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.

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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?

Tim Herbert: Yes. Let’s go back and talk a little bit about what we’re talking about first. First, I think, we’ve always kind of talked about like a 12%, seasonality as we moved into Q1. But when we’re talking about with these stimulation leads, we — remember, we’re in the third quarter when we transitioned from the polyurethane production line to the silicone production line. We built up safety stock polyurethane, then we had to stop and purge the line and get them back up and running. And we did that, but we have to be able to get up to volume. And then the process of scaling is when we ran to some of the challenges. So, we went to more of a just in time delivery to support cases and would be holding some powers, part level of orders or things like that.

But we were able to fulfill, and closely track with schedule procedures to make sure that we had all those products ready to go. And for cases that get scheduled in January and part of the just in time system, some of those may ship in January. So, probably not a big number, but certainly wanted to bring awareness to that in that the seasonality still exists, but with the supply chain challenges, it might offset that a little bit, but the just to make everybody aware of that. But the good news is the inventories are growing and the production lines are scaling up.

Rich Newitter: Okay, that’s helpful, got it. So, it sounds pretty minor. Your normal seasonality is probably a good way to think about it. And then just on the account opportunity, I think, I think you’re right under a 1,000 centers right now in planting centers. You’ve talked in the past about, I know it’s very high level, but I think something to the tune order magnitude of 4,000 accounts in the U.S. that you could theoretically get. And I think you’ve also said there’s 4,000 ASCs out there. Can you maybe just refresh our memory on kind of how you see that a 1,000 installed base progressing towards some account opportunity and what is the right account opportunity?

Tim Herbert: Yes, good question. So yes, when we took that 4,000 and 4,000 got to a total of 8,000 and then we just assumed about a third of those centers would have a capability or would be doing Inspire and that put our target market at 2,400. And I think over the last couple quarters, we’ve been spending more time evaluating that, because we’ve been recognizing in smaller communities, physicians are setting up centers that don’t require patients to take long drives into more of the larger city centers. So, I think we’re going to continue to evaluate that. I think the number of centers that we can move to will far exceed the 2,400. And we’ve already demonstrated in some towns in Idaho, Montana, even in that well, Jackson, Wyoming, that there are very productive accounts in these smaller communities, and we can really leverage the community doctors to be able to offer Inspire and have more community-based care.

So I think that story continues to evolve, and we will continue to increase the number of centers capable of treating patients with Inspire.

Operator: Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. You may proceed.

Larry Biegelsen: I wanted to ask on the guidance and the new indications and label changes. Tim, what do you assuming for the timing down to AHI, BMI and any impact that you’re assuming in the guidance?

Tim Herbert: I think we’re very optimistic with the pediatric population with Down syndrome. I think that we’ve been working closely with the FDA to answer questions that they have, they’ve come and done audit on the clinical data. So, we know that they’re progressing under review as well. And so we’re optimistic that that should happen in the first half of the year, which I think is really exciting. As far as the high AHI and the warrants for BMI, I think that also is progressing, we’re working with the FDA again, and a little bit earlier stage, so that will take a little bit longer to be able to get that approval, but certainly confident that that’s coming through. And it does have the proper designation to help accelerate the review at the FDA.

So, we expect both of those in the near future and should have impact on the business. So we did try to kind of build that into the guide that we put forward. I think the, in both of those populations, it’ll be a little bit of a slow uptick as we get awareness out there and to be able to incorporate that into the existing practices. The good news is a lot of the pediatric hospitals or the children’s hospitals are affiliated with some of the larger institutions that already do inspire today. So we already have an Inspire present. So hopefully, that will streamline our ability to get those centers up and running on the pediatric front. So more to come on that we’re very excited about that population that’s near and dear to our heart, and will work in with the societies and in the parents of family groups to be able to build awareness of that.

Larry Biegelsen: Just one follow-up on pediatric Down. Why do you think the uptake will be low there? They’re relatively well or well organized community, if you will. I think the clinical need seems pretty, pretty high here. You’ve been working on this for a while. So why do you expect the uptake in that population to be slow? Thanks for taking the questions.

Tim Herbert: I think we will be working on it for years, and you’ve seen the clinical studies and enrollment those studies and it’s still a relatively small number of patients have we seen Inspire in that pediatric group. I think it’s a new therapy, and a new option for the families and the doctors to be able to understand. So, I think this is going to be an educational process like any new indication or like any new therapy or in introducing Inspire into any new country. There’s just always just a little bit of a slow adoption curve as people learn about to therapy and become comfortable with it and increase the prescription of the therapy.

Operator: Thank you. Our next question comes from John Block with Stifel. You may proceed.

John Block: Maybe first with review, in the quarter, I’m talking around 15 million I just don’t have the cash flow statement, so maybe just your thoughts on around 15 million? And if so, I believe you guys would be EBITDA positive for full year ’22. Maybe just provide your thoughts on how that would look or trend for full year ’23?

Rick Buchholz: Yes. So, stock-based compensation was about 15 million. So in rough terms, John, we’re about 18 million roughly in EBITDA positive for the fourth quarter. And so that stock based compensation expense has increased. Again, that will increase. We’re also going to continue to make investments along our all facets of our business R&D, sales and marketing, and so on. And so with that, we expect that, we’ll lose leverage in the first quarter with our seasonality but then gain that back as we progress throughout the year. But again, we’re not providing any guidance on OpEx or bottom-line at this time.

John Block: No, I got it. But I guess maybe just as a follow-up to that. If you’re EBITDA positive or full year ’22, which you just confirmed, and you expect leverage, not for 1Q, but over the course of ’23. We can just sort of draw our own conclusions from there. Is that a fair statement?

Rick Buchholz: That’s fair.

John Block: And then, Tim, just you talk to us, if you don’t want on the ASCs a little bit. I think it came in again 23%, is that representative as a percent of the overall procedures? And maybe more importantly, how do you see this playing out and evolving over time. I think initially, you were excited about those potentially being higher utilization settings, the reimbursements improved there, you’ve got a good number or percentage commercial payers, to talk to us and how that can help act as an overall driver for utilization for Inspire longer term?

Tim Herbert: I think it was continue to be excited about. And I think this maybe a little bit more of post-COVID phenomena where the hospitals are really active again. And so while we’re still at 23%, we’re still growing the number of ASCs. But we’re growing the number hospitals as well and that’s not too surprising. I do think the utilization impact that we’re seeing is part of a factor of the ASCs is I think, right now we’re running maybe 20% of our procedures are done in as ASC. Even though ASC make up 23% of the centers, what that means is they’re taking more of their fair share of the procedure. So, that’s really good to see the utilization growing in both, but particularly in ASCs. As we continue to progress, I think we’ll continue to look for further sites of service.

But as we know, the reimbursement in hospitals continues to be very, very strong, and our ability to garner all our time to take care of the patient continues to grow. And that is evidenced by the increased utilization across the board. So we’re not taking our focus off as his but we continue to leverage all the hospitals that want to participate with Inspire as well.

Operator: Thank you. Our next question comes from Michael Polark with Wolfe Research. You may proceed.

Michael Polark: First topic, the comments on modifying incentive compensation for your field force to focus on higher utilization as existing centers. I guess, can you level that, is this a notable change? Is it a subtle change? What did the framework look like before what does it look like now, and I guess why make this change for 2023?

Tim Herbert: Absolutely, well, first off, it’s a important part of the compensation for the field and especially the territory managers, but the management team shares in the same compensation structure. So they’re all very consistent. We have different groups of people. We have the area business managers, as you know, that focus on opening new centers, and the territory managers are responsible for cultivating the existing centers to increase utilization. In the past, we used to compensate more — everybody gets their base comp, and of course they get the commissions based on implants and revenue and unit sold, but we have added components, in the past years, it’s been based on what we call patients expecting therapy are more around patients in the prior authorization process.

But as we continue to mature, it’s important that we shift that from individual patient count to more utilization at site. So, we’ve kind of switched over the parameter starting this year to really focus more on the utilization site. So I think, we just presented it at the national sales meeting just a week ago, and team is very excited about the progress that they made last year, as well as the prospects moving forward.

Michael Polark: My second one, if I may leverage related question. You report SG&A in a consolidated line. I don’t see a breakout in filings or the like of S&M versus G&A. I’m just curious as you assessed kind of a leverage that you’re seeing in the model? Is there a variance worth calling out as to how your G&A spend is getting leveraged versus S&M? Just if you could frame up like, where G&A is as a portion of total, and is that getting materially better versus S&M? Or are they about trending the same? Any color there would be, great. Thank you so much.

Rick Buchholz: Hey Mike, it’s Rick. So, we have demonstrated leverage across all those line items, R&D, G&A, and sales and marketing, as over the fourth quarter and throughout the year in 2022. Again, we’re going to lose that in Q1 with seasonality. But even R&D, we’re continuing to make investments. R&D was 19% of revenue in the third quarter. That was 15% in the fourth quarter. G&A is in that 10% to 12% range. And we expect to continue to be in the — in that ballpark, in that range going forward. So cross all line on you.

Operator: Thank you. Our next question comes from Chris Pasquale with Nephron Research. You may proceed.

Chris Pasquale: I want to follow up on the question about the shift in incentive comp. So the guidance for this year implies we add about as many sites in ’23 as you did in ’22. Just wanted to see like how you square that with where you’re incentivizing your team to spend their time. Maybe we’re reading too much into that comment, but it seems like that could mean fewer center ads this year.

Tim Herbert: Well, I think, we left the guys consistent from ’22 to ’23, because we still have our training team and the area of business managers to be able to focus on adding new centers. And we’re going to continue with that. We also previously talked about how the — our growth has really been driven predominantly by increased utilization, same store sales versus the contribution from new centers. And I think, what we’re kind of highlighting is we’re going to continue down that pathway. And we want to keep focusing on growing utilization, because centers that are able to do more procedures, they can better outcomes. They’re more proficient in the procedure and proficient on managing the patients, they’re better at patient flow, they’re better at submitting the proper codes to get proper reimbursement.

So centers that have high utilization are just so much more efficient and have higher patient outcomes. So we’re going to continue with that trend and continue having territory managers, ideally managed less centers that are doing higher utilization.

Chris Pasquale: Okay, that makes sense. And then 70,000, physician contacts driven by our DTC effort, it is very impressive, you treated about 16,000 patients last year, so one out of every five people who raise their hand, are actually getting an implant. Where are the stumbling blocks today that are causing patients to fall out of that funnel? And can you talk a little bit more about the digital scheduling tool you mentioned? And whether that’s part of the solution for trying to improve that yield?

Tim Herbert: Well, you want to talk about physician contacts. There’s another sentence in there that talks about patients getting direct referrals from their own health care providers. That’s not part of that number. And so, there’s always a little bit of specificity on where exactly the patients come from, and is it truly one in five from the Advisor Care Program, but how many patients see the ad, they’ll go to the website, there’ll be educated. But rather than going through the Advisor Care Program, they will contact their own healthcare provider or their own sleep physician, saying, what do you think about the spiral will this work for me, and they actually will become a direct physician referral, and that not coming through from the Advisor Care Program.

So that’s really an important part of the business as well. So we have to continue to educate the physician. On the other side, we need to continue to improve the efficiency of the Advisor Care Program. And we do have a pilot out there right now to be able to log directly in to the scheduling at physician’s office. So, when the Advisor Care Program, talks to a potential patient determines that excuse me, they’re a good candidate that they can directly schedule in. So we have a handful of face up and active. And we’re really looking to further expand that program earlier in the year.

Operator: Thank you. Our next question comes from Matthew Mishan with KeyBanc. You may proceed.

Matthew Mishan: So, I think this might be a little bit early to ask, But I think investors are encouraged about the improvements with the Inspire 5 once that gets through approval. Do you think as it gets closer, like some physicians will wait for it to be approved where it might actually delay, start some implants?

Tim Herbert: Great question. I don’t think so. So we see this in the past with a new remote with Bluetooth with going to silicone leads going to Inspire 4 from the Inspire 2, now that’s back in 2018. But we just don’t see that slowdown once we have a patient flow and the patient could schedule was a standard pathway. Inspire 4 going 5, while it puts the something inside the can, it doesn’t have a dramatic impact such as like when we go into future generations with adults 50 tact or with adults titration. So, we don’t expect to see any kind of slowdown and we know that demand continues to be strong.

Matthew Mishan: And then follow-up just a PREDICTOR study with initial readout in 2023, I think you mentioned that an industry presentation earlier this year that there was some data published from another study? Can you comment on what that showed? And why that would be encouraging for the readout for PREDICTOR?

Tim Herbert: Absolutely. So we finished the first 300 in ’22. At the same time, Dr. Weiner is a physician in Arizona give him a shout out, because his paper was published several weeks ago with the first100 patients. And we’re getting into data now from the first 300. Right now, it’s in the quality stage, meaning that we get physician overreach of the data for quality control. So, we’re right in that process, but we also noted there were patients with a higher BMI above 32. So we actually are entertaining the opportunity to continue that study and actually increase to maybe add another 300 patients go to 600 being able to widen the number of patients that we can treat with that. So very active program, we’re in the process of getting into quality control on the first 300.

And we’re looking to just continue enrolling patients, because the data is we’d like what we see and we think that we might be able to treat even a higher BMI population. So you’ll expect to expect us to say no, we’re going to 600 patients in.

Operator: Thank you. Our next question comes from Suraj Kalia with Oppenheimer. You may proceed.

Suraj Kalia: So, Tim, forgive me, maybe I missed the new store, same store metrics provided. If I could ask specifically the 225 or so sites added last year? How many implants did they do for the full year?

Tim Herbert: We don’t have that specific numbers in front of those, but remember how we do new sites. And a new site is anybody who has opened up during the year. So any site that we opened in the fourth quarter, obviously they were only able to do their first cases. So, they do one or two cases in November, December. Anybody who opened up January 1 of 2022 is still in the same bucket of a new center. And they have the opportunity to reorder right and do additional patients to the year. So, some of those can be productive accounts by the time they get to the end of 2022. So, it’s kind of the way that we established case centers, and we established them per year. So, yes, I don’t really have the exact number of what percent of the cases were from the class of 2022.

Suraj Kalia: How do you define account turnover?

Tim Herbert: First, let’s define account and account is a purchasing unit, right. That would be a hospital that borders product from us. That’s what we call a center. A center can have several different accounts per se. So, there may be catch up back down to who’s on the website, right. We don’t have one center on a website. We could have multiple centers on there, right. The sleep practices could be on the website along with the planning surgeon website. So turnover, we don’t have a whole lot of center turnover, those are purchasing units. But sometimes, they’ll go on hold if the surgeon moves, but go ahead.

Suraj Kalia: I guess Tim, what I was really getting at just trying to get my arms around. You’ll have 905 sites exiting FY ’22. Great, but does 905 really imply that onboarding was, I don’t know, pick a number, 1100, and then some bled out for the various reasons that you have mentioned on calls in the past, they didn’t do implants. You’ll kick them out the list and all that, and then you’ll exit it at 905. So just kind of trying to understand what the turnover is? How many don’t come so to speak?

Tim Herbert: Very low, very, very low, and I don’t think in the fourth quarter we really closed any sites. So what you see is additive and 905 is the active number of centers. And during COVID, we reported, I think once we closed 15 sites and every time we closed like 12. By the way, some of those sites have a surgeon move back in our back-end process. So, we have very, very low turnover of a site once they become active, now we want to continue to work with that site to be able to increase utilization. Doesn’t mean a site if they’re not productive or if they have too much of a backlog of patients that they’re scheduling out too late, we’ll remove them from the website. But the website and an active center are two independent functions.

Operator: Thank you. This concludes the Q&A session for the conference. I’d now like to turn the call back to Tim for any closing remarks.

Tim Herbert: Thank you, Josh, and thanks for all for joining the call today. As always, I’m grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve successful and consistent patient outcomes. The Inspire team’s commitment to patient remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts, as we remain focused on further expanding our business in the U.S., Europe, and in Asia. All of you on the call, we appreciate your continued interest and supportive Inspire and look forward to providing you with further updates in the month ahead. Please stay safe and healthy.

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