Inspire Medical Systems Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 19 speakers on the call.

Operator

After the speakers' remarks, there will be a question and answer session. I'll now hand the call over to your first speaker, Esky Yajah, the Vice President of Investor Relations at Inspire. You may begin the conference.

Speaker 1

Thank you, Dilemma. Thank you all for participating in today's call. Joining me are Tim Herbert, Chairman and Chief Executive and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the 3 6 months ended June 30, 2024. A copy of the press release is available on our website.

Speaker 1

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, full year 2024 financial and operational outlook and changes in market access are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. Please see our filings with the Securities and Exchange Commission, including our Form 10 Q, which we filed with the SEC earlier this afternoon, for a description of these risks and uncertainties.

Speaker 1

Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information and speaks only as of the live broadcast today, August 6, 2024. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Speaker 2

Thank you, Esky, and thanks, everyone, for joining our business update call for the Q2 of 2024. We always start our earnings call by reiterating our commitment to delivering strong and consistent patient outcomes. Our mission is to put the patient first and we now have over 75,000 patients treated with Inspire therapy to date. With that, let's review our results. In the Q2, we generated revenue of $195,900,000 representing a 30% increase compared to the Q2 of 2023.

Speaker 2

2nd quarter U. S. Revenue totaled $187,800,000 a 30% increase over the same period last year. This revenue growth reflects greater therapy adoption as a result of increased market penetration in existing centers as well as expansion into 81 new implanting centers in the United States and 12 new U. S.

Speaker 2

Sales territories. We now have 13 16 active U. S. Centers and 310 sales territories. Outside of the U.

Speaker 2

S, revenue increased 27% to $8,100,000 We saw strength in Germany, Switzerland, the Netherlands and Belgium as the irrigation authorizations allowed us to continue to grow the adoption of Inspire therapy. With this strong start and confidence in our outlook for the remainder of the year, we are increasing our 2024 revenue guidance to $788,000,000 to $798,000,000 which represents 26% to 28% growth over 2023 revenue of $625,000,000 Net income for the 2nd quarter was $9,800,000 compared to a net loss of $12,000,000 in the prior year period, representing net income per share of $0.32 compared to a net loss of $0.41 in the Q2 of 2023. Given the strong performance we have seen year to date, we are raising diluted net income guidance to $0.60 to $0.80 per share for the full year. We'd like to highlight some very important business updates. First, we are excited to announce EU MDR certification in Europe, which includes full body MRI compatibility.

Speaker 2

This is a very significant milestone as approval requires a stringent review and operations quality and regulatory compliance and we are very proud of our team for this achievement. As a reminder, we obtained derogation in several European countries to help ensure patient access to therapy and product continuity. With this EU MBR certification, we may now submit for approval of the Bluetooth patient remote, the updated physician programmer and the Inspire 5 neurostimulation system. 2nd, we received countrywide reimbursement in France at levels consistent with other European countries. France is the 2nd largest OSA market in Europe.

Speaker 2

Our local team is already in place and we are ready to start reimbursed Inspire cases. And just last week, we received FDA approval for the INSPIRE 5 neurostimulation system. This is a significant accomplishment highlighting many years of development and evaluation. And we are incredibly proud of the hard work across the organization. We are focused on operational readiness and building sufficient inventory to support a soft launch in late 2024 and a full launch in 2025.

Speaker 2

The Inspire 5 neurostimulation system incorporates respiratory sensing capabilities into the IPG, eliminate the need to implant the pressure sensing lead. This will provide benefits to the patient with 1 fewer component to the physician with reduced surgical times and to the company with reduced production costs and complexity. Turning now to market access. We continue to make good progress with the PREDICTOR study and analyses. As a reminder, the initial focus with the PREDICTOR study is for patients with a lower BMI who may not have significant lateral wall collapse and therefore may not require the drug induced sleep endoscopy or DICE.

Speaker 2

We expect to continue the analyses and move towards submission of the manuscript to a peer reviewed publication this fall. We have already discussed the results with payers and have had several payers update their policies to remove the DICE requirement. We will continue our discussions with other payers to further improve a patient's experience in obtaining Inspire therapy. Staying on the market access front, we are pleased with the proposed 2025 National Medicare outpatient payment rates, which call for a 2% increase, bringing the hospital outpatient rate to $30,198 and a 3% increase bringing the ASC rate to $25,620 Their proposed physician fee schedule for 2025 calls for a roughly 2% reduction to the Medicare physician fee of $8.37 However, we would expect the final rule to reflect a higher overall physician reimbursement rate. With respect to our market development activities, we continue to advance our medical aid education programs and year to date, we have hosted over 150 advanced practice providers and Inspire training programs.

Speaker 2

The primary focus of this initiative is to improve capacity in both sleep and ENT clinics to meet the strong patient demand we continue to see for Inspire therapy. Further, we continue to increase our presence at primary care and cardiology conferences to drive increased awareness of Inspire therapy. Our direct to consumer program remains strong and provides a pathway for patients to connect with the proper health care providers. In the Q2, our direct to consumer spend declined modestly compared to the prior year's period as we found ways to be more targeted and efficient in our digital advertising, which has contributed to a significant increase in digital patient engagement at a lower cost. We continue to advance initiatives to improve the patient experience and one example is we now have over 200 centers using digital scheduling to book appointments.

Speaker 2

With digital scheduling, we have observed a 60% increase in a patient's ability to schedule an appointment on their first attempt, greatly improving the patient's journey to receive INSPIRE therapy. Switching to the recently released data from the Symant OSA trial. The data further reinforces our view that GLP-1s will be complementary to our market opportunity and may provide a mechanism for patients to reduce their weight and qualify for Inspire therapy. As you know, Inspire therapy stimulates the hypoglossal nerve and is designed to treat tongue based collapse. Patients with a higher BMI are more likely to experience lateral wall collapse of the airway, which is not effectively treated with hypoglossal nerve stimulation.

Speaker 2

This was further confirmed with our predictive results as discussed above. Based on the results of the surmount OSA trial, we believe many patients who experienced significant weight loss, including those who benefit from the use of GLP-1s are likely to experience a reduction in their lateral wall prep, which would allow them to qualify for Inspire. Please refer to our updated investor deck for a 3rd party data on concurrent use of GLP-1s and INSPIRE therapy. According to the report, over 1500 patients in the past 2 years received Inspire therapy while actively on GLP-1 therapy. Finally, we have made great strides and profitability, which we expect to continue into 2025 and beyond.

Speaker 2

Given our strong balance sheet, financial performance and long term outlook, we believe shares of Inspire stock represent a strong investment opportunity and as such, today we announced our Board's approval of $150,000,000 share repurchase authorization, the first in the company's history. The program provides us with a flexible way to return value to our shareholders, including supporting our stock when we see unwarranted volatility. In summary, we remain focused on the patients to continue the growth and adoption of Inspire therapy. We will continue to execute our growth strategy of driving higher quality patient flow, increasing the capacity of our provider partners to effectively treat and manage more patients. Our key strategies include adding advanced practice providers, training and adding new implanters, increasing center independence, driving the adoption of SleepSync and our digital tools, all of which are embedded strategies and our commercial team's objective to increase provider capacity.

Speaker 2

As we move into the second half of twenty twenty four, we remain excited about our future prospects and are confident that we have the appropriate strategy in place to drive long term stakeholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Speaker 3

Thank you, Tim, and good afternoon, everyone. Total revenue for the Q1 was 195,900,000 dollars a 30% increase from the $151,000,000 generated in the Q2 of 2023. U. S. Revenue in the 2nd quarter was $187,800,000 an increase of 30% from the $144,700,000 in the prior year period.

Speaker 3

Revenue outside the U. S. Was $8,100,000 which is a 27% increase year over year. Gross margin in the 2nd quarter was 84.8% compared to 83.9% in the prior year period. The increase was primarily driven by increased sales volumes and manufacturing efficiencies.

Speaker 3

Total operating expenses for the Q2 were 160,900,000 dollars an increase of 12% as compared to $143,400,000 in the Q2 of 2023. This planned increase was primarily due to the expansion of our sales organization and increased general corporate costs. As Tim noted, our targeted DTC investments are yielding some savings. Interest and dividend income totaled $5,900,000 in the Q2 compared to $4,900,000 in the prior year period. This higher income was driven by higher interest rates on our cash and investment balances compared to a year ago.

Speaker 3

Operating income for the 2nd quarter totaled $5,100,000 compared to an operating loss of $16,600,000 in the prior year period. Net income in the Q2 was $9,800,000 compared to a net loss of $12,000,000 in the prior year period, representing net income per share of $0.32 compared to a net loss of $0.41 in the Q2 of 2023. The weighted average number of diluted shares outstanding in the 2nd quarter was 30,400,000. Excluding the impact of any share repurchases that we may affect over the remainder of 2024, we now expect the full year diluted shares outstanding to be approximately $30,500,000 to $30,600,000 Our total cash and investments were $466,000,000 at June 30. The strong cash position allows us to remain focused on executing our growth strategies.

Speaker 3

We continue to expect to generate positive cash flow for the full year 2024. Moving on to 2024 guidance. With the strong trends we are seeing in our business, we now expect full year revenue to be in the range of $788,000,000 to $798,000,000 representing an increase of 26 percent to 28% compared to full year 2023 revenue. We continue to expect full year gross margin to be in the range of 83% to 85%. We also continue to expect to activate 52 6 new U.

Speaker 3

S. Centers and establish 12 to 14 new U. S. Sales territories during each remaining quarter in 2024. Given the strong momentum in our business and our improving operating leverage, we expect the diluted net income for the full year 2024 will be between $0.60 to $0.80 per share.

Speaker 3

Lastly, given our strong financial performance and outlook, we are excited to announce a $150,000,000 share repurchase authorization. In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2024. With that, our prepared remarks are concluded. Duhem, you may now open the line for questions.

Operator

Thank you, sir. 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 a fantastic quarter here. Tim, coming off a great quarter, so I want to try and ask this in a positive way here. There has been one disappointing quarter, one good quarter. Another disappointing quarter, a really good quarter here was 2nd quarter.

Speaker 4

Help us understand if any of this was catch up or recouped procedures from Q1? And if not, how do we think about the go forward on a fundamental basis? Is this the new normal? Do you think you fixed all of the compensation in sales force issues and now we're back to normal? Just give us a sense of sort of what you think the underlying in second quarter was and the go forward?

Speaker 2

Got you. Well, I want to back up a little bit. Remember, we had the challenges in the Q3 last year that did have a reflect a really strong Q4 and we talked about the impact that had on the Q1, which is a little bit of a residual, going all the way back to the Q3. We believe we had a strong Q1 that had us in the right momentum going forward and then we demonstrated that into Q2 and we do have the momentum with the team going forward. We certainly have the patient demand, which has always been there and really important to us.

Speaker 2

But when you look back at the prior authorization challenges and we have all that resolved, in fact we've had some real positives on that front. Yes, we have confidence moving forward and hence we have significantly increased our revenue guide in both Q1 and Q2 to reflect the positivity we have going into the rest of the year.

Speaker 4

Great. Down the P and L, Rick, the profitability was impressive here and you're raising the EPS guide for the year. You talked about better productivity on the digital advertising, but how do we think about where the rest of the savings coming from? You're clearly being more productive with the sales force and the expenses here off of the revenue. So just help us understand where it's coming from.

Speaker 4

And again, same vein how sustainable are they into 2025 and beyond? Thanks.

Speaker 3

Yes. Thanks Robbie. Yes, we're really focused on continuing to drive the top line growth and growing therapy adoption. And we continue to make investments. And what I would say is we continue to invest in our top line growth, but we are getting leverage, operating leverage from our business model.

Speaker 3

If you look at a couple of larger items, DTC, a year ago in the Q2 was 17% of our revenue, in the Q2 it's 12% of our revenue. But we're taking a more targeted approach and we are seeing savings. And so we expect to continue to drive leverage off of DTC, as well as R and D was down from a year ago. And as a reminder, in the Q2 of 2023, we had an expense of about $3,000,000 for pre launch inventory with Inspire 5 in R and D. We did not have that in the Q2 of this year.

Speaker 3

So we also did focus Inspire 5 shifting from development efforts to operational readiness. So between the combination of top line and some of those items in the OpEx, drove $5,000,000 of operating income, which we're very proud of and proud of the overall team's effort in the 2nd quarter.

Speaker 4

Appreciate it. Thank you very much.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Richard Newitter from Chorus Securities. Please go ahead.

Speaker 5

Hi, thanks for taking the questions. Congrats on the quarter. Maybe just thinking about the back half here and with the updated guide, should we be thinking about U. S. Utilization because there's I think there's some seasonality in the Q3.

Speaker 5

Any help you can give us on the cadence, particularly around the U. S? And I'm just wondering if you can give us any signal as to whether or not utilization should be increasing sequentially every quarter? By my calculation, you should be increasing on a year over year basis in the back half by mid single digit utilization growth. But that also presupposes that you come in line with your new account adds and that exceeded handily in the Q2.

Speaker 5

So maybe just kind of walk us through the puts and the takes and bring it back to utilization cadence and growth sequentially and year over year? Thanks.

Speaker 3

Sure. Going back to consensus is kind of what you're indicating there too, Rich, is year to date, we have exceeded consensus by 12,000,000 and we've raised our first half of the year guidance by 13,000,000 and we put forth guidance that we have a high degree of confidence in. As you know, historically, we do have seasonality in the Q1 and the composition of our full year revenue generally builds throughout the year. And so with that said, our aspiration is to increase utilization sequentially and year over year going forward.

Speaker 5

Okay. That's pretty clear and helpful. Thank you. And then I guess just you exceeded the number of new account openings or center adds substantially in 2Q. I guess is 52% to 56% the right quarterly number?

Speaker 5

And how should we think about that? I know in the past you've talked about your you have a lot more new accounts that are in the base. They're all coming up the curve. Is this the right number for the quarterly new account assumption? Just help me understand that you've been eating that handily for the last few quarters.

Speaker 5

Thanks.

Speaker 2

Got it, Rich. And we've been very consistent. We haven't changed that guide for quite some time. And that does vary quarter to quarter because we do not open centers until they're ready to open and have patients in the pipeline ready to go. And so that's why this quarter we're in a good position with centers.

Speaker 2

There's always a high patient demand and there is a significant number of centers that would like to open up with Inspire therapy. And when they get through all their training programs, get through the contractual phase and they're ready to open and they have the patients ready to go, we do open them up. So that's why there's always been a little bit of fluctuation in that number. But we're going to hold guide where it is. And but we're going to continue to find avenues to further increase patients' ability to find a proper healthcare provider.

Speaker 5

Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 6

Hi, Tim, Rick, Oeske. Thank you for taking the questions and congrats on the progress. I wanted to start by asking about Inspire 5 and the rollout there and really just hoping to get some more granularity on the U. S. Commercial launch.

Speaker 6

So the first question is when do you expect to start offering that product to customers? It seems like based on your prepared remarks that's a Q4 event, but wanted to confirm how many accounts will you target initially? Just maybe level set us on capacity and inventory levels as you get ready to launch? And then finally, just any color around pricing and margin with Gen 5? And then I had a follow-up.

Speaker 2

Got you. Hi, Adam. I think the key is, it's nice to have the first milestone with the FDA approval that came last week and the FDA was worked with us interactively to answer a lot of questions and very proud of the team for years in the development of the Inspire 5 product. But now we need to be ready to launch our the Inspire 5 into the U. S.

Speaker 2

Market. And the key is making sure that we have sufficient inventory. So once we do full launch that we're able to have continuous supply of products. So we're going to really focus on that in the second half of the year. The purpose of the soft launch is really just in a handful of centers to introduce it and to make sure with all the operating norms with the physician program and the remote, with SleepSync and our digital tools.

Speaker 2

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

Speaker 3

Yes. Thanks for the question, Adam. We're working through our pricing strategy prior to launch as part of our operational readiness. But with that said, even with flat pricing, Inspire 5 is gross margin accretive.

Speaker 6

Got it. Thanks for the color guys. For the follow-up, I wanted to circle back to the guidance and just kind of unpack that a little bit more. So on the top one to $788 to $798 I guess could you just comment around the cadence for Q3 versus Q4? I have Q3 consensus on the top line at $197,000,000 Any reaction to that figure?

Speaker 6

And then would also just like to better understand how you're thinking about specifically the U. S. Business versus the OUS business as it relates to the guide? Thanks for taking the questions.

Speaker 3

Sure. I'll take that. Given our updated guidance, consensus revenue estimates are reasonable for the rest of the year as they stand. And regarding the split between U. S.

Speaker 3

And OUS, OUS for the full year will still represent between 3% to 4% of our worldwide revenue.

Speaker 6

Thanks, Rick.

Operator

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

Speaker 7

Thanks and congrats on a strong quarter here. Maybe a couple on Inspire V and I have a quick follow-up on GLP-1. On INSPIRE V, maybe a little bit on the funnel. You've said in the past, Tim, that the funnel is still around 6 months. INSPIRE 5 is going to have a procedure time benefit, I think bringing the total procedure time down to a half hour from 60 minutes or so today.

Speaker 7

So where do you think the funnel could go once Inspire 5 is launched? And I'll have a quick follow-up.

Speaker 2

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

Speaker 2

So absolutely, it will have a positive effect on that overall timing.

Speaker 7

And then the follow-up just on GLP-one, still the debate is out there. I know you mentioned prepared comments that upper BMI category can come into the sweet spot for hypoglossal nerve. Are you seeing any evidence of that sort of out of the gate here? There are folks out there obviously on GLP-1s for obesity specifically. There's already obviously a large comorbid population out there.

Speaker 7

Are you seeing actual quantitative evidence of this yet? And if not, how much of a factor do you think it could be in 2025? Thanks.

Speaker 2

Well, we think it's going to be significant for patients as we go forward. As we're working through the GLP-one investigation and trying to understand it, we knew that we had subjective feedback from our physicians that they're seeing patients on a GLP-one. So we went and contracted with a 3rd party to do an independent review of claims data and we actually have provided several of the slides in our updated deck that you can find on our website. And I think that really kind of highlights the number of patients that have dual claims, meaning when they receive Inspire therapy, they are also actively on a GLP-one therapy. And the number over the last 2 years was significant up over 1500 patients.

Speaker 2

So we're already seeing evidence of that right now and we're going to make sure that continue to communicate with our physicians to take advantage of these therapies because again, we believe these GLP-1s are complementary to INSPIRE and will help patients qualify for INSPIRE therapy.

Speaker 1

I would just note, Anthony, that data is not all encompassing. It's claims data from one provider. So 1500 is a huge number, but that may not be capturing all of the patients on GLP-1s receiving INSPIRE therapy today. But we thought it was a helpful data release to share with you guys and it's in our updated deck.

Speaker 8

Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 9

Hey, good afternoon guys.

Speaker 10

Thanks so much for taking the question. Congrats on a really good quarter here. Just a question Tim for you on surgeon capacity and it came up a little bit with Inspire 5, but I think there's more to it, right? And I guess, maybe give us some color here on where you guys think you are in this process of freeing up capacity at the ENT level and really just getting more mind share, getting them to commit more their time to doing Inspire therapy. I'm guessing Inspire 5 alone is helpful, but it's not the only thing.

Speaker 10

So maybe talk a little bit more about some of the other initiatives there and how you guys are progressing against those. And I'll just leave it at that one question. Thanks so much.

Speaker 2

Great, Danielle. And it's a great question. I think it's twofold. It's taking care of building efficiencies from their office setting and seeing patients initially, but also improving their capacity in the operating room. And what we find is that there are advanced practice providers, APPs, that can do a lot of the early work, helping patients understand what inspires them all, what to expect during the education part of it.

Speaker 2

And on the opposite end, after surgery, helping them with the early titration and the programming of the device. So we can free up the ENT to really focus 3rd time on being in the operating room, which is the probably the number one priority. Number 2, in the operating room, it's about gaining experience, getting comfortable with the procedure and having confidence, so they know they can reduce their own operating room time, they can confidently speak to patients and then we help them out a little bit. Predictor and eliminating DICE for low BMI patients is one initiative we can really help them out to not require them to be in an operating room to do a sleep endoscopy. And then of course, as you mentioned, Inspire V is going to reduce the overall OR time.

Speaker 2

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

Speaker 1

Thank you. Thank you.

Operator

Thank you. And I show our next question comes from the line of Michael CiCone from Jefferies. Please go ahead.

Speaker 11

Hey, good afternoon and thanks for taking the question.

Speaker 2

Thanks, Michael. Hey, so maybe for Rick, just

Speaker 11

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

Speaker 3

Yes, sure. Thanks for your question, Michael. So, now that we're providing earnings per share and we also provide gross margin guidance of 83% to 85%. 2nd quarter OpEx growth was 12%, but based on our earnings per share revised guidance of $0.60 to $0.80 per share and our revised revenue guidance that implies that our year over year OpEx growth will be 17% over 2023. So in 2023, our total OpEx is $568,000,000 and the growth in OpEx would be roughly around 17% or so year over year growth and that will be a ratable increase over the next couple of quarters.

Speaker 11

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

Speaker 2

Yes, I think that's exactly true. I think that our focus is going to remain on low BMI patients, primarily patients who have a BMI less than 32. Again, it's back with our discussion of our GLP-1s and lateral wall collapse and patients with a low BMI just don't have that lateral wall collapse. And therefore, it's intuitive that they just won't need a sleep endoscopy. And that's how what the data supports in our discussions with some of the patients.

Speaker 2

And they're open to those discussions. But we've had other payers, earlier removed requirement for DICE because remember the FDA does not specify sleep endoscopy. It only specifies patients have the proper anatomy and we're seeing some payers kind of align around that. But we remain very active with a lot of the payers, with all changes, including the increase in the AHI, the increase in the BMI. Most recently, you may have saw UnitedHealthcare removed the requirement to trial oral appliances.

Speaker 2

Now while we manage that with the prior authorization process, certainly that's a benefit to patients. But they also improved and clarified the language around patients being able to refuse CPAP, not necessarily failing a trial of CPAP. So we continue to work with all the payers to maximize clarity across all payers and improve the experience for patients.

Speaker 5

Great. Thank you, Tim. Thank

Operator

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

Speaker 12

Thanks and congrats on the quarter guys. The operating leverage in particular was great to see. And as I look at the ratio of new territories to center adds, in the first half of last year, you added about 1 new territory for every 4 new centers. And it's kind of what you've guided to historically. It was one for every 6 here, so more efficient use of the sales force.

Speaker 12

Is that sustainable? Or did you just not see as many good candidates in terms of new rep adds?

Speaker 2

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

Speaker 12

Great. And then the GLP-one data Hey,

Speaker 1

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

Speaker 2

A little off. Okay.

Speaker 12

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

Speaker 2

Yes. I think that the key is going to be for patients who are newly diagnosed and they want to go out of GLP-one. I think the sleep community, the sleep physicians have really talked about that they're going to start them on CPAP and the GLP-one at the same time because the sleep physician does not want to accept the liability of a patient going 9 to 12 months, to lose weight and to see if they resolve their sleep apnea. And that money slide that you're talking about at the back of the deck did talk about the benefit of 9 to 12 months of being on therapy to have significant weight loss. So I think that starting patients on the CPAP and GLP-1s at the same time is really going to help any air pocket.

Speaker 2

And then I think that when if patients are not successful or refuse CPAP, then they're going to be ready to come over to Inspire therapy and you won't see an air gap from that standpoint. The other practical standpoint is, as mentioned earlier in the call, we're running about 6 months from the time you call to the time a patient receives an implant. And within that window, that capacity with ENT surgeons, we have sufficient patient population that we're working to take care of that I don't think you'll really see any kind of GLP-one air gap even visible.

Speaker 13

That's helpful. Thanks, Tim.

Speaker 2

Thank you, Chris.

Operator

Thank you. And I show our next question comes from the line of Brett Fishman from KeyBanc Capital Markets. Please go ahead.

Speaker 14

Hey guys, thank you so much for taking the questions. A lot of good ones already asked, but I'll follow-up on the Inspire 5 rollout with just one more question. I'm just curious, I mean, we have like a general sense of the timing at some point in late 2024 that will start. But maybe if you can just talk a little bit more about what the limited market launch actually includes in terms of like engaging and training the initial accounts? And then maybe like directionally how much of the installed base would actually be participating in the LMR?

Speaker 14

And finally, like any key milestones that you would want to see to indicate that you're ready to move on to the full launch next year?

Speaker 2

Yes. I think we it's going to be a very simple limited launch. It's going to be a few centers. And we want to measure positive experience with the device with all the externals being in the programmers, the remote, and proving out the training and getting some experience with that, but it's not going to be an extensive limited launch. It's going to be just a few centers.

Speaker 2

And the key milestones is just having a positive experience with the device.

Speaker 14

All right. And then just a really quick follow-up here. Obviously, like the number of new centers added this quarter was well above the guidance and what we would typically expect to see. But revenue guidance for the full year is coming up $5,000,000 maybe not as much as you would expect to see apples to apples with the number of new centers. So I'm just curious like one topic over the past year or 2 has been an increased number of secondary sites of service where you may be adding centers at face value, but not necessarily opening a ton of new capacity.

Speaker 14

So maybe if you could just touch on kind of like the balance between secondary sites of service that were in that 81 number versus new doctors? Yes. And overall,

Speaker 3

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

Speaker 14

Got it. Thank you so much.

Speaker 5

Thanks. Thank you.

Operator

And I show next question comes from the line of David Rescott from Baird. Please go ahead.

Speaker 15

Great. Thanks for taking the questions. Congrats on the strong quarter here. I wanted to go back some of your comments around utilization, new center adds. I think just, I guess, depending on the way you slice, it looks like utilization in Q3 last year was down sequentially.

Speaker 15

And I think if I heard you right, you're expecting utilization to increase sequentially in Q3 this year. Is that right? And can you just help us think about if that is the case, why we should expect a sequential increase in utilization in Q3?

Speaker 3

Yes. I mean, we said that that's our goal aspiration is to increase utilization sequentially in year over year just like we did in the Q2. And there are a lot of positive items we talked about in our prepared remarks about that gives us confidence for the rest of the year, not only in Europe with countrywide reimbursement in France and commercial payers continuing to adjust their policies for expanded indications. Tim briefly touched on the reversal of the oral appliance therapy requirement and the continued progress we're making with our DTC programs. And so again, we put forth guidance that we have high degree of

Speaker 15

something specific to the U. S, is that correct?

Speaker 3

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

Speaker 15

Okay. That's helpful. Maybe just on the P and L, again, heard the comments around the total year over year OpEx growth and you can kind of back into what's implied in the second half of the year. I'm curious, just looking at the cadence in the back half relative to the first half,

Speaker 2

should we be thinking

Speaker 15

about, depending on where the models kind of shake out, a positive kind of net income number, positive EPS number for Q3? Or is that to us to the numbers there? Thank you.

Speaker 3

Yes. The way we framed that up 17% growth in OpEx year over year basis. And when I mentioned kind of incremental for we're expecting about the OpEx in Q2 was $161,000,000 And if you increase OpEx sequentially $9,000,000 each quarter, that gets you to a 17% growth in OpEx. And with that, we expect to be profitable in the 3rd Q4.

Speaker 15

Okay. Thanks and apologies if that was already asked. Thank you.

Operator

Thank you. And Ayesha, our next question comes from the line of Shagun Singh from RBC Capital Markets. Please go ahead.

Speaker 9

Great. Thank you so much and congratulations. Tim, I was wondering if you could talk a little bit about how you feel about your business and some of the drivers in 2025. You obviously have INSPIRE-five, you said that could speed up the procedure, benefit from the PREDICTOR study that could play out. Do you expect that to speed the funnel?

Speaker 9

And then I guess I'm just wondering, does that give you confidence in a And then I guess I'm just wondering, does that give you confidence in a 20%, 25% growth company beyond this year off of about 27% that you're doing this year? And maybe if you don't want to answer 25 questions, how should we think about Inspire's long term growth rate? Any comments that would be really helpful. Thank you.

Speaker 2

Absolutely. Thank you for the question. And yes, when you ask the CEO if he's excited about his business, that's a question I can go for quite some time to talk about because we're very excited about what the prospects of the company, our technology and taking care of patients, our safety and efficacy is unmatched. And that we continue to drive our growth based on strong patient outcomes. And with that and with the limited penetration we have in our target market, we stand to have profitable growth for years to come.

Speaker 2

And I know you're looking for a specific number that we're not going to go down that pathway yet, but we do have great confidence with our technology, both the implantables with Inspire 5 as well as the accessories with our programmer, with our sleep sync system, with our digital tools to help patients navigate the process, our improvements in market access and not to mention the improvements that we're all seeing on the international landscape with the number of patients who are being able to treat continuing to grow. So yes, we're very excited about our future and we continue to invest heavily in our growth and heavily in our technology going forward and do see years of growth ahead of us.

Speaker 9

Got it. Just I guess as a follow-up on utilization, can you tell us where the top quartile customers are tracking perhaps in your primary centers? I'm just trying to understand the potential here in improving utilization. And then have you guys decided on the guidance? How are you going to guide us in 2025 beyond?

Speaker 9

Perhaps you can give us rates for primary versus secondary sites on utilization. Just any color would be great. Thank you.

Speaker 2

Sure. We're still I'm going to work backwards on that. I think the information that we're going to provide next year to help you kind of gauge the strength of the company, we're still working on that. We'll stay in communication with you as we work through the rest of this year, but we will continue to provide the number of centers and reps as we progress through the year and we'll be in close communication. As far as the top quartile centers, the range of number of centers or number of implants per month, The range is somewhere approaching 2.75 or 3 all the way up to over 17 procedures per month.

Speaker 2

So we continue to push the upper end and we want to continue to move the entire normal distribution of the group of centers.

Speaker 9

Thank you.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.

Speaker 16

Thanks for taking the question. Congrats Tim and Rick and Hesky. Tim, on Inspire V, where are you in terms of determining the right CPT code for Inspire 5? And what's the process and timeline? And if you have to go back to the old code, what impact do you think that could have?

Speaker 16

And I have one follow-up.

Speaker 2

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

Speaker 16

So the current code, you're saying, you have confirmation that you can use the current code?

Speaker 2

I did not. I said we're going to have a plan all laid out and we will have that code part of the training package and we'll have that ready to go when we move to launch.

Speaker 16

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

Speaker 2

What we do is a lot of those centers that you talked to, that's obviously a pretty productive account when they have that level of inventory and they likely have a power level that they keep as inventory. And we will expect that as they're going to burn down their inventory before they wrap up with 5. As remember, 4 has the same functionality as the Inspire 5 system. So we're not looking at swapping out. We We'll work for the have them burn down their inventory.

Speaker 13

All

Speaker 2

right. Thanks, Tim. You bet. Thanks, Larry.

Operator

Thank you. And I show our next question comes from the line of Calum Titchmarsh from Morgan Stanley. Please go ahead.

Speaker 17

Great. Thanks for taking the question guys. I wanted to ask on the center dynamics in the U. S. A lot added in Q2 at 81%, but also seems a larger number of deactivations versus prior trends.

Speaker 17

It would just be helpful if maybe you could walk through what you saw there and how we should be thinking about this churn for the remainder of the year in light of the maintained guidance? Thanks a lot.

Speaker 2

Sure. Great question. I think the key to it is we want to make sure that the territory managers are focusing on centers that can be productive and can take care of our patients. And those centers that have not had the ability to take care of patients over the last 1 or 2 years. We want to deactivate them.

Speaker 2

Another key example in the majority of those sites, you just have a physician moving to a different facility. So that maybe we're opening one facility, but they're left, the old facility that we will deactivate. And as Esguin mentioned, we have reactivated centers as well because they want to go out and hire another surgeon to take over the program and we will restart them and we will reprogram them. But in the interim, we don't want the field team to focus too much time on centers that aren't able to take care of patients. So we purposely deactivate them.

Speaker 2

If you go back in time over the last several years, that's very consistent what we've kind of done on an annual basis. Pretty close to the Q2, we kind of deactivate. I think we did 25 in the year 2022 and 15 in 2020.

Speaker 1

Correct. So the 2017 call that we've done year to date is not really an anomaly.

Speaker 17

Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from the line of Michael Polarc from Wolfe Research. Please go ahead.

Speaker 4

Good afternoon. Thank you. I just have one thread on Gen 5. Rick, I heard you say with flat pricing, it's gross margin accretive. Can you help us think about Gen 5 unit costs versus Gen 4?

Speaker 4

How much lower are they? And then the second part of this is, maybe back 2 to 4 quarters, there was speculation you might consider a price increase here with Gen 5. Where does that thinking stand? And if you were to take a price increase with the launch order of magnitude, what might that be? Thank you.

Speaker 3

Yes. With our operational readiness, we're still working through those details, Mike. So we have determined whether or not there'll be a price increase or continued pricing with that. But we are removing the sensing lead that will be now part of the IPG. And so we will be removing costs associated with that.

Speaker 3

And so we didn't mention it will be accretive even with a flat price, but we haven't quantified that yet.

Operator

Thank you.

Speaker 2

Thanks, Mike.

Operator

And our next question comes from the line of Jon Block from Stifel. Please go ahead.

Speaker 18

Thanks guys. Good afternoon. Maybe just 2 for me. Tim, how quickly can you move across the 1300 centers for Inspire V for training considering this eliminate the lead and simplifies the procedure when we think about the broader rollout in early 2025? I'm guessing you can move pretty quick, but maybe if you can quantify.

Speaker 18

And then just longer term, do we have to worry about anything regarding the physician fee considering this does simplify the procedure and what that might mean or not mean for the physician? And then I'll just ask my follow-up.

Speaker 2

Very good. Thanks very much. I think 1300, I think, as you cannot hint there, the training is relatively straightforward, right? We don't implant the, pressure sensing lead, which is going to be very well accepted from an ear, nose and throat surgeon as you can imagine. That's the one part of the surgery that we think is a little bit uncomfortable for an ENT.

Speaker 2

So we do believe on a capacity front that by removing that sensor that we're going to have more ENTs who want to do the procedure and it will reduce the OR time. But I do think that longer term if people wanted to look at skin to skin time to do the procedure and they do a new RUC survey. I think right now the procedure is fairly paid and it may take a couple of years for them to do another RUC survey. So I don't think you'll see any significant change in physician payment for several years. But certainly they will do a survey to make sure it's properly paid.

Speaker 2

On your first question, I think the greater challenge is more so working through all the contractual items because we have pricing agreements with every center and we just need to do contracting updates with all the centers. But we have a team that can effectively work through that process. And even though we have 1300 centers, we can efficiently move through that. So thanks for asking.

Speaker 18

That was really helpful. And then maybe just as a follow-up. Rick, the 2Q 'twenty four year over year revenue, I think, was up about $45,000,000 almost 50% drop through to net income. Just a really impressive drop through. If I take the midpoint of your 2024 guidance, I sort of do that same exercise in the back part of the year.

Speaker 18

I get way over $1 in the back part of it's in 2H24 in terms of earnings per share. So again, really solid EPS power. I'm just curious, is the $0.60 to $0.80 just reflect some of your usual conservatism? Or are there any other areas of spend that you may accelerate as we work our way throughout the balance of 2024? Thanks.

Speaker 3

Yes. Thanks for your question, John. Part of that, driving that number, we do have variability in our R and D as a percentage of revenue. A year ago it was 20 percent and even in recent quarters, it was high teens this particular quarter. In Q2, it was 15% of revenue.

Speaker 3

So we're continuing to make investments in our R and D, in our sleep sync and our technology platform. And so we're not slowing down with investments. We'll also continue to expand and make investments in our commercial organization. So we're not slowing down. We want to drive top line growth with those investments.

Operator

Thank you. And I show our next line question comes from the line of Mike Kratke from Leerink Partners. Please go ahead.

Speaker 7

Hi, everyone. Thanks for taking our questions. Can you provide an update on the current backlog of patients that are waiting to get an Inspire implant? And just to clarify, does that backlog specifically refer to patients that have been cleared for INSPIRE post DICE and are just waiting for a water time to become available? And how would you characterize that backlog of patients?

Speaker 2

Yes, it's a great question and there's a lot of different definitions in there. What we at a high level talk about is the time it takes somebody, patient from contacting our call center through the implant. And we still have that running at about 6 months, although we're seeing some improvement with that. And by increasing capacity, we can start to lower that down. What is impressive is our ability to track the patients once they go to a sleep endoscopy and reduce the time from sleep endoscopy to implant.

Speaker 2

And you can imagine, if we can start to reduce the number of sleep endoscopies based on the predictor results, we can have a significant reduction in their experience that way. So a very key focus for the team right now and we closely track patients once they get their insurance approval to make sure they get scheduled in a very expeditious manner and we can start to track that very closely. So very high priority for the team.

Speaker 7

Got it. Thanks very much.

Speaker 2

Thanks Mike.

Operator

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

Speaker 2

Hey, Rick, can you hear me all right? Yes, Suraj. How are you?

Speaker 8

Congrats on the quarter. Thank you. A couple of questions and I'll throw them your way together. I know it's been a long call. Maybe I missed some qualitative commentary or quantitative on new stores, same store sales.

Speaker 8

Any additional color there would be great. And also, Tim, I'll throw my second question also your way. Your comments about physicians not wanting I'm paraphrasing this, not wanting to take liability on GLP-one and waiting to see 9 to 12 months for the impact. I guess help us understand that a little more. Even with hypoglycelorinearstem, it takes almost 4 to 6 months to get through the pipeline and get to a surgery, another 3 plus months for full titration.

Speaker 8

And you really don't know if you're going to respond to hypoglycemia nervous system. So maybe if you could tie your comments about the liability component would be greatly appreciated. Sure.

Speaker 2

Thanks, Raj. Same store sales, go back there first. I think we continue the priority to make sure that we want to increase same store sales and increase the utilization at existing sites. And I think that is what you're seeing by seeing the increased utilization on a quarter over quarter basis, certainly year over year. And that remember has a little bit of a dilutive effect by adding more centers to the denominator.

Speaker 2

So it really shows that we are growing, utilization at existing centers. As far as sleep physicians, they don't want patients to remain left untreated. And so maybe let me backtrack from the word liability a little bit, but talk about the desire of sleep physicians to take care of patients and they're going to want to start them on a therapy like CPAP right away to be able to move forward. As far as Inspire goes, we know there's a time that it takes people to get through the process, get through a sleep endoscopy, a prior authorization and get to surgery. But remember, these are patients that have already attempted, CPAP.

Speaker 2

And so they've tried therapy. They may be using CPAP to carry them forward. But once properly selected, we've been able to show our safety and efficacy at a very high probability that they will have a strong benefit with Inspire therapy. And that's why we have over 75,000 patients treated with Inspire therapy to date.

Speaker 1

Thanks, Dheeraj. We have time for one last question. Dilan, can you queue up, Stephanie, please?

Operator

Sure. Thank you. And I share our last question comes from the line of Stephanie Piazzolla from Bank of America Securities. Please go ahead.

Speaker 13

Hey, it's actually Travis Steed from BofA. Hey Travis. Hey. Welcome. Hey.

Speaker 13

Just wanted to sneak in my mind, Tim wasn't working. So I've had several questions tonight on the sequential increase in utilization and trying to tie that into the other comments of you're comfortable with the consensus U. S. Revenue. So I don't know if that's just the aspiration as it grows sequentially or just how to think about that sequential uptick in utilization this quarter?

Speaker 2

We are going to be in the queue for the rest of the year quarter over quarter sequential increase in utilization and certainly year over year. So we're going to continue to focus on that. And that's the mode of the commercial team.

Speaker 13

Okay. But the guidance, the Comfortwood Street is not necessarily showing that sequential increase, correct?

Speaker 2

We keep those as separate topics.

Speaker 13

Okay, perfect. And then one other question I got from investors is just kind of curious if there was any anything in Q2 that was one time Easter timing that came in or anything impact of UNH not doing prior authorizations? Anything to consider in Q2 that was one time that we would think about modeling that sequentially?

Speaker 2

Yes. Travis, great question. We actually went through and tried to look at sales days and what month the days are in and did FedEx close because of ice or we had a hurricane this past week. So now we don't we didn't see anything in the second quarter that really highlights a single event. I think we had a strong quarter from the team.

Speaker 2

We're very proud of the efforts both in the U. S. As well as international and their support.

Speaker 13

Okay, great. Thanks a lot.

Speaker 5

Thank you.

Speaker 2

Thank you. Hey, let me jump in and just before we close, I want to thank everybody for joining the call today. And as always, we're grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve successful and consistent patient outcomes, teens' commitment to patients remains unmatched and is the most important element to our success. We 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

And for all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates in the months ahead. So thank you very much and Dylan back to you.

Operator

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

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Earnings Conference Call
Inspire Medical Systems Q2 2024
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