Q2 2022 Inspire Medical Systems Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good afternoon, My name is dilemma and I'll be your conference operator today.
At this time I would like to welcome everyone to the inspire medical systems second quarter 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session. Thank.
Thank you.
I'll now hand, the call over to your first speaker Meghan <unk> director of financial reporting at inspire you may begin the conference.
Thank you and thank you all for participating in today's call. Joining me are Tim Herbert President and Chief Executive Officer, and Rick <unk>, Chief Financial Officer earlier today, We released financial results for the three and six months ended June 32022, a copy of the press release is available on our website.
On this call management will make forward looking statements within the meaning of the federal Securities laws, all forward looking statements, including without limitation those relating to our operations financial results and financial condition investments in our business continued effects of the COVID-19 pandemic full year 2022 financial and operational out.
<unk> 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.
See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC today for a description of these risks and uncertainties inspire disclaims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or.
Otherwise.
This conference call contains time sensitive information and speaks only as of the live broadcast today August <unk> 2022, and with that it's my pleasure to turn the call over to Tim Herbert Tim.
Thank you Meghan and thanks, everyone for joining the call today for our second quarter 2022 business update.
We are excited to report on a very strong second quarter with 73% revenue growth over the same period last year.
Moreover, we overcame several challenges common across the med tech sector, including supply chain issues staffing shortages and economic concerns.
This really highlights the team's resiliency and commitment to the patient.
To this AD. We currently have an abundant supply of both finished goods and with our work in process.
We do not expect Covid to have a negative impact on our business going forward and regarding staffing challenges, we continue to be able to get cases scheduled in the or as well as at ambulatory surgical centers.
Collectively our success in managing these factors allows us to focus on executing our growth strategy.
With that.
Let's review, our second quarter results.
In the second quarter, we generated worldwide revenue of $91 4 million again, representing a 73% increase compared to the second quarter of 2021.
Looking ahead, we are confident in the outlook of our business for the remainder of 2022. Therefore, we are increasing our full year 2022 revenue guidance to a range of $354 million to $362 million from our previous guide.
<unk> of $336 million to $344 million.
This guidance represents an increase of 52% to 55% over full year 2021 revenue of $233 million.
As always I would like to reiterate that our primary focus remains on the patients.
To ensure that each and every one has the best possible outcome from inspire therapy.
Let's get into the details surrounding the second quarter beginning with capacity.
During the quarter, we added 52, new U S implanting centers ending the period with a total of 785 centers.
Now a 50, while 52 new centers is within our guidance range, we experienced a slight delay in opening several additional centers as a result of the price increase implemented during the quarter, which required centers to update approvals from their value analysis committees.
And at the end of the second quarter.
<unk> made up 23% of all U S centers.
We will continue to monitor and ensure that the field team is focused on accounts that can provide the greatest benefits to patients moving forward.
And for the remainder of the year, we continue to expect to add between 52 and 56 centers per quarter.
The utilization at existing centers showed a significant increase and was the leading factor in the growth during the quarter.
We will continue our balanced approach of increasing utilization at existing centers.
As well as opening new centers to grow capacity and improve patient access to care.
Regarding the U S sales team, we created 17, new sales territories in the second quarter, bringing our total to 191.
While this was ahead of our guidance, we continue to expect to add 11 to 12, new territories per quarter during the remainder of 2022.
We also increased the number of field clinical representatives by adding seven ending the second quarter with 100.
During the remainder of the year, we will continue to scale, our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity.
This builds upon the changes that we implemented in the first quarter. When we expanded our U S sales leadership team, which now includes 30 regional managers and increase of three as compared to Q1.
And eight area Vice presidents.
We expect increased productivity from the team as a year moves on resulting in additional inspire procedures, while maintaining and improving patient outcomes.
Turning to reimbursement.
CMS recently announced a proposed 2023 payment rules for physicians as well as for hospitals in afcs.
For our physicians the RV used proposed for the inspire procedure have been slightly increased.
Hospital reimbursement proposed for 2023 remained flat to the current year.
And the other good news is that the ASC reimbursement is proposed to increase by nearly 4% to $25744.
Our growth continues to focus on utilization improvements at existing sites and setting utilization targets for newly activated centers.
Paramount to this is improving our ability to assist interested patients with making a connection with a qualified health care provider.
Importantly, our outreach programs continue to be very effective in generating interest and inspire therapy, primarily through the inspire sleep dot com website.
For the first half of the year the number of visitors to our website was approximately $7 4 million an increase of 131% year over year.
And from these visits we had approximately 42000 physician contacts.
Of note. These physician context represent the calls and emails to our adviser care program or directly to a physician's office and does not include participation in community health talks or referrals directly from a patient's health care provider.
The growth in web activity leads patients to connect with our adviser care program or ACP.
Which now serves approximately 85% of our centers.
We intend to continue to expand our ACP throughout 2022, which will include many technology advancements to streamline the process through which patients are able to make an appointment with qualified physicians and ultimately confirm their suitability for receiving inspire therapy.
Moving on our international business had a strong quarter driven by increased procedure volumes.
While units sold outside the U S were up 8% year over year.
Unfavorable exchange rates resulted in a decrease in international revenue of 3% from the second quarter of 2021.
We remain very optimistic about our European prospects, particularly in Germany, and expect the increased strength in results throughout the remainder of 2022.
In other European countries, we have trained three additional sites in the Netherlands in response to positive reimbursement decisions in the UK, we have begun to identify and train additional centers. After the first implants were completed there in Q1 and follow on procedures this past quarter.
Following the recent receipt of countrywide reimbursement for inspire therapy in France.
We continue to have dialogue with authorities there to determine the proper reimbursement level.
In the interim we continue to plan for the broader launch of inspire therapy in that country.
We also have received positive reimbursement news in Belgium in Austria.
In Japan, we.
We remain excited about the opportunity and along with our partner, Japan Lifeline have now trained multiple centers, including two which have completed their first procedures and several others who are currently screening patients.
The team is also excited about completing our initial procedures at two centers in Singapore during the second quarter and we have additional procedure schedule.
Further we continue to work with physicians in Hong Kong.
On the scheduling of their initial cases.
Turning to R&D.
We are very optimistic about our new Bluetooth enabled patient remote.
That has been approved by the FDA.
This next generation inspire digital platform branded sleep sync enables remote therapeutic monitoring through the new patient remote and web based patient management portal.
We formally introduced our sleep sync digital health platform at the American Academy of Sleep Medicine meeting in June .
And have a full commercial rollout plan for the second half of this year.
We expect the sleep sync digital health platform will become an important tool for physicians to monitor patient experiences and outcomes.
Later this year, we plan to submit our upgraded physician programmer for FDA review.
This new program or connect with sleep sync and is key to the next step providing remote patient programming.
Last month, we received FDA approval for full body MRI compatibility there.
Full body MRI approval expands the inspire use labeling that previously allowed only had neck and extremity MRI scans.
Most importantly, this approval is retroactive.
<unk> to all patients with the inspire four neuro stimulator device that was introduced in 2018.
We know that concern over future access to MRI had been a barrier for some patients considering inspire therapy.
<unk> ability with this important diagnostic tool will provide peace of mind for current and future inspire patients.
We also recently received FDA approval for the new Silicon based stimulation and sensing leads which provide improved manufacturer ability easier system implantation increased long term performance and enhanced reliability.
We are targeting the U S launch of the new leads for later in 2022.
Longer term, we continue to work on the design for our fifth generation inspire neurostimulator.
Spire five device will eliminate the pressure sensor and incorporates sensing inside the neuro stimulator using that using an accelerometer to measure respiration.
We have strong confidence with the current design and are moving into qualification testing and continue to target FDA approval in late 2023.
Finally, we continue to conduct research and clinical trials to increase the number of patients who can benefit from inspire therapy.
As an example, we have been working with the FDA to increase the upper limit of our indication to include patients who have an abbvie hip public index or Abi of up to 100 events per hour.
Current indication is approved for patients with NHI of up to 65 events per hour.
In addition, our current labeling carries are warranted for patients with a body mass index of up to 32.
And with our current data, we will be submitting a request to the FDA to increase the BMI warning to patients with a BMI of up to 40.
Just this week, we learned that the FDA has accepted these indication changes with a breakthrough device designation, thereby reducing expected review time.
In summary.
We continue to experience significant momentum in all key aspects of our business and our focus on patient outcomes and physician education support our confidence in the continued growth of inspire.
Our core focus for 2022 remains increasing utilization at our existing centers, which we demonstrated well in the second quarter as well as increasing capacity by opening and training new centers there.
The continued expansion of our call center and investment in our DTC campaign support these initiatives.
Finally.
Many R&D achievements during the second quarter highlight our commitment to improving patient outcomes and enhancing both the patients and health care providers experience with inspire therapy.
We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long term long term shareholder value.
With that I'd like to turn the call over to Rick for his review of our financials.
Thank you Tim and good afternoon, everyone.
Total revenue for the second quarter of 2022 was $91 4 million, a 73% increase from the $53 million generated in the second quarter of 2021.
On a sequential basis revenue for Q2 grew 32% compared to $69 4 million in the first quarter of 2022.
U S revenue in the second quarter was $87 9 million, an increase of 78% from the $49 4 million in the prior year period.
The growth in the U S reflects several factors, including higher utilization at existing centers. The addition of new implanting centers.
Expanded direct to consumer marketing and an increased number of territory managers.
On a constant currency basis outside the U S.
Revenue grew 7% year over year, while on a reported basis revenue decreased 3% from the prior year period to $3 5 million due to an 11% reduction in foreign currency exchange rates.
The U S average selling price in the second quarter was 24100.
Compared to 23900 in the prior year period.
The increase reflects our price increase that began in may.
We expect U S asps.
Asps to steadily climb throughout the remainder of 2022 and into 2023.
As the price increase is implemented with our various hospital systems, we expect the U S asps to approach 24900.
The ASP outside the U S was 21.
During the quarter.
<unk> to 'twenty 3400 in the second quarter of 2021, which was driven primarily by unfavorable exchange rates and a lower ASP for distributor sales in Asia.
Gross margin in the second quarter decreased to 84, 5% compared to 85, 8% in the prior year period.
Primarily due to higher cost of certain component parts, which is common across the industry given the current supply chain challenges.
As Tim discussed due to the product transitions and introduction of the new silicone leads and the new Bluetooth enabled patient remote.
Potential inventory obsolescence charge on any remaining stimulation and sensing leads and patient remotes may occur in the second half of 2022.
The amount of the charges if any will depend on the timing of the introduction of the new lease and remote both in the U S and outside the U S, which is uncertain at this time.
For this reason along with the higher cost of certain component parts. We are lowering our full year 2022 gross margin guidance to between 80, 385%.
Longer term, we expect gross margins to return to the prior guidance levels of about 85%.
Total operating expenses for the second quarter were $91 2 million.
An increase of 57% as compared to $58 million in the second quarter of 2021.
This increase was due to the expansion of our sales organization.
<unk> direct to consumer marketing programs.
<unk> product development efforts.
General corporate costs.
The increase in operating expenses is reflective of our ongoing plan to drive continued growth and to make investments in key areas of our business.
Net loss for the second quarter was $14 5 million compared to $13 1 million in the prior year period.
The net loss per share for the second quarter was 53 per share compared to the net loss per share of <unk> 48 in the second quarter of 2021.
The weighted average number of shares outstanding for the quarter second quarter was $27 6 million.
We anticipate that the weighted average number of shares for the third quarter will be approximately $27 7 million.
Moving to the balance sheet as of June 30, our cash and investments totaled $196 million.
Our year to date cash usage of $28 million includes the previously announced $10 million strategic investment and info data.
And $3 million, an initial debt principal payments.
This strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers and training and opening new implanting centers.
In conclusion, our strong performance and recent implant trends provide us with confidence in our outlook for the remainder of the year.
With that our prepared remarks are concluded.
Selim can you please open up the call for questions.
Thank you Sir.
To ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Larry <unk> from Wells Fargo. Please go ahead.
Good afternoon. Thanks for taking the question and congratulations on another really strong quarter, Tim and Rick and Rick I Hope you're feeling better.
Thank you Larry Thanks Terry.
Hey, Tim just two questions from me one on the filings that you announced at this one on the guidance. So let me start with the two filings.
For the IHA to 100, and the BMI of 40 do you have that.
And hand, it sounds like you do and what data have you submitted and could you just talk to put them into context for us I mean, how much does this increase your Tam it sounds pretty significant.
And I had one follow up great. We're very excited.
Cited about it as you know we've had the adhere registry ongoing since FDA approval back in 2014 and now we are looking at data of over 3000 patients and we're continuing to enroll in that and the cap on that adhere registry is 5000 patients at which time we.
Plan to transition over to <unk>.
And here to point, all of which will be part of the sleep sync digital healthcare platform. So very excited with that data and remember that when we did prior authorizations, we work with physicians for patients who are outside of the indication we make sure we.
Tell the insurance companies that this patient is outside the <unk> upper limit, but we always fight for those patients because what other options do they have and so we would submit to the insurance companies, we would be able to get approval and so India adhere registry over the years, we have collected a <unk>.
<unk> amount of data with patients with IHI higher than 65, as well as those with the BMI higher than 32, and we have provided all of that data to the FDA already and we are just formalizing the final PMA supplements and Thats when the FDA came back.
And let us know about the.
Positive designation that that these.
These applications will carry that really minimizes the review time. The good news is the FDA has already reviewed the data so very promising.
If you look at the star data and the enrollment from the Star trial.
There are several items that offset each other but in general we expect that this could be a 20% increase in our overall target market and so we're very encouraged by that and what's really encouraging is these patients who have been getting therapy off label can now be included with some of the <unk>.
Health care policies, so pretty exciting.
That's great to hear thank you for the comprehensive response Rick.
<unk> been hearing this question, but the first half growth over 70%.
<unk> at the midpoint implies about 40% in the second half at the midpoint.
We're just seeing in the environment.
The slowdown or.
Just conservatism and how should we think about the cadence in Q3.
Taking the questions.
Yes, we haven't changed our philosophy towards guidance and we're just really focused on our continued expansion of our commercialization efforts.
By adding additional centers as well as adding territory managers, because we'd like to maintain that ratio.
Of about 4% to six centers per territory manager.
Given the fact that we had a nice increase in utilization from existing centers as.
As well as adding 17, new territory managers.
Along with <unk>.
We have our new dedicated code this year.
As well as the two incision approach that was implemented last year that has given us confidence that our ability to increase our guidance.
For the rest of the year.
And we normally see a stronger Q4 than Q3.
Do you expect sorry, one just let me follow up.
Q3 to be up like we normally see.
But more pronounced some receipts this year John thanks for taking the questions.
Yes, I mean, you've seen that phenomenon and how we have a strengthening throughout the year, especially in Q4 before the deductibles reset and then we have our seasonality in Q1, but.
Yes, the statements passengers.
Thank you.
Thank you.
And our next question comes from the line of Robbie Marcus from Jpmorgan. Please go ahead.
Oh great.
Congrats on a really nice quarter.
Thank you Ravi.
Maybe to start.
Once again.
Put up.
Really nice utilization good new center growth.
Any way now that Youre a couple.
A couple of quarters into your National advertising program, it's about a year since the CPAP recall came in any way to put.
Some metrics around.
How the National program is impacting numbers, if you have any.
Tricks you could share in any way to size up the CPAP recall at this point and how much of a tailwind do you think is left there.
Sounds great. Let's go back to the utilization, which is really positive in the second quarter and really a focus of the team, but we also had 52 new centers, which is still within our guidance very strong but previously we've been opening center is much higher than that and then one of the phenomena was driven by Covid is opening new sites of service.
To be able to have.
Places, where physicians can perform the procedures during the COVID-19 environment, so little bit of a phenomena there switching into the <unk>.
Second quarter here, but still very very strong and then as we mentioned the price increase pushed.
Pushed a couple of new centers into the end of the third quarter. The national programs and then as we mentioned the price increase.
Pushed a couple of new centers into the end of the third quarter. The national programs continue to drive awareness right.
In the earlier in the year, we saw a big bolus of.
Web hits driven by for the first time ever and over time now we go to a rotational program, where we have patient outreach programs.
<unk>.
One week on one week off rotating around the entire United States. So we've kind of settled back down to a basal rate, but we still had over 7 million people come to the website. So very very strong interest and that has really driven the need for us to continue to invest in our digital tools to help those patients get connected.
With physicians so it's a pretty complex program, we really like what we see with our national programs opening up new centers, increasing utilization and really just driving capacity and then finally the sleep sync is building capacity for the sleep physicians to be able to treat more.
Patient and so it's a whole systemic.
Program that we have running thats going to continue to drive the growth.
As far as the CPAP recall I think it is it remains key.
Key part of the environment for which we operate were doing everything we can to continue to help those patients.
To get therapy, I don't know, if we see that being resolved anytime in the near future, but we certainly are there for those patients and we'll certainly do everything we can get them approved through their insurance providers.
Great maybe as a follow up.
When we do Doc checks they loved the product there is still a ton of room to go in terms of utilization at the centers, but many years down the road that one of the things. We consistently hear is that theres only so many docs, who can do this and they only have so many hours in the day so.
How should we think about inspire five as increasing the available capacity within the system, how much can that open up with the shorter procedure and anything else you can do.
Hi.
To keep capacity not the issue going forward. Thanks, a lot sure I mean, if you look back to when we went from <unk> to incision, we're able to take it down from 120 minutes down to 90 and now when we go to inspire five not only are we getting a significant increase in technology and improved sensing with the accelerometer.
We are eliminating the pressure sensing lead altogether.
And that has a significant not only reduction in or time or operating time, but also an improvement in overall system reliability. So we can get that or time down to even 60 minutes. That's another very significant reduction, thereby improving capacity and allowing.
IMT.
Surgeons to be able to schedule additional cases in a single day and so we need to just continue to improve the.
Surgical techniques improve the technology improve the training and as surgeons become more.
<unk>.
Experience with the procedure they themselves.
Get better and more proficient and that reduces time that being said, we still need surgeons to.
Allocate a greater percentage of their practice to inspire.
And with the improvements in reimbursement Theres now economical.
Arguments to be able to support that as well as the strong patient outcomes and a strong <unk>.
Safety profile of the therapy, so again, combining everything together, so it's going to continue to drive improvements and capacity down the road.
Great I appreciate it thanks.
Thanks Ravi.
Thank you.
And I show. Our next question comes from the line of Travis Steed from Bank of America. Your line is open.
Hey, Thanks for taking my question and congrats on the strong quarter.
What if any staffing headwinds in these numbers so its.
Great quarter.
I guess on the Q2.
To kind of get some color on April May June early July if you saw anything different month to month.
And then on the utilization piece.
A way to kind of quantify and think about where you think utilization goes.
From here.
Absolutely well so when we're coming out of Q1 remember during our last earnings call. We talked about the challenges we had in January and the first half of February certainly we have our normal seasonality, but this year it gets compounded.
With the rebound of Covid it yet and so we spent a lot of the second half of February and most of March working through.
The cases that were deferred from the beginning of the year and some of those pushed into April . So April was a really busy month. So I don't know if youre going to see the saw tooth effect as you see in sales cycles I think it was pretty.
Consistent across the quarter from April May June on how busy it was only because we had so.
Chad built.
Built up amount of patients coming at coming out of Q1, I think as far as.
Utilization goes we just saw a strong performance.
In the second quarter, we expect that to just continue and were probably just above $1 five mid $1 55 in utilization, which is significantly up from what was a $1 three in the second quarter of 2021, So a dramatic improvement across the board with a significant number increased.
Number of.
New centers since the second quarter of 2021, so we're going to continue to drive utilization Ravi asked the question about how we can do that with improvements in technique technology and reduced overtime, but we also can do that by gaining confidence of the physicians to say the therapies really helping a lot of people.
And we need to kind of increase the percent of our practice that we dedicate to inspire.
No that's helpful. Thank you.
On the price increase you mentioned steadily climbing, but it looks like this quarter was up.
About 5% more than the last quarter. So just want to make sure I understand.
How the pricing flows through.
And how those conversations have gone with the physicians and practices.
To put that.
Price increase through.
Hey, Travis it's Rick we did do the price increase in the U S on may 1st.
But we have.
Formal pricing agreements with all of our customers.
So eventually all of the customers will have that.
We'll pay that higher price, but the impact.
We will be phased in over several quarters and so in the second quarter. When we introduced it the price increase about 1% of our revenue was attributable to.
Two the price increase.
Great. Thanks for taking my questions.
Thanks Ted.
Thank you.
And I sure.
Next question comes from Rich New winter from tourists. Please go ahead.
Hi, Congrats on the quarter guys really impressive thanks for thanks for taking the questions. So just a couple for me.
Really really solid step up in utilization here.
And I was wondering if you could provide a little color around anything that might be.
Driving that.
Inflection like maybe you could talk a little bit about some of your higher higher volume accounts.
Older accounts are they continuing to kind of question.
Still even higher and higher monthly.
<unk> reviews.
Or is this just a faster ramp.
The newer onboard that you've had in the last year or so and then maybe talk.
To the ASC utilization relative to the outpatient is that finally, starting to diverge and does that potentially contributing.
Perfect.
I think.
Were increasing our core titles were.
<unk> increased the number of new centers and so there's a lot of <unk>.
New centers that are still at the very early stages of low utilization, but the upper quartile continue to grow and.
In the mid core titles kind of continue to progress to higher numbers and remember that the field team works very hard.
Having productive accounts so they can.
Really go deep and focus on the strongest content in their territories that are that are helping our patients. So we saw growth across all four quarters that was very.
Important.
And we're very encouraged by that especially when a quarter, where we opened a number of centers within our guidance.
But not having.
Real high numbers that we had previously as far as ASC is we're seeing consistency there I think the.
<unk>, we're a little bit busier earlier in the year when they're dealing with a lot of the Covid cases, moving away from hospitals, but you can see they are up to 23% of.
Our overall centers, but we're still not quite at 20% of our overall implants are still growing there and having a decent.
Focus on that in a really good news is we just got a proposed 4% increase.
And reimbursement from CMS with the National average Medicare reimbursement exceeding $25000 now that really makes a big impact.
Going forward when that takes effect later in the year.
Okay.
So Tim just just following up on that is the ASC.
Utilization kind of accelerating faster than the utilization maybe in the outpatient and I'll just.
Other question is on MRI.
What does that do for you exactly on how much of a limiting factor to a patient potentially choosing inspire previously thanks.
We're going to find out.
We know patients that.
That just know they need to have a MRI in the future they consistently have them and so they're a little bit worrisome about having a procedure that will prevent that diagnostics, but we do think it's certainly going to be a positive and certainly at ease of of Minder comfort for those patients to be able to move forward, but we will report back on that as we.
<unk>.
<unk> now in.
Patients and physicians really become aware of that and are more comfortable moving forward.
And then thank you.
Utilization.
Asset utilization will continue to grow, especially with the increased reimbursement.
<unk>.
It's pretty consistent we increased the number of centers up to 23%.
In the quarter and I think the utilization is maybe a little bit flat from the first quarter, but I think that has a lot to do with the COVID-19 impact because of Covid cases, getting moved to the ASC, but it's going to continue to be a positive push and we expect that will continue to grow.
Okay. Thanks, Congrats guys.
Thanks.
Thank you.
And I show. Our next question comes from the line of Jonathan Block from Stifel. Please go ahead.
Thanks, guys I think it's my turn return so let me go ahead, yes, thanks, Dave good good thanks.
Taking a look at the 10-Q the AD expense was $18 million I believe in the second quarter and I think it was 15 million in the first quarter.
How do we think about that ramping for the balance of the year and maybe more importantly.
Ultimately, where do you see that going is this a $100 million plus DT DTC type of business. When we look out 12 months to 24 months and then I've got a follow up along a similar talk trucks.
Yes, Youre right John .
In and all of.
'twenty one R R.
DTC spend advertising was about $48 million that was an increase of about.
80%, 80%.
We're still making investments just because were low in the penetration of centers.
As well as physicians and the awareness is growing and we're seeing good return on investment.
With our with our high margin.
Product and so we're going to continue to make those investments.
Will the increase by 80% in 2022, now and will probably be closer to <unk>.
60% to 70%, but that number will continue to grow because.
Again, we're in 785 centers.
Our next goal is to be an <unk> hundred and then ultimately in roughly 2400 centers and so we're going to continue to make those investments.
Because despite the fact that we're growing our sales organization.
We have made numerous investments in a lot of different R&D development projects and increased our DTC.
We have showing leverage.
In our business model so we.
We will continue to make those investments.
Okay.
Helpful and then maybe Tim for you.
I've got some of these numbers right you throw out roughly 42000 physician contacts.
When I walk it back to the model six 5000 give or take or so U S implants in the first half of the year. The first two quarters. So of course, there's going to be a good amount of leakage, but maybe just talk to us.
<unk> that off our increasingly conversion ever so slightly from the physician contacts down to the implants, but I have a tremendous impact on the P&L clearly so what can you guys do what's in your control to go ahead and increase that conversion or maybe said differently, where does some of the bottlenecks still exist in your opinion. Thanks, guys. Yeah very good question couple key.
Bottlenecks that we have when we deal with staffing challenges our staffing challenges in our centers and <unk> as they just don't have somebody sitting there waiting to take our phone call. So we need to work with technology to find better ways to get patients they are approved or getting patients their initial upon.
<unk> with physicians.
And number two we need to get those appointments within a reasonable period of time ideally within 30 days a lot of our physicians are very busy and they're scheduling out a longer period of time, which is a frustration for patients but.
We need to continue to grow the number of physicians offering the therapy same goes for scheduling.
Jacob cases number two the most notable is.
Many of the patients almost half of the contact or patients who have not had a sleep study within the last two years and Thats a specific requirement for Medicare as well as a lot of the commercial payers. So we need to work with those patients to find tools to be able to.
Get those sleep studies conducted two examples are our investment in Agnon me, which we are currently running.
Millet programs in three states right now to test that out to show improvements and getting patients their sleep studies in a very timely manner number two is using <unk> data, which is a tool for sleep labs to improve their own capacity, we are using auto scoring of sleep studies.
We need to keep.
Improving our technology, we have a lot of other tools coming in as far as texting and ongoing communication with patients to make sure. They are aware of their permit we get them to their appointment. So we have a whole team that focuses on that exact pipeline of how to improve that conversion just step by step.
Got it perfect. Thanks for your time guys. Thanks, John .
Thank you.
And.
I show. Our next question comes from the line of Amit <unk> from Goldman Sachs. Please go ahead.
Alright, So for me thanks for taking my questions just a couple of clarifying.
Points that have already been kind of touched on previously.
The first one I know when we talked about it previously that there was some comment that there were patients on the sidelines for that MRI compatible that were waiting to be done I'm wondering if the pop and utilization of the very strong utilization. This quarter had anything to do with some patients that have been on the sideline on the MRI side, if it's something you can quantify or called out.
I think thats something that we can talk about next quarter, because we just got the MRI approval and the time it takes for patients to work through the cycle, probably is running longer than than the previous four months, we talked about.
Think that with the number of patients we are in the process.
And our need to increase capacity is probably running more like.
Five months, so those patients will not have come through the process, yet, but that would that would be seen as a potential boost and in the second half of the year.
Fair enough fair enough.
We don't have to belabor the second one, but just a little bit more color on what happened with the centers that werent able to open due to the price situation. It sounds like it was just a couple of centers in authority result in <unk>.
If there were an issue.
There's a couple of different phenomenon going on there that we did in the first one that we didn't touch on is in the Q4 Q1. When Covid was ramping we were opening up second sites of service either community the hospital or ASC to provide avenues for physicians to continue to do.
Procedures.
And then secondly, as we discussed during the quarter. When we did a may one price increase in centers, who had already been through their value analysis committee or have been at a corporate level needed to go back and do another review so.
Lot of those will get resolved relatively quickly and we will get those centers up and operational.
In the third quarter.
Okay. So not something you would expect.
Strangely enough.
To be per system is just going back through value analysis. Okay can you quantify how many centers that might have represented.
I don't think it's that significant.
Of a number we opened up 52, but.
Probably on the high single digits.
Alright, great. Thanks for taking my questions appreciate it.
So that's one.
Thank you.
And I show. Our next question comes from the line of Chris Pasquale from Nephron Research. Please go ahead.
Yes, thanks, congrats on the quarter guys.
Ken raising the ehi and the BMI ceilings and label it sounds like a great step in terms of expanding access.
102 patients still have to jump through the dice procedure I would think when you get up to a BMI of 40, there's often at least some lateral wall involvement. So how are you thinking about the importance of that step.
And do you see a pathway to eliminating it at some point.
Yes, first half with IHI, that's not a concern.
We don't think that being able to be screened through data is going to be proud of for those patients at the high Hei. That's just a benefit for those patients because they just don't have any other therapeutic options. We know that as you increase the BMI that increases the probability of a larger net.
Our conference.
And as we've talked about previously Nextera conference.
Is indicative of.
Complete concentric collapse because of fab pads are on the side of the neck. So when you lay down you get the lateral wall collapse. The lateral wall collapse is what cannot be stimulated.
With hypoglossal nerve stimulation.
So that's going to be a greater challenge for those patients, but it's a while it's a higher probability when you get to the upper <unk>. We did have sufficient data to show the FDA that its certainly worth changing the warning level to help those patients out and not just blanket.
<unk> locked them out because they have a higher BMI want to make a note on this this is only a warning. This is not part of our formal indications. So a patient with a higher BMI is not prevented from having therapy.
Or just given information that says hey for patients above 32, we don't have a lot of data on the success of that therapy now we've been able to give the data to the FDA that says that 32 needs to be increased up to 40, because we can show with sleep endoscopy and we can show a proper screening that we can in fact treat.
Those patients and they can have strong outcomes, just like patients with any BMI.
Thanks, that's helpful.
And then just one on the reimbursement front the proposed hospital outpatient and ASC rules included a request for comments upgrading 11, six APC code hypoglossal nerve stimulation was one of the procedures that was included in this hypothetical new category.
It looks like you did a 10% bumps if that goes through is that something your team is focused on responding to hear during the comment period and if so how are you thinking about the potential for success there.
Well, we'll see what the potential is.
Pretty good application organizationally to pull that together, we will provide comments right now where our price point is with the price increase we're very comfortable with level five APC that we're currently in today.
Obviously, getting a 10% increase really has a positive impact at hospitals, but really more importantly on ASC. So we would certainly love to see that come through were not counting on it and we're not basing our business on the fact that we need a level six we have our business set up to be.
We are successful with level five but.
To your point, we're going to certainly track it closely.
Thanks, Tim.
You bet Chris.
Thank you.
And I show. Our next question comes from the line of Adam <unk> from Piper Sandler.
Okay.
Adam Yan there.
I'm sorry.
Mr. Mehta Your line is open.
Hi can you guys hear me okay. Okay. There we go out of RF.
Hey, guys, sorry about that guys.
Two questions from me, maybe just to start first one on gross margin.
Was hoping you could flesh out.
Some of the puts and takes for the new gross margin outlook in the.
Implied second half step down a little more detail I heard you reference obsolescence charges with.
Some of the product transitions and the higher input costs with the supply chain, but wanted to see if you could go a little bit deeper there and then just talk about how quickly you think you can get back to that 85.
A percent or so gross margin target and then had a follow up thanks.
Sure. So there's two parts of that Adam So first for the second quarter.
Our gross margin was 84, 5% 130 basis points lower from a year ago and that was really primarily due to higher costs on certain components of our system, specifically around the remote existing remote.
In addition to paying higher prices for some components some of our vendors.
Require higher purchase commitments and so in that case, our inventory balances are growing.
On the supply chain challenges are not uncommon for other companies similar to us but.
Our team continues to monitor it closely.
<unk>.
We are managing that on a daily basis, but.
That's really the impact from Q2.
We've also had a strategy of maintaining a good level of safety stock try and target about 90 days of inventory on hand.
And so that's kind of our approach.
Specifically for our guidance that's the second part of your question.
That's really specifically around.
<unk>.
Approval and targeted launch dates of the new silicone leads as well as the new Bluetooth remote.
As we transition these products sometime in the second half of 2022.
We have some inventory quantities that are going be excess inventory that.
We will plan to write off as existing inventory quantities of the older versions and so that's why we're just focused on 2022 with our with our gross margin guidance and Thats why we are lowering that specifically around that for 83% to 85%.
And then longer term as we as after we introduce those to those products. We expect that we will return back to our previous guidance level of 85% roughly for gross margin.
Okay understood. That's really helpful color appreciate that and then Tim.
I wanted to kind of piggy off Chris's question and I noticed there's a study on clinical trials Dot Gov called the predictors study I was hoping you could talk a little bit about kind of the objective of that trial is it to potentially remove the dice procedure from the treatment funnel just any more color you can share on that study would be helpful.
Thanks again, guys for taking the questions Congrats on Monday.
Awesome quarter.
You very much.
Jordan Weiner.
Physician down in Phoenix very accomplished.
<unk> and he was tracking his patients and he was looking for a technique that he could in his office setting in an awake state being able to diagnose a patient without having down.
To have a drug induced debated endoscopy or sleep endoscopy, either way, what we call a dice procedure. So we develop this technique and then he published a paper with about 100 patients and we really became interested now that because he with his technique became predictive of which patients would respond to therapy, which patients did.
Not have <unk>.
Fleet concentric collapse based on the dimensions of the airway in in a weak state.
So we worked with Jordan and says Okay now we need to prove it. So we are currently activating <unk>.
10 sites to be able to conduct a study of 300 patients we have already have.
Think for sites open and enrolling patients a fifth site ready to start I think we're already close to.
Almost 50 patients enrolled already it's going to go quickly because it's the normal operation except we do.
Use of calibrate a measure the dimensions of the airway and underweight state and then patients follow through the intent of this study is to take that data to eliminate the need for sleep endoscopy for patients who have a BMI less than 32 that significant here one really important step on this.
The indication from the FDA does not require a sleep endoscopy to be done.
It requires that the patient has the proper anatomy for which inspire therapy can help them.
We as a company being responsible put that requirement of update back in to ensure strong patient outcomes.
If we're comfortable with.
The trial coming out we're going to be able to make a change there. So that's really going to be a strong benefit for the patients and we're going to make really strong progress with that study.
Throughout the second half of the year, because it's such a.
Relatively easy study conduct.
That's great color, Tim Thanks again.
You bet.
Thank you.
And I'm showing our last question comes from the line of Michael Polack from Wolfe Research. Please go ahead.
Hi, Good evening. Thanks for sneaking me in question on raising VHF, Hey, Hei limit to 100 I'm just curious what you see in the data Tim.
As you move up the spectrum.
I presume the safety is no different than what you observe in the start trial as an example, but are there.
Uh huh.
Diminishing returns to the benefit as you move up the scale.
Framed differently did these patients with north of $65 IHI see less reduction than say the folks.
South of 65, what is the data that you have suggest so far they actually see more it's just a matter of what mathematical tool you want to use if you look at the percent reduction they actually get higher because they are starting with a high baseline right. If you look at the absolute reduction in AHRI, the absolute number of the App.
They do better only because they have so much to give back the challenge gets into if you start talking about responder rates such as like the share criteria at all you have to have.
50% reduction in the AI and the resultant hei needs to be below 20, while that's where it gets tough because you need a patient who has the AHRI of 80 to get down less in 'twenty of 40.
<unk> 40, I'm, sorry, a 50% reduction is only halfway there right yeah, almost eight what do you need a 75% reduction from 80 to get less in 'twenty. So responder rate is always a little bit challenging, but if you just look at the benefit that those patients have and what we also showed from the data is there.
Quality of life is also a real dramatic improvement as well because think about how challenging it is having a IHI.
Above 65, that's pretty significant so these patients are really going to have a strong benefit and getting a significant reduction in <unk> is really what it's all about.
That is good color I appreciate that.
If I may last one sure, Germany small country small market small numbers.
It is.
Locality, where you have.
Competition in small numbers for your competitor there as well, but I'm just curious if you have any kind of early.
Assessment of how that.
Our country is performing with two choices in the market any any perspective on share.
<unk> you both ramp up efforts there in the market accepts hypoglossal nerve stimulation more broadly with permanent reimbursement thanks for taking the questions.
Absolutely Mike Thank you very much.
I think there's really only one choice in Germany today, and Thats inspire we have over 25000 patients and growing we've long been established in Germany.
And.
The company, you're referring to just.
Theyre focusing right now on conducting clinical studies to gather the data to show that that they can be safe and.
An efficacious in a viable option for patients so it's a little bit early right now.
We don't see too much of a presence from them in Germany today, but again they are focusing on conducting their own clinical research and we are making sure that we're part of the.
S III therapy guidelines in <unk>, Germany, which is the highest level of of guidelines and it's cross functional and inspire and inspire alone is recognized $10 therapy guidelines.
But thank you very much I appreciate that.
Thank you.
This concludes the Q&A session for the conference I would now like to turn it back over to Tim Herbert for any closing remarks.
Thank you very much I know are coming minutes over but I want to thank you all for joining the call today and as always I am 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 remains unmatched and is the most important element to our success I wish to thank all of our employees as well as the health care teams for their continued efforts as we remain focused on further expanding our business in the U S.
Europe and now in Asia.
For all of you on the call. We appreciate your continued interest in and support of inspire and look forward to providing with further further updates in the months ahead, please stay safe and healthy.
This concludes.
This concludes today's conference call.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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