Inspire Medical Systems, Inc. (NYSE:INSP) Q4 2022 Earnings Call Transcript

Inspire Medical Systems, Inc. (NYSE:INSP) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good afternoon. My name is Josh, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems Fourth Quarter and Full Year 2022 Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I’ll now hand the conference over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Ezgi Yagci: Thank you, Josh, 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 12 months ended December 31, 2022. 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 condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2023 financial and operational outlook, and improvements in market access are based upon our current estimates and various assumptions.

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 annual report on Form 10-K to be filed with the SEC by February 14 for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by laws 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, February 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 fourth quarter and full year 2022. We are excited to report our first profitable quarter and a solid finish to a very strong year with significant progress across all elements of our business. As always, we first and foremost reiterate our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire therapy. During today’s call, we will highlight many accomplishments from 2022 that demonstrate our ongoing focus on the patient, including improvements and access to therapy, technology advancements and planned activities to broaden the population that can benefit from Inspire. We will also discuss our outlook for fiscal year 2023.

We completed many important milestones in 2022, and there are now over 36,000 patients who have received Inspire therapy. During the year, we received FDA approval of full body MRI compatibility, and launched our silicone-based stimulation and sensing leads, along with a Bluetooth enabled patient remote. Further, we made significant progress with our digital platform including major updates to the Inspire SleepSync patient management system and the Inspire Sleep app. We also initiated a pilot of a digital scheduling tool, which we believe will significantly enhance patient access to care through our Advisor Care Program. In addition, we submitted important indication expansions to the FDA, including for the pediatric population with Down syndrome and for patients with a high Apnea Hypopnea Index.

We raised over $240 million in cash, as noted previously, and in the fourth quarter, we achieved profitability for the first time, all of which gives us confidence as we enter 2023. With that, let’s review our results. In the fourth quarter, we generated revenue of $137.9 million, representing a 76% increase compared to the fourth quarter of 2021. For the full year of 2022, revenue totaled $407.9 million, a 75% increase compared to full year 2021. Our growth continues to be driven by higher utilization at existing centers and supported by the activation of new centers. During the fourth quarter, we experienced challenges with our supply chain and as the demand for the silicone-based sensing and stimulation leads outpaced our ability to provide products due to issues with scaling the production bites.

These challenges have been resolved and we are increasing our inventory levels. Despite these challenges, we were successful in providing product for all scheduled procedures in the fourth quarter. Historically, we have experienced seasonality in the first quarter due to the reset of high deductible health plans at the start of the year. While this remains the case, the first quarter of 2023 may see slightly less seasonality due to the supply chain issues in the fourth quarter. With that said, we expect full year revenue to be in the range of $560 million to $570 million up 37% to 40% increase compared to 2022. In the fourth quarter, we continue to increase our capacity by adding 61 new in planning centers, ending the year with a total of 905 centers.

Photo by National Cancer Institute on Unsplash

At the end of the fourth quarter, ambulatory surgical centers made of 23% of U.S. centers, and in 2023, we expect to continue to activate 52 to 56 centers per quarter. Regarding the U.S. sales team, we created 16 new sales territories in the fourth quarter, bringing our total to 225 territories. We are increasing our guidance in 2023 and expect to add 12 to 14 sales territories per quarter compared to 10 to 12 per quarter in 2022. In 2023, we will continue to scale our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. As such, we modified our incentive compensation for the field organization to focus on how your utilization at existing centers. We will continue to enhance our ability to connect interested patients with a qualified healthcare provider.

Our outreach programs are very effective in generating interest in Inspire therapy, primarily through the inspiresleep.com website. For the full year of 2022, the number of visitors to our website surpassed 13 million, an increase of 86% year-over-year. And from these visits, we had over 78,000 physician contacts. Of note, these physician contacts represent the calls and emails to our Advisor Care Program or directly to a physician’s office, and do not include referrals directly from a patient’s healthcare provider. From a U.S. reimbursement perspective, the final rules for 2023 were published in November and came in generally as expected, providing a stable reimbursement outlook for healthcare providers. Moving on, our international business continues to make strides, growing 28% in the fourth quarter over the prior year over the prior year, despite ongoing headwinds from unfavorable exchange rates.

During the quarter international revenue was less than 3% of global revenue, highlighting the significant growth in the U.S. market. There are many positives in our international business during the fourth quarter, including the strong performance in Germany, the Netherlands and Switzerland. For the more, following many years of working with the French authorities, we are in the final process to have Inspire listed on the French registry in early 2023 at reimbursement rates consistent with the rest of the world, and the team continues preparations for our commercial launch there. In Singapore, our flagship programs continue to perform at productivity levels consistent with U.S. centers. We also see momentum in Japan, with multiple centers doing first procedures in the fourth quarter that have also completed or booked additional cases in the first quarter.

In Hong Kong, we expect to complete our first procedures in February. And in Australia, we have read submitted for reimbursement and should have a determination later this year. Turning to R&D, we recently submitted our SleepSync physician programmer for FDA review. This new programmer connects with our next generation SleepSync Digital Health platform, which is a key step for providing remote patient programming. Longer term, we continue to work on the design of our fifth generation Inspire neurostimulator. The Inspire 5 device will eliminate the pressure sensing need and incorporate the sensor inside the neurostimulator using an accelerometer to measure respiration. We have finalized the design and we are conducting operational and production qualification.

We are still targeting FDA and FDA approval in late 2023, but depending upon the FDA review cycle, this could move into early 2024. Finally, we continue to conduct research and clinical trials to increase the number of patients who can benefit from Inspire therapy. In the fourth quarter, we finished enrolling the first 300 patients in our PREDICTOR study, which is the first step to replacing the requirement for drug induced sleep apnea procedure with an office based measurement for patients with a BMI of less than 32 and continue to clap for initial readout of the data in 2023. In summary, we’re experiencing significant momentum in all aspects of our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy.

In 2023 and beyond, we will continue to increase utilization at our existing centers, while adding capacity by opening and training new centers. The ongoing expansion of our call center and investment in our DTC campaign support these initiatives, and we’re seeing enhanced productivity from these efforts, which are driving our improved financial performance. Finally, the many R&D achievements in 2020 to highlight our commitment to improving patient outcomes and enhancing both the patients and health care providers experience within Inspire therapy. We remain extremely 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 fourth quarter was $137.9 million, a 76% increase from the $78.4 million generated in the fourth quarter of 2021. U.S. revenue in the fourth quarter was $134.3 million, an increase of 78% from the $75.6 million in the prior year period. The growth in the U.S. reflects several factors including higher utilization and existing centers, the addition of new implanting centers expanded direct to consumer marketing and a higher number of territory managers. Revenue outside the U.S. increased to $3.6 million, which is a 28% increase year-over-year on a reported basis, while units sold outside the U.S. grew 43% year-over-year. The U.S. average selling price in the fourth quarter was 24,900, compared to 23,900 in the prior year period.

The increase reflects our price uplift that began in May of 2022. We expect U.S. ASP to remain steady at the current level. The ASP outside the U.S. was 20,400 during the quarter, compared to 22,700 in the fourth quarter of 2021, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the fourth quarter was 83.9% compared to 85.8% in the prior year period, primarily due to higher costs of certain component parts and additional costs associated with the transition to our new silicone based leads partially offset by the price increase that began in the second quarter. Total operating expenses for the fourth quarter were $116.1 million, an increase of 68% as compared to $69.1 million in the fourth quarter of 2021.

This planned increase was due to expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $3.4 million in the fourth quarter compared to 15,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances. We had no interest expense in the fourth quarter have you paid off our outstanding debt in the third quarter of 2022. We are proud to announce our first profitable quarter in history and Inspire. Net income for the fourth quarter was $3.2 million, compared to a $2.4 million net loss in the prior year period.

The diluted net income per share for the fourth quarter was $0.10, compared to the net loss per share of $0.09 in the fourth quarter of 2021. We have average number of diluted shares outstanding for the fourth quarter was $28.9 million. We expect Q1 weighted average shares outstanding to be approximately $29.1 million. During the fourth quarter, we generated $24 million in cash and we ended the year with cash and investments totaling 451 million. 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. For the full year 2022, revenue totaled $407.9 million, or a 75% increase over $233.4 million. U.S. revenue was $394.8 million or 79% year-over-year growth, while revenue outside the U.S. totaled $13 million, a 5% year-over-year growth despite foreign currency headwinds.

Net loss for full year 2022, totaled $44.9 million compared to $42 million in 2021 with the net loss per share of a $1.60 for 2022 compared to a $1.54 in the prior year. Moving on to 2023 guidance, we expect full year revenue to be in the range of 560 million to 570 million, a 37% to 40% increase compared to 2022. Full year gross margin is expected to be in the range of 83% to 85%. As Tim previously noted, we expect to activate 52 to 56 new centers per quarter and establish 12 to 14 new sales territories per quarter in 2023. Given the prevalence of high deductible health plans, we have historically seen seasonality in our business. As Tim previously mentioned, we continue to expect revenue to step down sequentially in the first quarter of 2023, and will then increase throughout the year.

In conclusion, our strong performance and business momentum provide us with confidence in our outlook as we enter 2023. With that, our prepared remarks are concluded. Josh, you may now open the line for questions.

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Q&A Session

Operator: Our first question comes from Travis Steed with Bank of America. You may proceed.

Travis Steed: Congrats on the profitability this quarter. And I think in the past you said, once you turn profitable, you wanted to stay profitable. So, I don’t know if this is the start of that because looking at The Street has over $2 in loss for earnings next year. Should that be closer to flat to slightly positive?

Tim Herbert: Hi, Travis, let me comment, first, and Rick kind of jumped in. I think as we know, we wanted to get your profitability. We know how important it is from a business standpoint. I think, moving forward, it’s, it will continue to be a desire of the organization, but we also know that in Q1, we do see seasonality there. So, let me hand off to Rick there.

Rick Buchholz: Yes. So, we did demonstrate some improved leverage in Q4, and we also expect in Q1 that we would lose some leverage just due to our normal revenue seasonality. But we do intend to show improving operating leverage as we progress throughout the year. We’re not changing our tone of profitability. We’re going to continue to run our playbook, but it is important to understand that we do have a very disciplined approach in determining our spending and our investments across our business.

Travis Steed: And so for OpEx, so something maybe in the 30% range, is that a good starting point? And I’m curious if you would hold that if revenues come in higher than expected for the year, or if you would also kind of grow OpEx upside with revenue outside of the course of the year? And then the other follow-up was on the comment on Inspire 5, you mentioned, I think, move into early 2024. I don’t know if there was a change or something that driven drove that comment, or if it was just more of a caveat?

Rick Buchholz: I’ll start Travis. So as you know, we did demonstrate that the revenue did outpace operating expenses. In the fourth quarter, we’re not going to guide on bottom line, which means also operating expenses at this time. And so, we’re going to continue to make thoughtful discipline investments but we’re really focused on driving that top line.

Tim Herbert: As far as the Inspire 5, I think we continue with the program, the design is frozen, we are going through the operational testing, we’re building up the quality units, and we’re building redundancies. We have multiple manufacturers for that product, again, to protect for supply chain. So always a little bit of a challenge to work the schedule to get all the testing done and get the submission then, but though, we’re still going to be pushing really hard to get the approval by the end of ’23, but we can see it right into early ’24 if the cycle is tight.

Operator: Thank you. Our next question comes from Robbie Marcus with JPMorgan. You may proceed.

Robbie Marcus: Maybe starting with the guide, you’re coming off a really good growth year. Your guidance, in terms of growth, is still a really healthy rate for 2023. But a pretty significant decline in growth rate versus 2022. And by my math, it kind of looks like center utilization might be flat to down in the implied guide for ’23. So anything other than your usual conservatism here that we should be thinking about implied in the guidance, as we start the year?

Tim Herbert: Yes, we want to be very consistent on how we put our guidance out there or how we look at the business at the beginning of the year. We already mentioned in the note that we want to continue to drive utilization actually improve, utilization at existing centers, in fact to the point of putting additional incentives in there for the sales team. So again, yes, we want to be careful putting guys early on, we like to position that the Company’s in and really has been strong across the board with all of our milestones.

Robbie Marcus: And then while not a huge part of sales today, the international constant currency growth number in fourth quarter was really impressive. And a big step up from third quarter, it looks like. How should we think about the cadence of international throughout 2023? And can this be a starting to become a material contributor? Thanks.

Tim Herbert: Thank you very much, Robbie. I think we’re very excited about international and we’re, we know it’s just days away before getting confirmation from the French authorities that we will be listed on the registry as an accepted product fully reimbursed in France. And we’re recruiting a country manager there’s within France is going to have a good year. We think Belgium will follow that as well as the Netherlands is set up to have a strong year in 2023 and Germany and on top of that even the UK has started doing kids too. So, we like what’s happening in Europe and the other side, Singapore, Hong Kong will be doing the first case in just a few weeks. And Japan is really starting to uptick a little bit. So I think it’s going to be a measured success with the growth in international was keeping it’s still hovering around the 3% mark as far as global revenue, and we’re not going to take our foot off the pedal on the United States, we want to continue to grow utilization and really focus on the U.S. market as well.

So, while I think you’ll see continued growth internationally, our emphasis continues to be on the U.S. market.

Operator: Thank you. Our next question comes from Adam Maeder with Piper Sandler. You may proceed.

Adam Maeder: Maybe just to start wanted to ask about direct-to-consumer expense and realize there’s no guidance on OpEx. But just to remind us kind of where 2022 DTC spend came in, and how investors should think about spend in ’23 and then just longer term kind of direction where this could go?

Rick Buchholz: So, hey, Adam, it’s Rick. So, we continue to make investments in DTC because very important for our pipeline. We talked about over 13 million visits to our website, and 78,000 physician contacts. And so it’s a very important part of our business. In the fourth quarter, our DTC spend was about 21 million. That’s relatively flat over the third quarter, but we’re going to continue to increase that. Year-over-year in ’22, we spent 74 million in 2022. And that was up by 55%, over ’21, where we spent 48 million. We’re going to continue to make those investments and grow our investments in DTC, but that growth will slow. There’ll be less than 55%. But we’re not given specific guidance around what that what might be right now.

Adam Maeder: And then just for the follow-up. You guys give helpful color and guidance on new account ads. I’m curious, if you are able to share some color on in planning physicians per account. Are there metrics you can share there? And how do you think about those trends going forward? There’s clearly a lot of demand for your product. So wondering, how you think about the importance of not just growing the account base, but also the number of docks, that existing centers?

Rick Buchholz: Absolutely, Adam. Great to hear from you, thank you. It continues to be a focus and it’s one of the fastest ways to be able to increase capacity at an existing center is to add a surgeon. And so we’ll continue with a focus on that we don’t have specific metrics here, but it is one of the key methods to work with centers to either grab additional or time for the existing surgeons. But to also just train their partners to be able to have additional art time because we know the demand certainly is there. So, we’ll continue to look forward and try to find some more specifics on that, but it is certainly a key factor in for our field team to be able to grow capacity.

Operator: Thank you. Our next question comes from Rich Newitter with Truist. You may proceed.

Rich Newitter: Thanks for taking the questions and congrats on another really great quarter of solid finish to the year. I wanted to maybe just start off on the 1Q seasonality comments in the context of the kind of the 4Q impact you called out on supply issues and maybe some deferral into the 1Q. Typically, you see, I think, last few years, about a 10% or low-teens percentage decline 4Q to 1Q. It sounds like you’re suggesting that might be a little bit less than normal. So, A is that correct that the 10% or less of sequential decline or less than historical is a good way to think about it? Could you quantify what you think that supply push out procedure, demand push out might have been?