Inspire Medical Systems, Inc. (NYSE:INSP) Q3 2023 Earnings Call Transcript

Inspire Medical Systems, Inc. (NYSE:INSP) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good afternoon. My name is Dilam [ph], and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Inspire Medical System’s third quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there’ll 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, DeLem, and thank you all for participating in today’s call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, chief financial officer. Earlier today, we released financial results for the 3 and 9 months ended September 30, 2023. 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 law. All forward-looking statements including without limitation those relating to our operations, financial results and financial condition, investments in our business, full-year 2023 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 F10-Q, which was 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 November 7, 2023. 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 third quarter of 2023. As always, we start with our commitment to patient outcomes and assure that each patient has the best possible experience with Inspire therapy. We are excited to announce that during the third quarter, we surpassed the significant milestone of 50,000 patients treated with Inspire therapy, and the team is very proud to be able to make a difference in the lives of so many patients. With that, let’s review our results. In the third quarter, we generated revenue of $153.3 million, representing a 40% increase compared to the third quarter of 2022. Our growth continues to be driven by increased utilization at existing centers and is complemented by the activation of new centers.

Internationally, we grew 99% with the European team delivering very good results. We had several wins, including growth in Germany and the first full quarter of leveraging country-wide reimbursement in Belgium. Looking forward to the fourth quarter in Europe, we are running up against inventory supply issues of polyurethane-based leads. We do not yet have our European Union Medical Device Regulation Approval, commonly known as EU MDR, which allows us to start shipping the new silicone-based leads, which were approved in the U.S. back in the third quarter of 2022. As background, we applied for EU MDR approval in December of 2021, but there is a significant industry-wide backlog in the European system, which has delayed approval beyond our expectations.

As such, we have limited supply of the polyurethane leads, although it is difficult to predict. We have made significant progress with our notified body and are targeting EU MDR approval of the silicone-based leads in early 2024. In order to maintain product deliveries, we are pursuing a temporary pathway called product derogation, which is a country-specific approval that allows for the early shipping of the silicone-based leads, while the EU MDR review is being completed. We have already received derogation approval in the Netherlands and have begun the delivery of silicone-based leads in that country. We have also initiated the derogation process in several other countries, including Germany, Belgium, and Switzerland. Therefore, during the fourth quarter of 2023 and possibly extending into 2024, we expect that the delay of the EU MDR approval and the shortage of polyurethane-based leads will cause delays to implant procedures resulting in a reduction in our European revenue of up to $4 million in the quarter.

In the U.S., during the third quarter, we continue to increase our capacity to support the strong demand for Inspire therapy by adding 62 new implanting centers, ending the quarter with a total of 1,107 centers. During the fourth quarter, we continue to expect to activate 52 to 56 centers. Regarding the U.S. sales team, we created 13 new sales territories in the third quarter, bringing our total to 274. We continue to expect to add 12 to 14 sales territories in the fourth quarter. To highlight the strong patient demand, in the third quarter, the number of visitors to our website surpassed 3.8 million. And from these visitors, we had over 15,000 physician contacts. These are significant increases from the second quarter and are due in part to a change in the media mix, which we implemented in the third quarter.

Further, we continue to improve our conversion of patients receiving Inspire therapy. Looking ahead to 2024, we will be more targeted in our approach to DTC. One example is increased attention to digital advertising directed towards qualified patients. As a result of this change in our strategy, these metrics will no longer be relevant, will not be reported into 2024. Summarizing the commercial activity in the United States, we tried to decrease the number of submissions by our customers seeking prior authorization to the Inspire procedure, resulting in a short-term impact on the number of implant procedures during the early part of the third quarter. As background, in early 2023, we initiated a pilot program with certain customers to minimize our involvement with their prior authorization process.

Despite a careful and well-planned approach to the pilot program, a significant number of our customer experience challenges with their prior authorization submission process. After recognizing this trend early in the third quarter, we reinvigorated our efforts to facilitate patient access to Inspire therapy by more closely engaging with our customers with the prior authorization submission process, involving both our field and corporate prior authorization teams to assure timely, consistent, and accurate submissions. As a result of these efforts throughout the quarter, the number of prior authorization for patients seeking Inspire therapy began to normalize, which reinforces their confidence in the fourth quarter and beyond. Even with these improvements, we were limited in our ability to add implant procedures as a result of the ongoing challenge of ENT Surgeon Capacity.

Having identified and addressed this prioritization issue, and with the ever-present patient demand, we are seeing significant momentum in the U.S. entering the fourth quarter and, therefore, we are increasing our full-year revenue to be in the range of $608 million to $612 million, up from $600 million to $610 million, representing a 49% to 50% increase compared to 2022. This increase for revenue takes into account the regulatory challenges in Europe. Switching over to reimbursement, we are actively working to include the FDA indication expansion into payer policies. Just recently, two large U.S. payers, Aetna and Humana, updated their policies to cover patients with an AHI up to 100 events per hour, and a BMI up to 40, as well as for the pediatric population with Down syndrome.

We will continue to work with other payers to include these expanded indications. Furthermore, the final OPPS rules for 2024 were published last week consistent with the proposed rules in July with minimal changes to the site of care reimbursement levels. We also highlight the significant increase in the reimbursement of the drug-induced sleep endoscopy, or DISE procedure, which increased from $180 to $1,618 for the Medicare facility payment in the hospital setting. The physician reimbursement had a slight decrease due to the general RVU reimbursement rate, but this is typically adjusted prior to the January 2024 effective date. Let’s switch over to product quality. Our real world evidence continues to show strong patient outcomes and patient satisfaction with Inspire therapy.

We recently published our 2023 Patient Experience Report, which shows continued improvement in our already low revision and explant rates and demonstrates our unwavering commitment to outcomes. This report can be accessed on our website at InspireSleep.com. We continue to make investments in our clinical research as evidenced by the PREDICTOR study results, which were presented at the International Sleep Surgical Society meeting in Nashville in September. The results indicate that a narrow airway correlates with complete concentric collapse. Furthermore, each millimeter increase in pharyngeal width correlated to a 10% decrease in the likelihood of complete concentric collapse. Additionally, the results from the initial subset of 300 patients demonstrated that BMI plays a key role, as BMI was correlated with increased lateral-wall collapse, which is a contributor in complete concentric collapse cases.

In the early results, each unit increased in BMI correlated with a 14% increase in the odds of complete concentric collapse. Importantly, these results do not vary from the results of the initial feasibility study. With these encouraging results, additional patients are being enrolled for validation with the intent of identifying specific patient populations for which DISE may not be required. We expect to complete enrollment of the second subset of 300 patients by year-end and publish results once the full dataset has been enrolled and analyzed. On the product development side, our pipeline remains robust. We submitted the Inspire V PMA supplement to the FDA at the end of the second quarter, and we have received the initial set of questions from the FDA.

The team is working diligently on a thorough response to these questions. Recall, the Inspire V system incorporates sensing capability into the neurostimulator using an accelerometer and will remove the need for the pressure sensing lead. We have several additional system level qualification tests to be completed and expect to submit a response to the FDA in early 2024 and with the normal review time, we expect approval in 2024 and following a limited market release, we are targeting full commercial launch in 2025. Looking ahead to 2024, we will launch our new connected physician program in the U.S. called the SleepSync programmer. This will allow physicians to access our programming screens from their own computers and eliminate the necessity for Inspire-provided tablets as part of the physician programming system, and also paving the way for future remote patient programming.

We continue to increase the adoption of our SleepSync digital platform and work on enhancements to streamline the post-procedural longitudinal patient management. Before I turn this over to Rick, I would like to address the impact of GLP-1s on our business. Despite the negative stock market reaction, we have not seen any adverse impact on our business and we see tremendous opportunity to work alongside this class of drugs to treat the many patients living with OSA. As you are all aware, OSA is a multifactorial disease with many independent factors including age, gender, weight, and neck circumference. Inspire is designed to address anteroposterior airway collapse, also known as tongue-based collapse. Patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral-wall collapse.

A combination of tongue-based collapse and lateral wall collapse is identified as a complete concentric collapse of the upper airway, which is detected during a DISE procedure. And Inspire is contraindicated for complete concentric collapse. Also, while weight loss can help reduce a patient’s AHI and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients. However, we expect GLP-1s will help patients address their lateral wall collapse, potentially bringing them into our indication. Furthermore, we believe the introduction of a pharmaceutical treatment option will significantly increase patient awareness and have a positive impact on the overall diagnostic rate of OSA, which still remains very underdiagnosed in the 20% to 30% range today.

The combination of these factors should have a positive impact on our business. Lastly, as shown on our ongoing ADHERE patient registry, the average BMI of patients treated with Inspire therapy is 29, and the American Academy of Sleep Medicine guidelines recommends weight loss prior to surgery for patients with a BMI greater than 35 and non-surgical solutions for patients with a BMI greater than 40. Therefore, there is not a significant overlap in the Inspire patient population with the GLP-1s today. In summary, we remain focused on patient outcomes and physician education to continue the adoption of Inspire therapy. We will continue to increase utilization at our existing centers, while adding capacity by opening new centers. 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 would 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 third quarter was $153.3 million, a 40% increase from the $109.2 million generated in the third quarter of 2022. U.S. revenue in the third quarter was $147.5 million, an increase of 39% from the $106.3 million in the prior year period. The primary growth driver in the U.S. was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers, our continuing direct-to-consumer marketing, and a higher number of territory managers. Revenue outside the U.S. increased to $5.8 million, which is a 99% increase year-over-year. The U.S. average selling price in the third quarter was $25,000 compared to $24,400 in the prior year period.

We expect the U.S. ASP to remain steady at the current level. The ASP outside the U.S. was $21,700 during the quarter compared to $20,500 in the third quarter of 2022. Gross margin in the third quarter was 84.1%, compared to 81.9% in the prior year period. Recall, the third quarter of 2022 was negatively impacted by obsolescence charges related to the transition from polyurethane- to silicone-based leads and the introduction of our Bluetooth remote in the U.S. Total operating expenses for the third quarter were $142.4 million, an increase of 34% as compared to $106.6 million in the third quarter of 2022. 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.

However, on a sequential basis, operating expenses were relatively flat, reflecting our commitment to improving our operating leverage. Interest and dividend income totaled $5.5 million in the third quarter, compared to $1.4 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 third quarter was $8.5 million compared to $16.8 million in the prior year period representing $0.29 compared to $0.60 in the third quarter of 2022. This includes $1.7 million of R&D expenses associated with pre-launch inventory related to Inspire V that is expensed for accounting purposes, bringing the total of expensed pre-launch inventory to $4.7 million year-to-date.

The weighted average number of shares outstanding for the third quarter was $29.4 million. We expect the fourth quarter weighted average shares outstanding to be approximately $29.6 million. Our cash and investments were $467 million at September 30. 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. Moving on to updated 2023 guidance. Given the continuing momentum in our business and taking into account the EU MDR approval challenge in Europe, we now expect full year revenue to be in the range of $608 million to $612 million, an increase from our previous guidance of $600 million to $610 million. This updated revenue guidance represents 49% to 50% growth compared to full year 2022 revenue.

We continue to expect full year growth margin to be in the range of 83% to 85%. As Tim noted, we continue to expect to activate 52 to 56 new U.S. centers and establish 12 to 14 new U.S. sales territories in the fourth quarter of 2023. In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2023. With that, our prepared remarks are concluded. Dilam, you may now open the line for questions.

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] And I show our first question comes from the line of Danielle Antalffy from UBS. Please go ahead.

Danielle Antalffy: Hey, good afternoon, everyone. Thank you so much for taking the question. Tim and Rick, just wanted to follow-up on the comments around the prior auth. And just if you can give any context around how many centers were piloting this program, just trying to get a sense of, or if you can give us the number of what you think is – how many procedures did not get done because of it, anything you can give there? I do have just one follow-up.

Tim Herbert: Okay. Very good. What we know is we continue to scale the organization and we need to start building independence, and so we’re working with some of the key centers to be able to help them along with their independence of the prior authorization. And we want to stay involved with some of the difficult cases and involve both the field and the prior authorization team. So it was a pilot study with a significant number of centers and the centers that we’ve chosen, of course, those centers that have higher utilization to be able to leverage the learnings at those centers. So while we don’t have the exact numbers for you, we are comfortable that we’re able to work with those centers and re-energize the field team and re-energize the prior authorization team to support these centers to get the prior authorization submissions back online. And we’re seeing continued growth there and confidence moving forward.

Operator: Thank you. And I show our next question comes from the line of Robbie Marcus from JPMorgan. Please go ahead.

Robert Marcus: Yeah, thanks for taking the question. Maybe to follow-up on Danielle’s, I’ll ask both of my upfront. One, it said in the release you started to learn about this early in the third quarter. I imagine it probably overlaps with the second quarter call. So just wondering when you knew about it and why not mention it on 2Q. And then as you looked at 2024, I realized it’s still early, but I think it’s important for investors, any early thoughts you have and how do you feel about where Street consensus is? Thanks a lot.

Tim Herbert: Got you. Well, we’re going to start off by looking at certainly we need a data as we continue to move through the first and second quarter. We talked about first quarter is really focused on Medicare cases as we come out of the fourth quarter. We also are in the process of implementing the pilot program. Further into the second quarter was being educated with new centers and that’s when we were able to start to track that a little closer. It wasn’t until the beginning of the third quarter that we realized we needed to take some corrective action. And we implemented that change, but we also want to watch for the data on those changes, which of course we don’t see until later into the third quarter. And at that point where their capacity is challenging to be able to add those additional implant procedures within the third quarter.

But if it started to become evident, maybe a little bit in the second quarter, but with tracking of the data, we really didn’t take the action until early in the third quarter when we had a strong confirmation on that. I’m going to hand it out to Rick there for talking about next year.

Rick Buchholz: Yeah, Hi, Robbie. Thanks for the question. So we provide annual guidance and we’ve only provided guidance through 2023. Normally, we don’t comment on consensus, but I mean that being said, our focus is to continue on increasing utilization that we’ve proven and also increasing capacity by adding new centers, territory managers, as well as really focusing on capacity by adding new implanting or additional surgeons, because the majority of our centers only have one implanter. Also as a reminder too, we expect to get some utilization tailwind as our centers mature, roughly half of our centers have been added in the last 2 years. So as we look towards 2024, we expect that we’ll continue to improve our operating leverage as we progress through 2023 as well as 2024. I would note, though, one headwind is what we mentioned earlier about the EU MDR challenge in Europe and that could carry over into early 2024 as Tim mentioned.

Robert Marcus: Okay. Thanks a lot.

Tim Herbert: Thanks, Robbie.

Operator: Thank you. And I show our next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.

Lei Huang: Hi, it’s Lei calling on for Larry. Thanks for taking the question. I will also ask my two up front. Just on the Q4 numbers, the implied 4Q growth is at 16% sequentially. And then number, what’s assumed about impact of the prior auth program? Is there any implications from what you learned in Q3 going into Q4? And related to that, the $4 million that’s coming out in Q4 due to supply in Europe, does that go into the backlog so when you get the clearance in Europe early next year, do you get that $4 million back? And then my second question is on the Inspire V. Can you give any color on the type or number of FDA questions that you got and if you need to do additional analysis? I guess the bottom line there is, what gives you the confidence that you would get approval in 2024? Thank you.

Tim Herbert: Sure. Good morning, Lei. The Q4 numbers when we look forward to that, that does include the improvements that we’re seeing with the prior authorization as we discussed. We do see good momentum going forward in that. We did include a note on the European regulatory challenges of the $4 million. Now, remember, we’re working a derogation process. We hope that we can actually overcome that during the quarter, but we can’t be predictive of that. So we’re being a little bit careful as we work through those opportunities. Certainly, we already received approval in the Netherlands, and we’re hoping that we can have communications with the other countries as well to kind of help that through. As far as the Inspire V, we give the FDA a lot of credit.

They did a great review on that. To put this in perspective, it is a Class III active implantable neurostimulator. The submission was 13,000 pages. So it’s quite an extensive job for the FDA to review that. They came back with a series of questions in detail, both around the product itself, on biocompatibility or on electromagnetic compatibility. The team has diligently kind of worked to answer each of those questions, but we look confidently moving forward with preparation of those questions. And once we put everything together with the programmers and the patient remote and the neurostimulator, and do our system level testing, we will be submitting right back to the FDA. So I have strong confidence that we’ll continue to work with the FDA to move towards approval.