Inspire Medical Systems Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 2, 2023

There are 13 speakers on the call.

Operator

Afternoon. My name is Dilem, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Inspire Medical Systems Q1 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer to ask a question during the session.

Operator

I'll now hand the conference call to your first speaker, Ezgi Yajas, the Vice President of Relations at Inspire. You may begin the conference.

Speaker 1

Thank you, Dylan, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer and Rick Beholz, Chief Financial Officer. Earlier today, we released financial results for the 3 months ended March 31, 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 laws.

Speaker 1

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-nineteen pandemic, full year 2023 financial and operational outlook and improvements 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, inspection, including our Form 10 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.

Speaker 1

This conference call contains time sensitive information and speaks only as of the live broadcast today, May 2, 2023. With that, it is my pleasure to turn the call over to Tim Herbert.

Speaker 2

Thank you, Esky, and thanks everyone for joining our business update call for the Q1 of 2023. 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 provide an update on our Q1 results and discuss our updated outlook for the full year 2023. To start, We want to highlight a very important milestone in the Inspire story. Today marks the 5th anniversary of our IPO and what a tremendous 5 years it has been.

Speaker 2

Since our IPO, the company has surpassed 40,000 patients treated with Inspire therapy, grown to over 800 employees, introduced many therapy improvements highlighted by the 2 incisions surgical approach, received a dedicated CPT code for reimbursement and most recently received approval for pediatric patients with Down syndrome. To celebrate this momentous occasion, along with the FDA approval of our pediatric Down syndrome indication. We had the privilege to ring the opening bell at the New York Stock Exchange last Thursday, and we were joined by Jesse Rivera, the 1st pediatric patient with Down syndrome to receive Inspire Therapy 9 years ago, and we all celebrated as Jesse rang the bell. With that, let's review our results. In the Q1, we generated revenue of 100 $27,900,000 representing an 84% increase compared to the Q1 of 2022.

Speaker 2

This 84% growth rate represents our highest quarterly growth rate post the COVID pandemic. Our growth continues to be driven by higher utilization at existing centers and is complemented by the activation of new centers. Given the strong momentum we are seeing in our business, We now expect full year revenue to be in the range of $580,000,000 to $590,000,000 a 42% to 45% increase compared to 2022. In the Q1, We continue to increase our capacity by adding 68 new implanting centers in the U. S, ending the quarter with a total of 973.

Speaker 2

For the remainder of 2023, We continue to expect to activate 52 to 56 centers per quarter. Regarding the U. S. Sales team, We created 17 new sales territories in the Q1, bringing our total to 242. For the remainder of 2023, we continue to expect to add 12 to 14 sales territories per quarter.

Speaker 2

In the Q1, the number of visitors to our website surpassed 3,400,000, which is significant. The website is the introduction for patients and the source of the growth in therapy adoption. In January of 2022, We initiated our 1st national media campaign, which resulted in a one time spike in website visitors surpassing the $3,400,000 in the Q1, but the current volume has us in a very strong position entering 2023. From these visits, we had over 19,000 physician contacts and have steadfastly improved our conversion of contact to patients receiving therapy. Of note, our team has implemented several services to enhance the patient experience, including a patient nurturing program whereby we are leveraging our significant patient database to reengage and help patients in their Inspire therapy journey through proactive outreach.

Speaker 2

Secondly, our digital scheduling pilot continues to make strides and we are currently experiencing a 30% improvement and physician appointments in the pilot centers compared to traditional phone and email scheduling through our Advisor Care program and are adding technology to support the next wave of participating centers. Further, we continue to focus on improving process time, including scheduling of sleep studies and one tool is our collaboration with Agnomi, which is showing great promise to date. And finally, Our focus continues towards increasing surgeon capacity and we see signs of improvement in the patient pathway and specifically be by reducing the time from patient contact to implant, which continues to be approximately 6 months. Moving on, our international business continues to expand, growing 15% in the Q1 over the prior year despite ongoing headwinds from unfavorable exchange rates. There were several positives in our international business during the Q1, including the strong performance in Germany, the Netherlands and Switzerland.

Speaker 2

We finalized countrywide reimbursement in Belgium and have increased our commercial efforts there. Furthermore, we hired a country manager in France in anticipation of the formal listing of the recently announced countrywide reimbursement in that country. In Asia, We had strong sequential growth from the Q4 of 2022. We continue to be pleased with the progress in Singapore and completed our first two cases in Hong Kong. In Japan, we transitioned to a direct sales organization launch inspire.

Speaker 2

Jp and see good momentum with strong patient outcomes and growing patient flow. Turning to R and D. We continue to work on the qualification of our 5th generation Inspire Neurostimulator. The Inspire 5 device will eliminate the pressure sensing lead and incorporates a sensor inside the neurostimulator using an accelerometer to measure respiration. We continue operational and production qualification as well as integration with the Inspire digital tools, specifically SleepSync.

Speaker 2

The testing is continuing as planned and the team is committed to submitting our application to the FDA by the end of this quarter. Given normal FDA review cycles, including time to respond to FDA questions, that could move approval into early 2024. Our SleepSync system continues to make progress since the launch of the Bluetooth enabled patient remote and we have experienced significant adoption in the number of users of SleepSync along with strong growth in the number of connected patients currently in the system. Another example of the expanded utility of SleepSync is the next release will incorporate the second version of our ADHEAR patient registry. The current ADHEAR registry is within 200 patients of the 5,000 patient cap and moving forward, patients will be enrolled into the ADHEAR 2.0 registry, which will be integrated into SleepSync.

Speaker 2

Subsequent digital programs will incorporate a sleep monitoring device and remote patient programming. Regarding operations, we continue to make good progress with the production wrap of the silicone based stimulation and sensing leads. We are in an improved inventory position and growing the inventory levels to our goal of 1 quarter of safety stock. Inventory levels are strong for all other components, including the Inspire 4 Neurostimulator, the Patient Remote and the Physician Programmer. In summary, we are experiencing significant momentum in all aspects of our business.

Speaker 2

We remain focused on patient outcomes and physician education to continue the adoption of our therapy. In 2023 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 are seeing enhanced productivity from these efforts, which is driving our improved financial performance. 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.

Speaker 3

Thank you, Tim, and good afternoon, everyone. Total revenue for the Q1 was $127,900,000 an 84% increase from the $69,400,000 generated in the Q1 of 2022. U. S. Revenue in the Q1 was 124,500,000 an increase of 87% from the $66,400,000 in the prior year period.

Speaker 3

The primary growth driver in the U. S. Was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers, expanded direct to consumer marketing and a higher number of territory managers. Revenue outside the U.

Speaker 3

S. Increased to $3,400,000 which is a 15% increase year over year on a reported basis, while units sold outside the U. S. Grew 24% year over year. The U.

Speaker 3

S. Average selling price in the Q1 was 25,000 compared to 23,800 in the prior year period. The increase reflects our 5% price uplift that began in May of 2022. We expect the U. S.

Speaker 3

ASP to remain steady at the current level. The ASP outside the U. S. Was 21,000 during the quarter compared to 22,200 in the Q1 of 2022, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the Q1 was 84.4% compared to 85.6% in the prior year period, primarily due to higher costs of certain component parts, partially offset by the price increase that began in May of 2022.

Speaker 3

Total operating expenses for the Q1 were $127,500,000 an increase of 69% as compared to 75.4 $1,000,000 in the Q1 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. 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 $4,300,000 in the Q1 compared to $34,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances compared to a year ago.

Speaker 3

Net loss for the Q1 was $15,400,000 compared to a $16,700,000 net loss in the prior year period. The net loss per share for the Q1 was $0.53 compared to the net loss per share of $0.61 in the Q1 of 2022. The weighted average number of shares outstanding for the Q1 was 29,100,000. We expect the 2nd quarter weighted average shares outstanding to be approximately $29,200,000 Given our continued operating leverage improvement, Our cash and investments increased to $452,000,000 during the Q1 from $451,000,000 at year end. 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.

Speaker 3

Moving on to updated 2023 guidance. Given the strong momentum we are seeing in our business, we now expect full year revenue to be in the range of $580,000,000 to $590,000,000 an increase from our initial guidance of $560,000,000 to 570,000,000 This updated revenue guidance represents 42% to 45% growth compared to full year 2022 revenue. We continue to expect full year gross margin to be in the range of 83% to 85%. As Tim noted, we expect to activate 52 to 56 new centers per quarter and establish 12 to 14 new sales territories per quarter in 2023. In conclusion, our strong performance and our business momentum provide us with confidence in our outlook for the remainder of 2023.

Speaker 3

With that, our prepared remarks are concluded. Dilem, you may now open the line for questions.

Operator

Thank you, sir. Please stand by while we compile the Q and A roster. And I show our first question comes from the line of Robbie Marcus from JPMorgan. Please go ahead.

Speaker 4

Great. Thanks for taking the questions and congrats on another great quarter.

Speaker 2

Thanks, Robbie. We'll give you a follow-up too if you want it.

Speaker 4

Now I'm going to I'll ask just one question. I've asked you about center growth and all of that before. So really just looking out a little bit here and thinking forward to when Inspire 5 And just wanted to get your thoughts on what the organization can do now ahead of the launch to lay the groundwork and drive even better procedure utilization at centers, better patient awareness and make that more of a step function than an incremental type of product launch. Thanks a lot.

Speaker 2

That's a great question. I can go a lot of different areas with this. I think the key will continue to be on the funnel and improving our SleepSync to be able to handle patients as they enter the program and help them with their patient journey. And we're having several tools that we're implementing as part of SleepSync that is working alongside the Advisor Care Program. We've mentioned some of the tools such as improved timing to get sleep studies, electronic scheduling, even electronic tools to help them gain referrals in.

Speaker 2

But when we move to Inspire 5, we see improvements in OR time that's going to provide some more efficiencies For the surgeon capacity to be able to add additional cases in a given day, then further we'll be able to drive further improvements and outcomes and specifically we like the reimbursement I'm sorry, the reliability improvements that we expect to see by incorporating the sensor inside the can and really thereby moving forward. And I'm sure later on we'll talk about The progress that we're making with the PREDICTOR study to even improve sleep surgeons' time by finding different ways that require them to do a drug induced sedated endoscopy. So all of those in composite Are going to be coming together at the same time frame as we launch Inspire V, allowing us just to continue the increased utilization of the therapy.

Speaker 4

Great. Thanks a lot. Appreciate it. Congrats again.

Speaker 2

Thanks, Robbie. Thank

Operator

you. And I show our next question comes from the line of Danielle Antalffy from UBS. Please go ahead.

Speaker 5

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on another really strong quarter and great start to the year. Just a question for me on thinking about sort of the staffing constraints that we've been going through. It feels like now 2 weeks or so into MedTech earnings, Avis quite a bit, but your guys' pathway is very different with the whole sleep study and the requirements there.

Speaker 5

So just curious if you're Still seeing any pressure there and how that's evolving? And could the quarter have been even better than expected if we or better than it was if that wasn't still an issue. Thanks so

Speaker 2

much. Thanks, Danielle. I think that we've been pretty good with the sleep studies and with The line of sight that we have for patients in the process, we're able to schedule them in advance. And so we're able to work around the staffing issues, quite well and therefore we're able to achieve that 84% growth in the quarter, which is tremendous and the number of patients that we're able to help is really extraordinary. So I think the staffing issues Is present for sure, but I think because we have some advanced planning with line of sight of our patients, we're kind of able to manage that with our centers.

Speaker 2

And I do think our limiting factor tends to be more of the ENT surgeon time in the operating room to do procedures. And if we could Continue to improve surgeon capacity, that really is the limiting factor that could have made our quarter even greater if we had more surgeon time. So when we look at staffing, I think we kind of focus more on the surgeon themselves who are doing the procedure, But the support staff is obviously very necessary, but with our advanced plan, we can work through that.

Speaker 5

Okay, got it. Super helpful. Thank you so much.

Speaker 2

Thank you, Daniel.

Operator

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

Speaker 6

Good afternoon. Thanks for taking the question. And I'll echo my congratulations on another strong quarter. I'll ask both upfront. Rick, just the usual question on just and think about revenue cadence for the rest of the year.

Speaker 6

And then Tim, I'd just love to get your reaction on the preliminary, Nyxcella data we saw. And at a high level, Tim, just to follow on Robbie's question, how you're thinking about preparing for competition eventually in the market. Thanks for taking the questions.

Speaker 3

Yes. Hi, Larry. This is Rick. So Yes, we're really excited and proud of the results achieved by the team in the Q1. And we did increase our guidance from our initial guidance beginning of the year.

Speaker 3

We're excited about the opportunity. We haven't changed our guidance strategy and we're going to continue to focus on increasing utilization at existing centers where we see that as well as add additional centers. And so if you take the increase in guidance, it's going to be really ratable throughout the entire year.

Speaker 2

Good, Larry. As far as releasing of early data, I think anybody who's been in medtech knows that early release of a Phase 3 pivotal study is pretty unorthodox. And that's not sure what the purpose was by doing that, But it's a very limited release and it's very hard to make any judgments from the data that was released. And maybe it's because there isn't a lot of other data available And so it's all they have to be able to put that out. It doesn't matter until the final numbers are available a year from now and what the FDA says when they assess those that data.

Speaker 2

So that's all we're going to really comment as far as competition, we know we're going to have competition in the future. What we've been able to do to show the benefits for patients in this market is tremendous. The market is extremely large and it's open to having viable and good competition that has therapies that can help patients. And I think that on the horizon that will happen. But in the meantime, Larry, we're developing our technology to improve physician and patient experience.

Speaker 2

Inspire 5 is a perfect example of a therapy that's going to be leading edge, one of the best, if not the best neurostimulator in the world today, to be able to take care of patients, reduce a lot of time, improve reliability by eliminating the sensor, improving outcomes and then tying that into our patient outcomes with the SleepSync system. I think we're going to be in very strong position for several years, probably until the time we'd even expect to see and any competition if they pass their trials anyways. But thank you.

Speaker 6

Thank you, Tim.

Operator

Thank you. And I show our next question comes from the line of Travis Steed from Bank of America Securities. Please go ahead.

Speaker 7

Hey, thanks for taking the question and congrats on a good quarter. Maybe to quickly follow-up on Larry's competition question. Maybe how we think about the weight loss drugs and that competitive environment. And then the other question I'd have is just, when you think about the higher revenue guide, how you're thinking about the OpEx guide Within that, if you would have the OpEx go up a little less than revenue and just kind of overall thoughts on margins and profitability again for this year. Thank you.

Speaker 2

Fantastic. Let me touch base on the weight loss drugs coming out and then Rick will touch base on OpEx. We really like the weight loss drugs. And the challenge that we have as a therapy is our treatment is for tongue based obstructions and it doesn't address lateral wall. No hypoglossal nerve stimulation system can treat lateral walls because we stimulate the geniaglossus, which is a tongue movement that moves it forward.

Speaker 2

Lateral wall collapse is related to higher BMI. And so if we have patients that can lose 20%, even 30% weight loss with some of the new injectable drugs. We think that's really a positive and really complementary to Inspire. Those That weight loss will reduce lateral wall collapse, but it doesn't address ton based collapse. So the 2 of us need to work in concert together to be able to treat the higher BMI populations and really look forward to The day when we get more patients that can have relief from their high BMI to bring them down into the group that we can treat with Inspire.

Speaker 2

So I think it's really complementary and we're quite encouraged by the development of those drugs. I hand off to Rick here for a discussion of OpEx.

Speaker 3

Yes. Hey, Travis. As We've trended the last several quarters that the revenue growth has outpaced the OpEx growth. And so with the new revised guidance of 42% to 45% for revenue on our updated guidance for the full year for 2023. We expect the OpEx to be less than that growth of revenue, not significantly, but just maybe a little bit less and our revised updated guidance.

Speaker 3

And then as far as profitability, we're not changing our tone on profitability. We know it's important, but we're going to continue to run our playbook. I want people to understand that we do have a disciplined approach in Our spending and our investments across our business and we demonstrated profitability in the Q4 of 2022. We're not guiding to profitability at this time and we did lose some of that leverage in the Q1 because of our seasonality. But as we progress through the year, our plan to show some improvement on that operating leverage.

Speaker 7

Great. Thanks a lot.

Operator

Thank you. And I show our next question comes from the line of John Baugh from Stifel. Please go ahead.

Speaker 8

Great, guys. Thanks. Good afternoon. I'll also ask both mine upfront. I guess, is 1Q Q clean from an end user demand perspective or was there a small benefit from inventory levels rebuilding a bit, Tim?

Speaker 8

I just Wasn't really sure based on the inventory comments. It actually seemed like inventory could still be below normal levels. So Any clarity there would be helpful. And then the number of centers were particularly solid, well above our estimates. So maybe just talk about The types of centers that are coming on board, importantly, what's being done to ramp them quicker than previously?

Speaker 8

And then I didn't hear a percent of ASCs. So if you got that handy, I'll take that from Thank

Speaker 2

you. Got it. Thanks very much. Yes, there is a little bit of that carryover from the Q1. There's no question about it.

Speaker 2

As we talked about Our Q4 call that we were, on allocation to make sure that we supported every implant that was scheduled. And from that, we were able to achieve that, but there's a little bit of carryover. But even the carryover is relatively small and even with taking that into account, We were still close to 80% gross I'm sorry, 80% growth in the quarter, but certainly that exists. Our inventory position has improved and we have that line up and running and ramping. And so we're able to support, all orders right now with positive inventory today and we're going to continue to grow that forward.

Speaker 2

As far as the number of centers that we experienced, we did get an increase to 68, which is phenomenal. The percent ASCs at this point is now 24%, 24%. So a little bit of an uptick from the prior quarter, which is good because ASCs will continue to grow slightly faster than the hospital setting, which we will continue to grow as well. So I think, just opening up the new quarter, you'll able to spend some time on opening new centers and that's why we Have that 68, we'll continue to be able to scale the number of centers that we open over the quarter. But For the meantime, we're just leaving our guidance where it was.

Speaker 2

Thanks, guys. Thanks, John.

Operator

Thank you. And our next question comes from the line of Adam Nader from Piper Sandler. Please go ahead.

Speaker 9

Hi, Tim. Hi, Rick. Thank you for taking the questions and congrats on the nice start to the year. Wanted to start on a couple of the label expansion opportunities, specifically raising the upper limit of AHI and then also the change to the language around BMI from the current label. Just any latest thoughts on timing?

Speaker 9

And then I have a follow-up. Thanks.

Speaker 2

We've been working with the FDA. We answered the question. We've had in the past, we've been talking about process, how these PMA supplements There are 180 days that the FDA asked questions at day 100. We have received the questions, responded to those questions. It's back in review with the FDA.

Speaker 2

We see promise moving towards approval and we think that approval is coming in the very near future. I think the high AHI is the, really the benefit for patients in that submission. Remember, the submission includes both AHI and BMI. The high AHI, right now those patients just don't have any other alternative. And so that's a natural fit for them to be able to fit right into INSPIRE.

Speaker 2

The limitation really goes back to the early days of the clinical study. So there's no reason to really have upper limit on AHI. I also think that we'll be able to quickly garner reimbursement support or coverage from both commercial payers and Medicare to be able to really take care of that population. We can get those patients approved through the appeal process, but this is going to really streamline Their patient experience will be able to get those patients in insurance approval quite quicker. As far as the high BMI, While that presents a good opportunity, it also is something we need to be careful about because remember with the higher BMI, It introduces the concept of lateral wall collapse and that's what's very difficult to treat with hypoglossum nerve stimulation.

Speaker 2

Patients will get improvements because we'll take care of the tongue based collapse, but they won't get a total improvement to the satisfaction that we desire. And so we're going to want those higher BMI patients to address that lateral wall collapse before they're going to be eligible. That being said, we do have our own work going on and to advance our system to Stimulate to take care of lateral wall clearance, but pretty early to talk about that right now.

Speaker 9

Okay. That's great color, Tim. Thanks for that. And maybe switching over to Rick and the P and L, just had a quick question on R and D spend in the quarter, which A healthy step up. So I guess first, what drove the increase?

Speaker 9

Where are those dollars being spent? And how do we think about kind of cadence of R and D spending going forward? Is this kind of the new base to work from? Thanks so much for taking the questions.

Speaker 3

Yes. Hey, Adam. Part of that increase is up in R and D. It was about 20% of revenue. That historically has been in that 15% to 20% of revenue and it has increased just year over year and sequentially just It's really a function of the timing of entering that full qualification of Inspire 5.

Speaker 3

And so We will continue to make R and D investments in the future. And so we expect R and D to continue to be in that mid teens range as we exit 2023.

Speaker 7

Thanks, Rick.

Operator

Thank you. And I show our next question comes from the line of Richard Newitter from Churwood Securities. Please go ahead.

Speaker 10

Hi, thanks for taking the questions. Two quick ones from me and congrats on the quarter. One, just the first, Rick, following up on the profitability line questionings here. I think last quarter, you said that you do think that adjusted EBITDA on a year over year basis will be higher than it was in 2022. Based on your comments around OpEx growth being below the top line growth rate.

Speaker 10

It sounds like all of that should still be intact. I just want to make sure that we're thinking about that correctly and that would imply positive adjusted EBITDA excluding stock based comp still. Is that fair?

Speaker 3

That is fair and that's accurate. We when you look at EBITDA, it was about $900,000 loss for the Q1 compared to a $6,100,000 EBITDA loss in the Q1 of 2022. And the big driver there is stock based compensation was $18,000,000 in the quarter. And so still accurate comment.

Speaker 10

Okay, very good. And then just thinking about competition, I know there is none in the U. S. Currently, but Assuming your competitor gets there, I think they suggested they could use either your code or there would be potential modifier situations with other codes that would get them kind of a, I want to use the word fast track reimbursement, but bypassing what you have to go through from a coding standpoint. I'd love to just hear what your view is, in light of some of those comments and any perspective you might have there.

Speaker 10

Thanks. Sure.

Speaker 2

Well, I think there's 2 people out there doing clinical studies. I think, LivaNova is Probably at the forefront of it because they got more data and more experience. And they already have an existing code, which is remember the old 64568 that we were using with our add on code. So they already have a code with their implanted neurostimulator and stimulation lead that they're going to be able to leverage as they go forward. As far as, Nyxoah, that jury is out and they got to go figure out what they're going to do with their code.

Speaker 2

But That's up to CMS and not for Inspire to comment, but that's always a little more challenging than you say it's going to be. Now that being said, both companies have to deal with coverage, which is their number one challenge. In order to get coverage, you need to have extensive data. And if you remember back, for us to get coverage, we had to publish large studies We had to publish 5 years of clinical data and Aetna was the first one to go. Remember that was back in 2018, I believe.

Speaker 2

That was 4 years after our FDA approval. So getting FDA approval does not bring you home. That allows you to enter the reimbursement phase of your business development. So long way to go.

Speaker 10

Thank you. Thanks, Reggie.

Operator

Thank you. And I show our next question comes from the line of Chris Pasquale from Nephron Research. Please go ahead.

Speaker 7

Hi, thanks guys. Two questions. 1, Tim, you talked about new services to improve the patient experience and proactively reaching out to patients. Can you talk a bit more about what you're doing there and what problem you're really trying to solve?

Speaker 2

Absolutely. So we have a lot of patients that come from the Advisor Care Program and have Challenges getting appointments with the doctor because we either can't work through the phone or the email. We highlighted in the script That with our electronic scheduling, we're actually seeing, a 30% improvement in the pilot centers. That means there's a significant number of patients that are just getting hung up in that process. And so we're doing things such as a more organized e mailing program to reengage them and help them through the process and get them back in the game and get them back connected to A health care provider that can take care of them.

Speaker 2

That's just one example, but we have a significant number of other patients in our system over the many years that we've been working that continue to show interest in Inspire. And now we're going to be proactively reaching out to them and really kind of just giving people a better chance to work through the process because the 1st couple of years as effective as that direct to consumer has been. We all know the challenges of that conversion and our tools are getting much better to be able to help more patients. So really that whole team is really focused on just improving those different factors and Patient communication and electronic scheduling are the 2 leading programs.

Speaker 7

That makes sense. Thanks. And then just curious what was behind and the decision to go direct in Japan and whether you expect that's going to have a noticeable impact on implant activity there.

Speaker 2

Yes, absolutely. No, we love the partner that we have. They're great people. But it's an implanted product. And so if you think about Every company that's successful in the United States and in Europe, they really have direct representation because you need to focus on the customer base, focus on those physicians to to maintain their commitment and drive utilization and it's very difficult for a distributor that will have 10, 12 products in their bag to be able to sell, to be able to provide the same level of commitment to the patients.

Speaker 2

And being there for a couple of years, we saw the direction that that was heading and we worked appropriately with our Partner there and we agreed the right thing to do was for us to just hire a direct force and that's what we have done. We have a country manager. We have The first sales reps were in Minneapolis last week as part of Inspire University. You know how every quarter we go through and train all the new reps together and it's great for them to come and be part of the new U. S.

Speaker 2

Sales force as well. We just authorized a new trainer today. We also have marketing team. We opened up the website and so we're showing Great promise and I think you're going to see a little bit of a response when we start talking about Japan performance going forward.

Speaker 7

Great. Thanks.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from the line of Matthew Mishan from KeyBanc Capital Markets. Please go ahead.

Speaker 3

Afternoon and congrats on a great quarter.

Speaker 6

Can you

Speaker 7

talk a little bit about utilization trends into the next couple of quarters from coming off of 1Q. I think as I'm like building out my model, I'm finding it difficult to kind of stay within your guidance range without keeping the utilization trends fairly modest into the next several quarters.

Speaker 2

Absolutely. I think that we as we showed through last year, we had a consistent step up from Q1 of 1.3 up to utilization of 2.0 in the 4th quarter. We always have seasonality primarily in January. And so you see a little bit of a pullback in the Q1 to I think it's about 1.7. And so pretty consistent with past years what we see going into the Q1.

Speaker 2

And from here, our job is to stay focused and continue to grow utilization going forward. We do believe that the majority of our growth in procedures and revenue will come from increased utilization, again complemented by opening additional centers. But you're going to see plan just to continue to keep growing utilization through the year. Some we haven't mentioned that we talked about previously As we have changed the compensation structure with the territory managers to really focus on Higher utilization at existing centers and that modification has been well received by the team so far and we'll continue to monitor that as we keep going forward. Excellent.

Speaker 2

And then

Speaker 7

just one clarification for me. I'm pretty sure I know the answer to that. The number of new centers you're adding, the 68 didn't pull from the 52 to 56 per quarter. It's that you're still expecting to do incremental 52 to 56 in 2Q, 3Q and 4Q?

Speaker 2

Well, we always put our guide at 52 to 56 is what we said. And it takes time to open centers. But we do know centers will go opening a new center can take anywhere from 3 to 6 months depending upon if they have to go through the value add committee or if they have to go with contracts and pricing agreements. So we have line of sight to the number of centers and we will open centers when they're ready. And what that means is that means everybody is trade.

Speaker 2

They've identified patients and they're ready to do their first case. And so that's why we're able to kind of control that cadence a little bit, But we never know from a quarter to quarter basis where the endpoint is going to be. We tend to be a little bit above the guide as you see in the past, But that's why we're just kind of holding the guide steady.

Speaker 7

All right. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And I show our next question comes from the line of Anthony Petrone from Mizuho Securities. Please go ahead.

Speaker 11

Thanks and congratulations on a strong 1Q here. I have a couple of questions just on procedure implant time. And maybe, Tim, can you remind us where total implant time was with the 3 incision procedure and where it stands with 2 incisions? And then the follow-up to that would be when we think about getting rid of the pressure sensing lead with Gen 5, Where do you think procedure time can go with that platform?

Speaker 12

Absolutely. Yes.

Speaker 11

Thanks.

Speaker 2

And I'll come back to a follow-up. So when we were doing when we went to Inspire 2, we the procedure time went from approximately 2 hours down to 90 minutes on average. So in general, with the 2 incision, we were at 90 minutes. Now the top centers that have a high utilization, they have a lot of experience. They routinely run at about 60 minute procedure time today.

Speaker 2

So you can say the range of procedure time today with 2 incisions is between 60 90 minutes. When we go to Inspire 5, we will expect that to drop down to between 4560 minutes, depending upon the experience of the surgeon. So it's going to have both a benefit from implanting the sensing lead itself, There also is improvement in our intraoperative testing. What's key to note here is remember that we do full operational testing in the operating room. So we know that the stimulation is moving the tongue forward and we know that we can review The respiratory signal.

Speaker 2

So we know we have an operational system before we close. And that's that we're going to be able to improve that time when we go to Inspire 5 as well. And you had a follow-up.

Speaker 11

It was very helpful. And maybe just a quick update on Philips. We tuned into ResMed last week and Phillips reported also last week and there's still just a lot of Opakeness around that process with FDA and SEC and DOJ. So just any kind of updates on what you're hearing around Philip Trecull. Thanks.

Speaker 2

Yes. I think I mean this has gone on for how many years now and it's just an ongoing frustration by everybody. And hopefully someday it will resolve. From our viewpoint, what it's done is change the paradigm for which Sleep physicians look at treating sleep apnea and they no longer are dedicated just to CPAP. They're opening up and saying what other methods do we have out there that can treat our patients.

Speaker 2

And there's a prospect of a new drug, right, that could possibly Take care of milder cases. They still have CPAP, but now they have Inspire. And they can, for patients that don't benefit from CPAP, They could quickly move on to Inspire. And we become part of the talk track earlier. And that really is going to be the long term paradigm change that is going to be the benefit to the patients that they become aware of all the therapies earlier on in the process.

Speaker 11

Thank you so much. Congrats again.

Speaker 2

Thank you.

Operator

Thank you. And I show our next question comes from the line of Suraj Kalia from Oppenheimer and Co Inc. Please go ahead.

Speaker 12

Good afternoon, Tim, Rick. Can you hear me all right?

Speaker 2

Yes, Suraj. How are you doing?

Speaker 12

Perfect. Congrats on a nice quarter. So Rick, one question for you and one question for Tim and I'll ask both of them upfront. Rick, if I were to define new stores as one open within the last 12 months, How would the new store same store sale configuration look like in Q1? And Tim, forgive me, I got a little confused.

Speaker 12

So maybe you can help me here. So from a phenotype perspective, right, Obese patients do have greater oropharyngeal collapse as a contributor to OSA. And hypoglossal nerve Stem has been approved for high BMI. So is the notion now that hgns cannot effectively target higher BMI Or is it that first you got to treat it with GLP-1s, let you do the weight loss and then hegienist can be used in the Higher BMI category. Thank you for taking my questions.

Speaker 3

Hey, Suraj, it's Rick. So to your point, Overall utilization is up from a year ago. It's down a little from Q4 because we have seasonality. But as Tim mentioned, it progressed nicely up on a quarterly basis. If we don't give the details, but at a high level, If you look at our the 4 quartiles on utilization in the Q1 from a year ago, All of those quartiles are up from a year ago on number of procedures that are completed.

Speaker 3

We do, and then Not looking specifically at the numbers, but when we bring a new center on, expectations are just different than they used to be. Several of the older vintages or classes were used to the 3 incision approach and reimbursement was not as in a good position as it is now. So now that we have the 2 incision approach, full reimbursement, good CPT reimbursement for the physician, There's just a different expectation. So we expect those new centers coming on board to get higher utilization faster.

Speaker 2

Very good. Okay. Let's address high BMI. First, in the United States, we do not The FDA did not limit BMI. So yes, you are correct.

Speaker 2

High BMI is not a factor For Inspire, although they have a warning in the labeling that says we do not have data patients who have a BMI higher than 32. The new warning that is in review with the FDA It's going to change that thing. We do not have data on patients who have a BMI higher than 40. So it's only changing a warning, it doesn't change the indication. And you are correct that high BMI patients are approved in the United States for Inspire therapy.

Speaker 2

Now the key though is we must identify which patients have the proper anatomy or proper collapse that is supported by any hypoglossal nerve stimulation system, including Inspire. We know hypogloss nerve stimulation stimulates the genioglossus muscle that moves the tongue forward, But the component of collapse in high BMI patients is a combination of tongue based collapse and lateral wall collapse that presents to what we all know as complete concentric collapse. We can now stimulate the hypoglossal nerve and clear That component of the obstruction, but the high BMI patients will remain or continue to have obstructions on the lateral wall. So while they may have improvements in their sleep, they won't get improvements in Those patients that are tongue based only because of the residual collapse from a lateral wall.

Operator

Segment. Thank you. And I show our last question comes from the line of Michael Pollard from Wolfe Research. Please go ahead.

Speaker 7

Hey, good afternoon. Thanks for sneaking in. I have a question on Gen5 launch next year. When that goes into the market, what evidence will you have to present to physicians and patients that the synchronicity of the 2 components of them approximates better than the 3 components. I mean, you mentioned better liabilities, so it sounds like with bench testing, It'll be even better than the 3 components system, but I guess what would you have on paper at the time of launch to persuade

Speaker 2

Sure. Thanks, Mike. We do have a clinical study we did and what we're able to do Take existing patients who have Inspire IV and we can use a second system, which is external with using an accelerometer to measure capture during the inventory phase of respiration. And this is the clinical evidence that went to the FDA that's been reviewed by them a couple of times already. To show that The accelerometer which has been used in rate responsive pacing for years for respiratory detection provides a cleaner respiratory signal and our improved algorithm is going to improve synchronicity by providing stimulation synchronous with the inspiratory phase of respiration.

Speaker 2

So we've already been able to demonstrate that with existing patients and provided that information to the FDA. So we're going to have evidence with, when we launched that we're going to be able to show a benefit. And then secondly, by removing the pressure sensor, it's just going to be an easier procedure for both the surgeon and the patient as well as the improvement in reliability because we know that Many of our revisions to date have been a result of that pressure sensor. So pretty confident in the device itself and already have data to be able to show that.

Speaker 7

I appreciate that. If I can ask a follow-up. I thought at your competitors' event, the most interesting part was one of the physicians that on different targets in the airway, the, anti cervicalis specifically and look, early stage stuff, who knows, but And my question for you is, is there stuff like this in your R line, your research line that you're thinking about, just curious for any perspective on that, different stimulation targets that promote

Speaker 2

Great question. Absolutely. We have our program going. We've already done several acute patients. We're going to be moving into more of a chronic study in the near term.

Speaker 2

And the concept is really around what we just discussed After Suraj's question about talking about the lateral wall collapse and that we mentioned that we have our own research study ongoing with this. And the Inspire 5 device does have the technical capability to have dual channels of stimulation. We will need mechanical modifications by adding a second port for a second stimulation lead. But we've identified an area that we want to stimulate to be able to take care of lateral wall collapse and therefore take care of what we described as high BMI patients and really be able to find a good solution to take care of those patients. So you're going to hear a lot more about that in the near future, but Yes, great questions.

Speaker 2

We're very active with that.

Operator

Thank you. Conference. This concludes the Q and A session for the conference. I'd now like to turn it back to Tim for any closing remarks.

Speaker 2

Thanks very much and thank you 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 patients remain 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 Asia.

Speaker 2

For all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates in the months ahead.

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Earnings Conference Call
Inspire Medical Systems Q1 2023
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