapse, therefore, may not require the drug-induced sleep endoscopy or DICE. We expect to continue the analysis and move towards submission of the manuscript to a peer review publication this fall. We have already discussed the results with payers and have had several payers update their policies to remove the DICE requirement. We will continue our discussions with other payers to further improve a patient’s experience in obtaining Inspire therapy. Staying on the market access front, we are pleased with the proposed 2025 National Medicare outpatient payment rates, which call for a 2% increase bringing the hospital outpatient rate to $30,198 and a 3% increase, bringing the ASC rate to $25,620.

The proposed physician fee schedule for 2025 calls for a roughly 2% reduction to the Medicare position fee of $837. However, we would expect the final rule to reflect a higher overall physician reimbursement rate. With respect to our market development activities, we continue to advance our medical education programs and year-to-date, we have hosted over 150 advanced practice providers and Inspire training programs. The primary focus of this initiative is to improve capacity in both sleep and ENT clinics to meet the strong patient demand we continue to see for Inspire therapy. Further, we continue to increase our presence in primary care and cardiology conferences to drive increased awareness of Inspire therapy. Our direct-to-consumer program remains strong and provides a pathway for patients to connect with the proper healthcare providers.

In the second quarter, our direct-to-consumer spend declined modestly compared to the prior year’s period as we found ways to be more targeted and efficient in our digital advertising, which has contributed to a significant increase in digital patient engagement at a lower cost. We continue to advance initiatives to improve the patient experience and one example is we now have over 200 centers using digital scheduling to book appointments. With digital scheduling, we have observed a 60% increase in a patient’s ability to schedule an appointment on their first attempt, greatly improving the patient’s journey to receive Inspire therapy. Switching to the recently released data from the SURMOUNT-OSA trial. The data further reinforces our view that GLP-1s will be complementary to our market opportunity and may provide a mechanism for patients to reduce their weight and qualify for Inspire therapy.

As you know, Inspire therapy stimulates the hypoglossal nerve and is designed to treat tongue-based collapse. Patients with a higher BMI are more likely to experience ladder wall class of the airway, which is not effectively treated with hypoglossal nerve stimulation. This was further confirmed with our predicted results as discussed above. Based on the results of the SURMOUNT-OSA trial, we believe many 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 cup, which would allow them to qualify for Inspire. Please refer to our updated investor deck for a third-party data on concurrent use of GLP-1s and Inspire therapy. According to the report, over 1,500 patients in the past two years received Inspire therapy, while actively on GLP-1 therapy.

Finally, we have made great strides in profitability, which we expect to continue into 2025 and beyond. Given our strong balance sheet, financial performance and long-term outlook, we believe shares of Inspire stock represent a strong investment opportunity, and as such, today, we announced our Board’s approval of a $150 million share repurchase authorization, the first in the company’s history. The program provides us with a flexible way to return value to our shareholders, including supporting our stock when we see unwarranted volatility. In summary, we remain focused on the patients to continue the growth and adoption of Inspire therapy. We will continue to execute our growth strategy of driving higher quality patient flow increasing the capacity of our provider partners to effectively treat and manage more patients.

Our key strategies include adding advanced practice providers, training and adding new implanters, increasing center independence, driving the adoption of SleepSync and our digital tools, all of which are embedded strategies and our commercial team’s objective to increase provider capacity. As we move into the second half of 2024, 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 $195.9 million, a 30% increase from the $151 million generated in the second quarter of 2023. U.S. revenue in the second quarter was $187.8 million, an increase of 30% from the $144.7 million in the prior year period. Revenue outside the U.S. was $8.1 million, which is a 27% increase year-over-year. Gross margin in the second quarter was 84.8% compared to 83.9% in the prior year period. The increase was primarily driven by increased sales volumes and manufacturing efficiencies. Total operating expenses for the second quarter were $160.9 million, an increase of 12% as compared to $143.4 million in the second quarter of 2023. This planned increase was primarily due to the expansion of our sales organization and increased general corporate costs.

As Tim noted, our targeted DTC investments are yielding some savings. Interest and dividend income totaled $5.9 million in the second quarter compared to $4.9 million in the prior year period. This higher income was driven by higher interest rates on our cash and investment balances compared to a year ago. Operating income for the second quarter totaled $5.1 million compared to an operating loss of $16.6 million in the prior year period. Net income in the second quarter was $9.8 million compared to a net loss of $12 million in the prior year period representing net income per share of $0.32 compared to a net loss of $0.41 in the second quarter of 2023. The weighted average number of diluted shares outstanding in the second quarter was $30.4 million.

Excluding the impact of any share repurchases that we may affect over the remainder of 2024, we now expect the full-year diluted shares outstanding to be approximately $30.5 million to $30.6 million. Our total cash and investments were $466 million at June 30. The strong cash position allows us to remain focused on executing our growth strategies. 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 $788 million to $798 million, representing an increase of 26% to 28% compared to full-year 2023 revenue. We continue to expect full-year gross margin to be in the range of 83% to 85%. We also continue to expect to activate 52 to 56 new U.S. centers and establish 12 to 14 new U.S. sales territories during each remaining quarter in 2024.

Given the strong momentum in our business and our improving operating leverage, we expect the diluted net income for the full year of 2024 will be between $0.60 to $0.80 per share. Lastly, given our strong financial performance and outlook, we are excited to announce a $150 million share repurchase authorization. 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.

Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Robbie Marcus from JPMorgan.

Robbie Marcus: Great. Thanks for taking the question and congrats on a fantastic quarter here.

Tim Herbert: Thanks, Robbie.

Robbie Marcus: Tim, coming off a great quarter. So I want to try and ask this in a positive way here. There’s been one disappointing quarter one good quarter, another disappointing quarter, a really good quarter here with second quarter. Help us understand if any of this was catch-up or recouped procedures from the first quarter, and if not, how do we think about the go forward on a fundamental basis? Is this the new normal? Do you think you fixed all of the compensation and sales force issues and now we’re back to normal? Just give us a sense of sort of what you think the underlying in second quarter was and the go forward.

Tim Herbert: Got you. Well, I want to back up a little bit. Remember, we had the challenges in the third quarter last year that did have a reflect a really strong Q4 and we talked about the impact that had on the Q1, which is a little bit of a residual going all the way back to the third quarter. We believe we had a strong Q1 that had us in the right momentum going forward and then we demonstrated that into Q2, and we do have the momentum with the team going forward. We certainly have the patient demand, which has always been there and really important to us. But when you look back at the prior authorization challenges, and we have all that resolved. In fact, we’ve had some real positives on that front. Yes, we have confidence moving forward and hence, we have significantly increased our revenue guide in both Q1 and Q2 to reflect the positivity we have going into the rest of the year.

Robbie Marcus: Great. Down the P&L, Rick. The profitability was impressive here, and you’re raising the EPS guide for the year. You talked about better productivity on the digital advertising. But how do we think about where the rest of the savings coming — are coming from you’re clearly being more productive with the sales force and the expenses here off of the revenue — so just help us understand where it’s coming from and again, same vein, how sustainable are they into ’25 and beyond? Thanks.

Rick Buchholz: Yes. Thanks, Robbie. Yes, we’re really focused on continuing to drive the top-line growth and growing therapy adoption and we continue to make investments. And what I would say is we continue to invest in our top line growth, but we are getting leverage — operating leverage from our business model. If you look at a couple of larger items, DTC a year ago in the second quarter was 17% of our revenue in the second quarter or 12% of our revenue. But we’re taking a more targeted approach and we are seeing savings. And so we expect to continue to drive leverage off of DTC as well as R&D was down from a year ago. And as a reminder, in the second quarter of 2023, we had an expense of about $3 million for prelaunch inventory with Inspire V in R&D.

We did not have that in the second quarter of this year. So we also did focus Inspire V shifting from development efforts to operational readiness. So between the combination of top line and some of those items into OpEx, drove $5 million of operating income, which we’re very proud of and very proud of the overall team’s effort in the second quarter.

Operator: And I show our next question comes from the line of Richard Newitter from Truist Securities. Please go ahead.

Richard Newitter: Congrats on the quarter. Maybe, just thinking about the back half year and with the updated guide, should we be thinking about U.S. utilization because this I think there’s some seasonality in the third quarter. Any help you can give us on the cadence, particularly around the U.S. And I’m just wondering if you can give us any signal as to whether or not utilization should be increasing sequentially every quarter. By my calculation, you should be increasing on a year-over-year basis in the back half by mid-single-digit utilization growth, but I’m also presupposes that you come in line with your new account ads and that exceeded handily in the second quarter. So maybe just kind of walk us through the puts and the takes and bring it back to utilization cadence and growth sequentially and year-over-year.

Rick Buchholz: Sure. Going back to consensus is kind of what you’re indicating there too, Rich, is year-to-date, we have exceeded consensus by $12 million, and we’ve raised our first half of the year guidance by $13 million and we put forth guidance that we have a high degree of confidence in. As you know, historically, we do have seasonality in the first quarter and the composition of our full year revenue generally builds throughout the year. And so with that said, our aspiration is to increase utilization sequentially and year-over-year going forward. .

Richard Newitter: Okay. That’s pretty clear and helpful. And then, I guess, just you exceeded the number of new account openings or center adds substantially in 2Q. I guess is 52% to 56% the right quarterly number and how should we think about that? I know in the past, you’ve talked about your — you have a lot more new accounts that are in the base, they’re all coming up the curve. Is this the right number for the quarterly new account assumption? Just help me understand that you’ve been beating that handling for the last few quarters.

Tim Herbert: Got it, Rich. And we’ve been very consistent. We haven’t changed that guide for quite some time. And that does vary quarter-to-quarter because we do not open centers until they’re ready to open and have patients in the pipeline ready to go. And so that’s why this quarter, we’re in a good position with centers, there’s always the high patient demand, and there is a significant number of centers that would like to open up with Inspire therapy and when they get through all their training programs, get through the contractual phase and they’re ready to open, and they have the patients ready to go. We do open them up. So that there’s always been a little bit of fluctuation in that number. But we’re going to hold guide where it is. And — but we’re going to continue to find avenues to further increase patients’ ability to find a proper health care provider.

Operator: And I show a next question, our next question comes from the line of Adam Maeder from Piper Sandler. Please go ahead.

Adam Maeder : Hi, Tim and Rick, thanks for taking the questions. Congrats on the progress. I wanted to start by asking about Inspire V and the rollout there and really just hoping to get some more granularity on the U.S. commercial launch. So the first question is, when do you expect to start offering that product to customers? It seems like based on your prepared remarks, that’s a Q4 event, but wanted to confirm how many accounts will you target initially just maybe level set us on capacity and inventory levels as you get ready to launch. And then finally, just any color around pricing and margin with Gen 5. Then I had a follow-up.

Tim Herbert: Got you. I think the key is it’s nice to have the first milestone with the FDA approval that came last week, and the FDA has worked with us interactively to answer a lot of questions and very proud of the team for years in the development of the Inspire V product. But now we need to be ready to launch our — the Inspire V into the U.S. market. The key is making sure that we have sufficient inventory. So once we do full launch that we’re able to have a continuous supply of products. So we’re going to really focus on that in the second half of the year. The purpose of the soft launch is really just in a handful of centers to introduce it and to make sure with all the operating norms with the physician programmer that were remote with Sleep Sync and our digital tools.

And so it will just be a handful of centers that we’ll use to help with that evaluation and then look to have a full launch into 2025. But very excited about having the approval with the FDA that really allows us to lean in hard on the operational readiness to be able to lodge and full launch in 2025. Let me hand off to Rick on pricing question.

Rick Buchholz: Yes. Thanks for the question, Adam. We’re working through our pricing strategy prior to launch as part of our operational readiness. But — with that said, even with flat pricing, Inspire V is gross margin accretive.

Adam Maeder: Got it. Thanks for the color, guys. For the follow-up, I wanted to circle back to the guidance and just kind of unpack that a little bit more. So the — on the top line, the $788 million to $798 million. I guess could you just comment around the cadence for Q3 versus Q4 or Q3 consensus on the top line at $197 million, any reaction to that figure? And then would also just like to better understand how you’re thinking about specifically the U.S. business versus the OUS business as it relates to the guide.

Rick Buchholz: Sure. I’ll take that. Given our updated guidance, consensus revenue estimates are reasonable for the rest of the year as they stand. And regarding the split between U.S. and OUS. OUS for the full year will still represent between 3% to 4% of our worldwide revenue.

Operator: And I show our next question comes from the line of Anthony Petrone from Mizuho Group.

Anthony Petrone: Congrats on a strong quarter here. Maybe a couple on Inspire V and I’ll have a quick follow-up on GLP-1. On Inspire V, maybe a little bit on the funnel, you’ve said in the past, Tim, that the funnel is still around six months. Inspire V is going to have a procedure time benefit in bringing the total procedure time down to a 0.5-hour from 60 minutes or so today. So where do you think the funnel could go once Inspire V is launched? And I’ll have a quick follow-up.

Tim Herbert: I think that you bring up a key point. And that’s one of our opportunities to improve efficiencies with the ENT and to build capacity. We also mentioned advanced practice providers that can help offload some of the ENT office-based opportunities but we also have initiatives to help the ENT the operating room. One of them was for patients with low BMI not necessarily meaning they need to have a sleep endoscopy procedure. But secondly, with Inspire V and reducing the OR time, that as you hit that, it allows the ENT to do more procedures in a given day, thereby increasing capacity, having an overall effect of reducing the time a patient has to wait from contacting a physician from to receiving therapy. So absolutely, it will have a positive effect on that overall timing.

Anthony Petrone: And then a follow-up just on GLP-1, still the betas out there. I know you mentioned in prepared comments that upper BMI category can come into the sweet spot for hypoglossal nerve. Are you seeing any evidence of that sort of out of the gate here? There are folks out there, obviously, on GLP-1s for obesity specifically. There’s already obviously, a large home mortgage population out there. Are you seeing actual quantitative evidence of this yet? And if not, how much of a factor do you think it could be in 2025?

Tim Herbert: Well, we think it’s going to be significant for patients as we go forward. As we’re working through the GLP-1 investigation and trying to understand it, we knew that we had subjective feedback from our physicians that they’re seeing patients on a GLP-1. So we went and contracted with a third-party to do an independent review of claims data and we actually have provided several of the slides in our updated deck that you can find on our website. And I think that really kind of highlights the number of patients that have dual claims, meaning when they receive Inspire therapy, they’re also actively on a GLP-1 therapy and the number over the last two years was significant, up over 1,500 patients. . So we’re already seeing evidence of that right now, and we’re going to make sure that we continue to communicate with our physicians to take advantage of these therapies because, again, we believe these GLP-1s are complementary to Inspire will help patients qualify for Inspire therapy.

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Ezgi Yagci: I would just note, Anthony, that data is not all-encompassing. It’s claims data from 1 provider. So 1,500 is a huge number, but that may not be capturing all of the patients on GLP-1 receiving Inspire therapy today. But we thought it was a helpful data release to share with you guys and it’s in our updated deck.

Operator: And I show our next question comes from the line of Danielle Antalffy from UBS.

Danielle Antalffy: Congrats on a really good quarter here. Just an option in for you on surgeon capacity, and it came up a little bit with Inspire V, but I think there’s more to it, right? And I guess, maybe give us some color here on where you guys think you are in this process of freeing up capacity at the E&P level and really just getting more mind share, getting them to commit more of their time to doing in Inspire therapy. I’m guessing Inspire V alone is helpful, but it’s not the only thing. So maybe talk a little bit more about some of the other initiatives there and how you guys are progressing against those. And I’ll just leave it at that one question.

Tim Herbert: Great, Danielle. It’s a great question. I think it’s twofold. It’s taking care of building efficiencies from their other setting and seeing patients initially, but also improving their capacity in the operating room and what we find is that there are advanced practice providers, APPs that can do a lot of the early work, helping patients understand what inspires a ball, what to expect in the education part of it. And on the opposite and after surgery, helping them with the early titration and the programming of the device. So we can free up the ENT to really focus their time on being in the operating room, which is the probably the number one priority. Number two, in the operating room, it’s about gaining experience, getting comfortable with the procedure and having confidence so they know they can reduce their own operating room time, they can confidently speak to patients, and then we help them a little bit, predictor and eliminating DICE for low BMI patients is one initiative we can really help them out to not require them to be in an operating room to do a sleep endoscopy.

And then, of course, as you mentioned, Inspire V is going to reduce the overall OR time. This also culminates with proper reimbursement as well. So when the doctors get comfortable that the reimbursement level for the amount of time they spend in the operating room is sufficient, then they can commit more of their practice to Inspire. And I think that’s what you’re seeing when you see a demand to open up 81 new centers in a quarter and grow the utilization quarter-over-quarter. That really is reflective of the increased physician awareness and desire to increase their capacity.

Operator: And I show our next question comes from the line of Michael Sarcone from Jefferies.

Michael Sarcone: So maybe for Rick, just to start on gross margin and OpEx control, really nice progress there. Can you give us any help on how to think about trends in the back half of the year, particularly around both 3Q and 4Q?

Rick Buchholz: Sure. Thanks for the question, Michael. So now that we’re providing earnings per share, and we’ve also provided gross margin guidance of 83% to 85%. Second quarter OpEx growth was 12% but based on our earnings per share revised guidance of $0.60 to $0.80 per share and our revised revenue guidance that implies that our year-over-year OpEx growth will be 17% over 2023. So in 2023, our total OpEx was $568 million and the growth in OpEx would be roughly around 17% or so year-over-year growth, and that will be a ratable increase over the next couple of quarters.

Michael Sarcone: And maybe, Tim, 1 for you on PREDICTOR. You had some positive commentary around some of these early conversations you’ve had with payers, some of whom have already updated their policies, is it fair to read that as kind of what you’ve seen so far in terms of the data looks successful enough to convince some of these payers and now it’s really just a matter of time for waiting for the publication and then we could start to see some of the large payers follow suit.

Tim Herbert: Yes, I think that’s exactly true. I think that — our focus is going to remain on low BMI patients, primarily patients who have a BMI less than 32. Again, it’s back with our discussion around GLP-1s and lateral wall collapse in patients with low BMI just don’t have that lateral wall class and therefore, it’s intuitive that they just won’t need a sleep endoscopy. And that’s what the data supports in our discussions with some of the patients and they’re open to those discussions those discussions. But we’ve had other payers earlier removed the requirement for DICE because remember, the does not specify sleep endoscopy. It only specifies patients to have the proper anatomy, and we’re seeing some payers kind of align around that but we remain very active with a lot of the payers with all changes, including the increase in the AHI, the increase in the BMI.

Most recently, you may have saw United Healthcare removed the requirement to trial oral appliances. Now while we manage that with the prior authorization process, certainly, that’s a benefit to patients. But they also improved and clarified the language around patients being able to refuse CPAP, not necessarily failing a trial of CPAP. So we continue to work with all the payers to maximize clarity across all payers and improve the experience for patients.

Operator: And I show our next question comes from the line of Chris Pasquale from Nephron Research.

Chris Pasquale: The operating leverage, in particular, was great to see. And as I look at the ratio of new territories to center ads, in the first half of last year, you added about one new territory for every four new centers and it’s kind of what you guided to historically, it was on for every six here, so more efficient use of the sales force. Is that sustainable or did you just not see as many good candidates in terms of new rep ads?

Tim Herbert: It is sustainable because what we’ve also done is increase the number of field clinical reps. So, we have a larger support staff in each of the territories to help with case coverage as well as working through some of the titration and some of the training. So we’re just finding ways to leverage it and be more efficient. And I don’t think long term, we’re going to really significantly increase the ratio, but I think we’re going to continue to focus on that.

Chris Pasquale: Great. And on the GLP-1 data…

Ezgi Yagci: Chris, this is Ezgi, sorry. It’s important to note that we actually did have 12 deactivations in the quarter, and we reactivated one center. So I think the ratio that you’re backing into maybe a little off.

Chris Pasquale: Little off. Okay. And then the GLP-1 data in the back of the deck is very helpful. The money slide for me is the last one where you show the before and after — and it seems to support the conclusion that more patients are going to come into your target is owned than drop out once the dust has settled. I guess the question that it doesn’t really speak to is whether there could be some disruption or an air pocket at some point as patients get on drug therapy and then wait to see where they’re going to end up and whether it’s going to resolve their apnea. How do you think about that risk? And those conversations started to change post the SURMOUNT-OSA results?

Tim Herbert: Yes, I think that the key is going to be for patients who are newly diagnosed and they want to go out of GLP-1. I think the sleep community, the sleep physicians I’ve really talked about that they’re going to start them on CPAP and the GLP-1 at the same time because the sleep physician does not want to accept the liability of a patient going 9 to 12 months to lose weight and to see if they resolve their sleep apnea and that money slide that you’re talking about in the back of the deck, did talk about the benefit of 9 to 12 months of being on therapy to have significant weight loss. So I think that starting patients on the CPAP and GLP-1s at the same time is really going to help any air pocket. And then I think that when — if patients are not successful or refuse CPAP then they’re going to be ready to come over to Inspire therapy and you won’t see a air gap from that standpoint.

The other practical standpoint is, as mentioned earlier in the call, we’re running about 6 months from the time you call to the time a patient receives an implant. And within that window, that capacity with ENT surgeons, we have sufficient patient population that we’re working to take care of that I don’t think you’ll really see any kind of GLP-1 air gap even visible.

Operator: And I show our next question comes from the line of Brett Fishbin from KeyBanc Capital Markets.

Brett Fishbin: A lot of the good ones already asked, but I’ll follow up on the Inspire V rollout with just one more question. Just curious, I mean, we have like a general sense of the timing at some point in late 2024 that will start. But maybe if you can just talk a little bit more about what the limited market launch actually includes in terms of like engaging and training the initial accounts — and then maybe like directionally, how much of the installed base would actually be participating in the LMR? And finally, like any key milestones that you would want to see to indicate that you’re ready to move on to the full launch next year?

Tim Herbert: I think we — it’s going to be a very simple limited launch. It’s just going to be a few centers. And we want to measure positive experience with the device with all the externals being in the programmers, the remote and proving out the training and getting some experience with that, but it’s not going to be an extensive limited lodge. It’s going to be just a few centers. And the key milestones is just having a positive experience with the device.

Brett Fishbin: All right. And then just a really quick follow-up here. Obviously, like the number of new centers added this quarter was well above than what we would typically expect to see. But revenue guidance for the full year is coming up $5 million, maybe not as much as you would expect to see apples-to-apples with the number of new centers. I’m just curious, like one topic over the past year or two has been an increased number of secondary sites of service where you may be adding centers at face value, but not necessarily opening a ton of new capacity. So maybe, if you could just touch on kind of like the balance between secondary sites of service that were in that 81 number versus new doctors?

Rick Buchholz: Yes. On overall basis, Brett, we’re still seeing significant growth in hospitals and ASCs being used kind of more frequently sometimes as a second site of service. At the end of the second quarter, about 24% of our overall centers are secondary sites of service.

Operator: And I show next question comes from the line of David Rescott from Baird.

David Rescott: Great. Congrats on the strong quarter here. I wanted to go back on some of your comments around utilization, new center ads. I think just, I guess, depending on the way you slice it looks like utilization in Q3 last year was down sequentially. And I think if I heard you right, you’re expecting noodles to increase sequentially in Q3 this year. Is that right? And can you just help us think about if that is the case, why we should expect a sequential increase in utilization in Q3?

Rick Buchholz: Yes. I mean we said that that’s our goal aspiration is to increase utilization sequentially and year-over-year just like we did in the second quarter. And there are a lot of positive items we talked about in our prepared remarks about — that gives us confidence for the rest of the year not only in Europe with countries reimbursement in France and commercial payers continuing to adjust their policies for expanded indications. Tim briefly touched on the reversal of the oral appliance therapy requirement. And the continued progress we’re making with our DTC programs. And so again, we put forth guidance that we have a high degree of confidence in, and we want to increase to .

David Rescott: Okay. Great. Okay. So that’s maybe a worldwide number rather than something specific to the U.S., is that correct?

Rick Buchholz: No. U.S., we expect — or we want to and our goal is to increase utilization in the U.S.

David Rescott: Okay. That’s helpful. Maybe just on the P&L, again, I heard the comments around the total year-over-year OpEx growth and kind of back into what’s implied in the second half of the year. I’m curious, just looking at the cadence in the back half relative to the first half, should we be thinking about depending on where the models kind of shake out a positive kind of net income number, positive EPS number for Q3 or is that to us on the numbers there?

Rick Buchholz: Yes. The way we frame that up 17% growth in OpEx year-over-year basis. And when I mentioned kind of incremental, for — we’re expecting the OpEx in Q2 was $161 million. And if you increase OpEx sequentially $9 million each quarter, that gets you to a 17% growth in OpEx. And with that, we expect to be profitable in the third and fourth quarter.

Operator: And I show our next question comes from the line of Shagun Singh from RBC Capital Markets.

Shagun Singh: Tim, I was wondering if you could talk a little bit about how you feel about your business. and some of the drivers in 2025. You obviously have Inspire V, you said that could speed up the procedure benefit from the PREDICTOR study, that could play out. Do you expect that to be the funnel, a potential replacement cycle and comment around that would be really helpful? And then I guess I’m just wondering, does that give you confidence in a 20%, 25% growth company beyond this year off of about 27% that you’re doing this year? And maybe if you don’t want to answer a ’25 question, how should we think about Inspire’s long-term growth rate? Any comments that would be really helpful.

Tim Herbert: Absolutely, thanks for the question. And, yes, when he asked the CEO, he’s excited about his business. That’s the question I can go for quite some time to talk about because we’re very excited about what the prospects of the company or technology and taking care of patients, our safety and efficacy is unmatched, and we continue to drive our growth based on strong patient outcomes. And with that and with the limited penetration we have in our target market, we stand at we have profitable growth for years to come. And I know you’re looking for a specific number that we’re not going to go down that pathway yet, but we do have great confidence with our technology, both the implantables with Inspire V as well as the accessories with our programmer with our Sleep Sync system, with our digital tools to help patients navigate the process or improvements in market access and not to mention the improvements that we’re all seeing on an international landscape with a number of patients who are being able to treat continuing to grow.

So, yes, we’re very excited about our future, and we continue to invest heavily in our growth and heavily in our technology going forward and do see years of growth ahead of us.

Shagun Singh: Got it. Just, I guess, as a follow-up on utilization. Can you tell us where the top quartile customers are tracking perhaps in your primary centers? I’m just trying to understand the potential here in improving utilizations and then has decided on the guidance, how are you going to guide us in FY ’25 and beyond? Perhaps you can give us rates for primary versus secondary site for utilization? Just any color would be great.

Tim Herbert: Sure. We’re still having to work backwards on that. I think the information that we’re going to provide next year to help you kind of gauge the strength of the company. We’re still working on that. We’ll stay in communication with you as we work through the rest of this year. But we will continue to provide the number of centers and reps as we progress through the year, and we’ll be in close communication. As far as the top quartile centers, the range of number of centers or a number of implants per month, the range is somewhere approaching two or three quarters, three all the way up to over 17 procedures per month. So we continue to push the upper end, and we want to continue to move the entire normal distribution of the group of centers.

Operator: And our next question comes from the line of Larry Biegelsen from Wells Fargo.

Larry Biegelsen: Tim, on Inspire V, where are you in terms of determining the right CPT code for Inspire V and what’s the process and timeline? And if you have to go back to the old code, what impact do you think that could have? And I have 1 follow-up.

Tim Herbert: Very good. No, we’re going to have it all ready to go for training. and it will be all very clear for the centers, and we have some work to do with the payers, but we’re going to be in a really good shape from reimbursement, and there’s no new codes that we have to go after.

Larry Biegelsen: Okay. So the current code, you’re saying you have the confirmation that you can use the current code.

Tim Herbert: I did not. I said we’re going to have a plan holiday out and we will have that code part of the training package, and we’ll have everybody to go when we to launch.

Larry Biegelsen: Got it. And Rick, do you stock or consign. And I’m asking because we spoke to a center this week that said they had over 10 Inspire IV devices on the shelf. Will you take those devices back from centers or require them to work down their inventory?

Tim Herbert: What we do is a lot of the alternatives that you talk to. That’s obviously a pretty productive account when they have that level of inventory and they likely have a power level that they keep as an inventory. And we will expect one they’re going to burn down their inventory before they ramp up with B because remember, IV has the same functionality as the Inspire V system. So we’re not looking at swapping out, we’ll work for the have them burn down their inventory.

Operator: And I show our next question comes from the line of Kallum Titchmarsh from Morgan Stanley.

Kallum Titchmarsh: I wanted to ask on the center dynamics in the U.S., a lot added in Q2 at 81, but also seems a larger number of deactivations versus prior trends. It would just be helpful if maybe you could walk through what you saw there and how we should be thinking about this churn for the remainder of the year in light of the maintained guidance.

Tim Herbert: Sure. Great question. I think the key to it is we want to make sure that the territory managers are focusing on centers that can be productive and can take care of patients. And those centers that have been — not had the ability to take care of patients over the last one or two years, we want to deactivate them. Another key example in the majority of those sites. You just have a physician moving to a different facility. So that maybe we’re opening one facility, but they’re left the old facility that we will deactivate. And as Ezgi mentioned, we have reactivated centers as well because they want to go out and hire another surgeon to take over the program. And we will restart them, and we will reprogram them. But in the interim, we don’t want the field team to focus too much time on centers that aren’t able to take care of patients.

So we purposely deactivate them. If you go back in time over the last several years, that’s very consistent what we’ve kind of done on an annual basis. pretty close to the second quarter, we kind of deactivate. I think we did 25% in the year 2022 and 15% in 2020. .

Ezgi Yagci: Correct. So the call that we’ve done year-to-date is not really an anomaly.

Operator: And our next question comes from the line of Michael Polark from Wolfe Research.

Michael Polark: I just have 1 thread on Gen 5. Rick, I heard you say with flat pricing, it’s gross margin accretive. Can you help us think about Gen 5 unit costs versus Gen 4? How much lower are they — and then the second part of this is maybe back 2 to 4 quarters, there was speculation you might consider a price increase here with Gen 5. Where does that thinking stand and if you were to take a price increase with the launch order of magnitude, what might that be?

Rick Buchholz: Yes. With our operational readiness, we’re still working through those details, Mike. So we have determined whether or not there’ll be a price increase or continued pricing with that. But we are removing the sensing lead that will be now part of the IPG. And so we will be removing costs associated with that. And so we did mention it will be accretive even with a flat price, but we haven’t quantified that yet.

Operator: And our next question comes from the line of Jon Block from Stifel.

Jon Block: Maybe two for me. Tim, how quickly can you move across the 1,300 centers for Inspire V for training, considering this eliminated to lead and simplify the procedure when we think about the broader rollout in early ’21, I’m guessing you can move pretty quick, but maybe if you can quantify. And then — just longer term, do we have to worry about anything regarding the physician fee considering this does simplify the procedure and what that might mean or not mean for the physician? And then I’ll just ask my follow-up.

Tim Herbert: Very good. Thanks very much. I think $1,300, I think, as you kind of hint there, the training is relatively straightforward, right? We don’t implant the pressure sensing lead, which is going to be very well accepted from a euros and thrilled surgeon, as you can imagine. That’s the one part of the surgery that we think is a little bit uncomfortable for an ENT. So we do believe on a capacity front that by removing that sensor that we’re going to have more ENTs who want to do the procedure, and it will reduce the OR time. But I do think that longer term, if people wanted to look at skin-to-skin time to do the procedure and they do a new rec survey. I think right now, the procedure is fairly paid. And it may take a couple of years for them to do another rock survey.

So I don’t think you’ll see any significant change in physician payment for several years, but certainly, they will do a server to make sure it’s properly paid. On your first question, I think the greater challenge is more so working through all the contractual items because we have pricing agreements with every center, and we just need to do contracting updates with all the centers, but we have a team that can effectively work through that process. And — and even though we have 1,300 centers, we can efficiently move through that.

Jon Block: That was really helpful. And then maybe just as a follow-up, Rick, the 24 year-over-year revenue, I think it was up about $45 million, almost 50% drop through to net income. I mean, just a really impressive drop-through. If I take the midpoint of your 24 guidance, I sort of do that same exercise in the back part of the year. I get way over $1 in the back part of — in 2 age in terms of earnings per share. So again, really solid EPS power. I’m just curious, is the $0.60 to $0.80 just reflect some of your usual conservatism or are there any other areas of spend that you may accelerate as we work our way throughout the balance of 2024?

Rick Buchholz: Yes. Thanks for your question, Jon. Part of that driving that number, we do have variability in our R&D as a percentage of revenue. A year ago, it was 20%. And even in recent quarters, it was high teens. This particular quarter in Q2 was 15% of revenue. So we’re continuing to make investments in our R&D in our Sleep Sync and our technology platform. And so we’re not slowing down with investments. We’ll also continue to expand and make investments in our commercial organization. So we’re not slowing down. We want to drive top line growth with those investments.

Operator: And I show our next slide question comes from the line of Mike Kratky from Leerink Partners.

Mike Kratky: Can you provide an update on the current backlog of patients that are waiting to get an Inspire implant? And just to clarify, does that backlog specifically refer to patients that have been cleared for Inspire post-ICE and are just waiting for a later time to become available and how would you characterize that backlog of patients?

Tim Herbert : Yes. It’s a great question, and there’s a lot of different definitions in there. What we — at a high level, talk about it as the time it takes somebody patient from contacting our call center through the implant and we still have the running at about six months, although we’re seeing some improvement with that. And by increasing capacity, we can start to lower that down. What is impressive is our ability to track the patients once they go to a sleep endoscopy and reduce the time from sleep endoscopy to implant. And you can imagine if we can start to reduce the number of sleep endoscopies based on the PREDICTOR results, we can have a significant reduction in their experience that way. So a very key focus for the team right now and we closely track patients once they get their insurance approval and make sure they get scheduled in a very expeditious manner, and we can start to track that very closely. So a very high priority for the team.

Operator: And I show our next question comes from the line of Suraj Kalia from Oppenheimer & Co.

Suraj Kalia: Can you hear me all right?

Tim Herbert: That’s right.

Suraj Kalia: Congrats for the quarter. A couple of questions, and I’ll throw them your way together. I know it’s been a long call. Maybe I missed some qualitative commentary or quantitative on new stores, same-store sales. Any additional color there would be great. And also, Tim, I’ll throw my second question also your way. Your comments about physicians not wanting — I’m paraphrasing this, not wanting to take liability on GLP-1 and waiting to see 9 to 12 months for the impact. Just help us understand that a little more. Even with hypoglossal nerve them, it takes almost 4 to 6 months to get through the pipeline and get to a surgery, another 3-plus months for full titration and you really don’t know if you’re going to respond to hypoglossal nerve stem. So maybe if you could tie your comments about the liability component would be greatly appreciated.

Tim Herbert: Thanks, Suraj. Same-store sales, go back there first. I think we continue the priority to make sure that we want to increase same-store sales or increase the utilization at existing sites. And I think, that is what you’re seeing by seeing the increased utilization on a quarter-over-quarter basis, certainly year-over-year. And that, remember, has a little bit of a dilutive effect by adding more centers to the denominator. So it really shows that we are growing utilization at existing centers. As far as the physicians, they don’t want patients to remain left untreated. And so maybe let me backtrack from the word liability a little bit, but talk about the desire of sleep physicians to take care of patients, and they’re going to want to start them on a therapy like CPAP right away to be able to move forward.

As far as Inspire goes, we know that it’s a time that it takes people to get through the process, get through sleep endoscopy, a prior authorization and get to surgery but remember, these are patients that have already attempted CPAP. And so they’ve tried therapy they may be using CPAP to carry them forward. But once properly selected, we’ve been able to show our safety and efficacy and a very high probability that they will a strong benefit with Inspire therapy. And that’s why we have over 75,000 patients treated with Inspire therapy to date.

Ezgi Yagci: We have time for one last question. The one you can queue-up, please.

Operator: And I share our last question comes from the line of Stephanie [indiscernible] from Bank of America Securities.

Travis Steed: It’s actually Travis Steed from BofA. Okay. Just wanted to sneak in mind wasn’t working. So I’ve had several questions tonight on the sequential increase in utilization and trying to tie that into the other comments of — you’re comfortable with the consensus U.S. revenue. So I don’t know if that’s just the aspiration as it grows sequentially or just how to think about that sequential uptick in utilization this quarter.

Tim Herbert: We are going to be in the — for the rest of the year and quarter-over-quarter. It’s a quite increase in utilization and certainly year-over-year. So we’re going to continue to focus on that and that’s the moat of the commercial team.

Travis Steed: Okay. But the guidance, the comfortable street is not necessarily showing that sequential increase, correct?

Tim Herbert: We keep those as separate topics.

Travis Steed: Okay. Perfect. And then one other question I got from investors is just kind of curious if there was anything in Q2 that was onetime Easter timing that came in or anything impact of UNH not doing prioritizations. Just anything to consider in Q2 that was one time that we would think about modeling it sequentially?

Tim Herbert: Yes, Travis, that’s a great question. We actually went through and tried to look at sales days and what month the days are in and the FedEx cold because of ice — we had a hurricane this past week. So, no, we don’t — we didn’t see anything in the second quarter that really highlights single that. I think we had a strong quarter from the team. We’re very proud of the efforts both in the U.S. as well as international and their support.

Tim Herbert: Let me jump into just before we close, I want to thank everybody for joining the call today. And as always, we’re grateful to the growing team of dedicated Inspire employees for their enthusiasm and hard work and continued motivation to achieve successful and consistent patient outcomes. Team’s commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the health care teams for their continued efforts as we remain focused on further expanding our business in the U.S., Europe and Asia. And for all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates in the months ahead. So, thank you very much, and Dilem, back to you.

Operator: Thank you, sir. This concludes today’s conference call. Thank you for attending. You may now disconnect.