Q3 2022 Inspire Medical Systems Inc Earnings Call

November 1, 2022

The conference will begin shortly to raise your hand.

Good afternoon, My name is <unk> and I'll be your conference operator today at this time I would like to welcome everyone to the inspire medical systems third 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 to ask a question. During this session you will need to press star one one on your telephone you wouldn't hear an automated message advisor in your hand as race.

I'll now hand, the conference over to your first speaker <unk> <unk>, the Vice President.

<unk> of Investor Relations at inspire you may begin the conference.

Thank you Joanne and thank you all for participating in today's call.

Joining me are Tim Herbert President and Chief Executive Officer and Rick.

Chief Financial Officer.

Earlier today, we released financial results for the three and nine months ended September 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.

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 outlook and improvements in market access are based upon.

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 quarterly report on form 10.

Form 10-Q filed with the SEC today.

For a description of these risks and uncertainties.

<unk> 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 November one 2022 with that it is my pleasure to turn the call over to Tim Herbert Tim.

Thank you Ed.

Thanks, everyone for joining our business update call for the third quarter of 2022.

We are excited to again report on a very strong quarter with significant progress across all elements of our business.

I always say right upfront, we again reiterate our commitment to patient outcomes to ensure that each patient has the best possible experience with inspire therapy.

During today's call we will highlight many key accomplishments that demonstrate our ongoing focus to the patients.

Including improvements in access to therapy technology advancements introduced and in development and planned activities to broaden the population that can benefit from inspire.

With that let's review our results.

In the third quarter, we generated revenue of $109 2 million Rep.

Representing a 77% increase compared to the third quarter of 2021.

We remain confident in the outlook of our business for the remainder of 2022.

And therefore, we are increasing our full year revenue guidance to a range of $384 million to $388 million.

From our previous guidance of $354 million to $362 million.

This guidance represents an increase of 65% to 66% over full year 2021 revenue of $233 million.

Our growth continues to focus on and is driven by utilization improvements at existing sites as well as the activation of new centers.

We will continue this balanced approach to growth and highlighted in the third quarter utilization improved significantly at existing centers and was the leading factor in growth during the quarter.

We further increased our capacity by adding 59, new implanting centers ending the period with a total of 844 centers.

At the end of the third quarter ambulatory surgical centers made up 23% of our U S centers.

We will continue to monitor and ensure that the field team is focused on accounts that can provide the greatest benefit to the patients moving forward and we continue to expect to add between 52 and 56 centers in the fourth quarter.

Regarding the U S sales team, we created 18, new sales territories in the third quarter, bringing our total to 209 four.

For the fourth quarter, we continue to expect to add 11% to 12 new territories.

We also increased the number of field clinical representatives by adding nine ending the third quarter with 109.

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 were implemented in the first quarter. When we expanded our U S sales leadership team, which now includes 32 regional managers and increase of two as compared to the second quarter.

And eight area Vice President.

We expect increased productivity from the team, resulting in additional inspire procedures, while maintaining and improving patient outcomes.

Paramount to this is Jim.

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 nine months of the year the number of visitors to our website was over $10 million, an increase of 98% year over year.

And from these visits we had approximately 60000 physician contacts.

Of note.

These physician context represent calls and emails to our adviser care program or directly to a physician's office and do not include participating participation in community all tax or referrals directly from a patients health care provider.

In the third quarter, we refined our national TV advertising campaign.

To improve reach in a more efficient manner.

Through our ACP, we closely monitor the success rates of connecting patients with health care providers and are continuing to develop and implement technology advancements to further streamline this process.

From a euro U S reimbursement perspective, we do not expect any major changes when the final <unk> rules are released today.

The most pressing topic was the addition of a level six neuro APC or ambulatory procedure code.

Which was proposed to be implemented back in July but if this were reversed.

Would expect that inspire would be included as part of this new APC.

From a site of service or physician reimbursement, we had very little change from the July proposed rule and do not expect any material changes when the final rule is released.

Moving on.

Our international business continues to make strides although during the quarter, we experienced a 14% decrease in revenue from the third quarter of 2021, driven largely by unfavorable exchange rates.

During the quarter International revenue was less than 3% of global revenue, reflecting the significant growth in the U S market.

There are many positives in our international business and I'd like to start by highlighting France.

Following many years working with the French authorities, we have been approved for countrywide reimbursement at rates consistent with those are established in other countries around the world.

Therefore, we are in the final process to have inspired listed on the French registry as early as the beginning of 2023 and the team is preparing for commercial launch in that country.

In Singapore, we are building momentum with additional procedures at our flagship centers, which are on track to become regional centers of excellence.

The adoption in Japan remains slow.

But we are energized by the recent activity primarily with the scheduling of procedures at new sites.

Further we have hired a full time country manager in Japan to oversee activities and support the growth of awareness and adoption of inspire therapy.

Turning to R&D.

We are very excited about our new Bluetooth enabled patient remote which we recently launched this new remote is a key part of our next generation.

Our next generation inspire digital platform branded sleep sync, which enables remote therapeutic monitoring.

The new patient remote and a web based patient management portal.

Please note that we previously described the sleep sync as inspire cloud.

We expect the sleep sync digital health platform will become an important tool for physicians to monitor patient experiences and outcomes.

Before year end, 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 of providing remote patient programming.

Also in the third quarter, we began the commercial launch of our new Silicon base stimulation and setting leads which provide improved manufacturer ability easier system implantation increased long term performance and enhanced reliability.

Longer term, we continue to work on the design of our fifth generation inspire neurostimulator.

Inspire device device will eliminate the pressure sensor and incorporate setting inside the neuro stimulator using 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.

To this end two key regulatory submissions were sent to the FDA to expand the inspire indication first.

First we submitted a request to approve inspire for the pediatric population with down syndrome, we have been working with the physician for quite some time to collect sufficient clinical evidence to support approval for this important group of kids.

The second request is to increase the upper limit of our indication to include patients who have an apnea hepatic index of up to 100 events per hour.

Current indication is approved for patients with an HCI of up to 65 events per hour.

In this same submission we also requested approval to modify the warranty for patients with a body mass index of up to 32.

And with their current data, we submitted a request to the FDA to increase the BMI warning to patients with a BMI of up to 40.

With this second submission the FDA provided 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 to support our confidence in the continued growth of inspire.

Our core focus for 2022 remains increasing utilization at our existing centers.

As well as increasing capacity by opening and training new centers.

Continued expansion of our call center and investment in our DTC campaign support these initiatives.

Finally, the many R&D achievements during the first nine months of the year highlight our commitment to improving patient outcomes and enhancing both the patients and healthcare 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 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 third quarter of 2022 was $109 2 million a 77% increase from the $61 7 million generated in the third quarter of 2021.

On a sequential basis revenue grew 19% compared to $91 4 million in the second quarter of 2022.

U S revenue in the third quarter was $106 3 million, an increase of 82% from the $58 3 million in the prior year period.

Our 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 a higher number of territory managers.

On a constant currency basis outside the U S revenue declined 2% year over year.

On a reported basis revenue decreased 14% from the prior year period to $2 9 million due primarily to a 12% reduction in foreign currency exchange rates.

The U S average selling price in the third quarter was 24400 compared to 23900 in the prior year period.

The increase reflects our price uplift that began in may.

We expect U S asps to steadily climb throughout the remainder of 2022 and into 2023.

As the price increases implemented with our various hospital systems, we expect the U S asps to approach 24900.

The ASP outside the U S was 2500 during the quarter compared to 23500 in the third quarter of 2021.

Which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia.

Gross margin in the third quarter decreased to 81, 9% compared to 86% in the prior year period.

Due to inventory obsolescence charges and higher cost of certain component parts.

As we previewed on our second quarter call. The introduction of the new Silicon leads and the new Bluetooth enabled patient remote remote.

Resulted in an inventory obsolescence charge of $2 8 million, which we booked fully in the third quarter.

We do not anticipate additional inventory charges related to these new product introductions, and therefore expect gross margin in the fourth quarter to be higher than the third quarter.

Though still impacted by higher cost of certain component parts.

For the full year, we continue to expect gross margin.

Between <unk>, 83% to 85%.

Longer term, we expect gross margin to return to prior guidance levels of about 85%.

Total operating expenses for the third quarter were $106 6 million, an increase of 70% as compared to $62 9 million in the third quarter of 2021.

This increase was due to the expansion of our sales organization increased direct to consumer marketing programs.

Continued product development efforts and general corporate costs.

The increase in operating expenses is reflective of our ongoing plan to drive continued growth and to make investments in key areas of our business.

Net loss for the third quarter was $16 8 million compared to $10 3 million in the prior year period.

The net loss per share for the third quarter was 60.

Compared to the net loss per share of 38 in the third quarter of 2021.

The weighted average number of shares outstanding for the third quarter was $28 2 billion.

We anticipate that the weighted average number of shares for the fourth quarter will be approximately $28 9 million.

Moving to the balance sheet, we ended the quarter with cash and investments totaling $428 million.

During the quarter, we completed an equity offering with net proceeds of $244 million and paid off our $20 million of outstanding debt.

As of September 30, we had no remaining debt.

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 in recent implant trends provide us with confidence in the outlook for the remainder of the year.

With that our prepared remarks are concluded.

You May now open the line for questions.

Thank you Sir as a reminder to ask a question you will need to press star one one on your telephone.

Please standby, while we compile the Q&A rosner.

And I show. Our first question comes from the line of Travis Steed from Bank of America. Please go ahead.

Hey, congrats on a great quarter again.

I guess looking at looking ahead, maybe just talk about puts and takes on 2023 would be helpful. At this point.

50 to 60, new centers add per quarter is the right way to think about it and we should see continued increases in utilization as well under the streets at 35% revenue growth right now and just curious if thats a place you're comfortable with at this point as well.

Yes.

Hi, Travis I think next year, we're still while we're still worrying about Q4 right now, but looking forward I think that Q1 of course, we will expect our normal seasonality. The good news is we shouldnt see COVID-19. This year. So we're encouraged by that but yes, we still with the high deductible insurance plans in the fourth quarter we.

Always expect a normal seasonality as we move into Q1, we will continue to drive utilization. We think we have further upside there.

Just we need to continue to work capacity and efficiencies and help that patient flow through the centers, but we need to continue to keep adding additional centers to so we'll keep that balanced growth from that standpoint, we will continue to add territory managers in line with the cadence for which we have been.

Running for many years now and the exciting news is we will continue with our improvements and.

Product development, and releasing new technologies, specifically around the sleep sync system.

Okay, that's fair any any comment on that.

The street is that today would be helpful. As well just a follow up to that and then I had a question on opex.

It has been growing roughly in line with revenue growth just I guess the question is can you keep spending at this level and why not move forward, we will start to see a little bit of a divergence between revenue growth and opex and a little bit better operating margins.

Absolutely we will get into the Q1.

Annual revenue plan at a later date, but getting into the the Opex R&D was high in the quarter, because we had several <unk>.

Very key accomplishments, primarily with silicon based leads with the new remote and as well as progress with the inspire five device moving into qualification in that.

More of a timing and some of the R&D charges, we think will be.

Are you able to manage that moving forward, but again, we had great quarter with a significant cut significant accomplishments with with the R&D line.

Okay, great and congrats again on the good quarter.

Thanks Travis.

Thank you.

And I show. Our next question comes from the line of.

Jon Block from Stifel. Please go ahead.

Great. Thanks, guys and good afternoon.

Jim maybe just help us out a lot of good detail in the press release sort of around your initiatives to expand the market, but can you just give us a little bit more granular on the next steps on the move from the BMI call. It.

Up to 40, and any timing with the FDA and then I'm. Just also curious any feedback from the industry. The industry sponsors want to move the BMI from 32 to four year, you're hearing any feedback from the E&P is going down that road and then I've just got a shorter follow up.

Absolutely I think the.

The primary driver.

We're the first submission with the pediatric population with down syndrome has been long coming as we discussed before we wanted to work with the FDA and the physicians to get a broader.

Indication, but we don't think Thats fair for that population and we did have the evidence to be able to support that credit goes out to mass eye and ear for their persistence.

Collecting this clinical evidence.

That has gone to the FDA. So we're very excited about being able.

To help the kids.

The HII is a good win rate because patients with IHI above 65% up to 100 really don't have any other options and we would try to work with those patients to try and get a prior authorization approval off label, but.

It's always up to the scrutiny of the insurance payers and certainly it's a problem with with Medicare. So we think thats going to be a very streamlined straightforward approach.

Going to BMI will be a little bit careful with that and I remember that's not an indication thats only a warning and for a patient with a higher BMI. They still cannot present with complete concentric collapse.

At the level of the soft palate, and we use a sleep endoscopy sleep endoscopy to be able to come.

Conduct that so we will work with Emt is to continue to make sure that they screen those patients and I think to your point a little bit we don't want to just blindly said every high BMI patients through will be very careful about.

Managing that but it certainly does open the door to to expand the coverage with Medicare as with the commercial payers to get above a BMI of 32 or a BMI of 35.

Understood very helpful. And then just shift gears, Rick for you I'm guessing someone's going to ask so let me take a shot at the <unk> or the guidance pardon me for <unk> implies sort of mid single digit to high single digit sequential growth just looking back historically and throwing out 2020.

You, usually mid 20% <unk> to <unk>. So just help us out here or is this just a function of <unk>.

Typical inspire conservatism or is there anything to call out of what you may have seen exiting <unk> into the month of October .

Gives you a little bit more pause thanks for the time guys.

Really no no pause John I mean, we haven't changed our guidance strategy. We're excited about the future of continuing to focus on increasing utilization in existing centers and adding new centers.

And as well as the other drivers we talked about with trying to improve our conversion with ACP and various initiatives that we are implementing there so.

We're excited at the opportunity, but we always put forth guidance there that we can stand behind.

Fair enough thanks, guys.

Thanks, Chad.

Thank you.

And I show. Our next question comes from the line of Robbie Marcus from Jpmorgan. Please go ahead.

Oh, great. Thanks for taking the questions and congrats on a nice quarter.

Maybe to start this comeback.

Going back on my math, it looks like your best quarter of units per Rep utilization per center.

Clearly all the trends are moving in the right direction, but I was wondering if you could put a finer point on what youre seeing on the ground is this across the board are you seeing utilization picking up that most of the centers is it just limited to a handful of centers that's moving the needle just sort of the.

How it fills out across the user base would be helpful.

Yes, I don't think any.

Single digit number of centers would ever be able to move the dial that we're seeing it's an across the board.

Our focus in it.

And there's it's multifactorial I think the.

Going back to the two incision going back to the new CPT code with stable reimbursement consistent payment levels and allowing.

Surgeons to dedicate more of their time to be able to provide inspire implants is what's really driving the utilization we've always had the patients.

Through our outreach programs, but we did not have the ability to take care of all of those patients with the capacity that we had we're at the point now where we're able to set expectations with these newer centers and kind of go back and look at all of the centers that we've opened over the last two to three years with the expectation of being productive.

<unk> accounted doing multiple cases.

In a month, because that's what drives proficiency and it also drive improved patient outcomes because the whole practice is more efficient and managing the patients.

Being able to.

Noticed any kind of changes in programming techniques, and just making just improving the proficiency of the of the process. So it's been a long term initiative, it's not a step function increase this utilization has been stepping up from Q1 to Q2 to Q3 and we're going to continue.

To focus on patient flows with centers and continue to add or block time and overall capacity.

Great maybe a follow up to that.

Now annualized.

Big CPAP recall.

Or at least the start of it.

<unk> had what 10 months now.

Your national advertising program, how much of a durable tailwind do you think that says do you think the interest will continue to grow over this time in any kind of.

Metrics, you could put on how well the national program advertising program has.

Has paid back for you in and.

Any way to size the benefit of the CPAP recall, thanks, a lot guys.

Again, we're going to we're going to be consistent with what we said about the CPAP recall, we don't think it has a significant.

Significant impact we know those patients that are coming through the pipeline.

That have been affected by that but we don't think that's a key.

Tailwind or future headwind for our business. We know that there is a significant amount of patients who are simply unable to benefit from CPAP and who are coming through.

Outreach program and coming through the adviser care program and looking for inspire. So we think that's really important I think from the beginning of the year when we.

<unk> started the national TV campaigns, we saw.

A real strong bolus of interest because the beginning of the year. We are out in every market in the United States and Thats a lot of markets that haven't seen any.

Messaging from inspire and the path. Since then we go to a rotational program and various regions still nationally.

But most recently, we're starting to go to a more advanced.

Kathy if were going to higher level.

Programming as an example, you may see us on the today show Good morning America.

And sporting events and that becomes a little bit more efficient and being able to get our messages out and get patients to a website and then finally to improve capacity, it's all about sleep sync and improving our tools to allow physicians to manage more patients efficiently.

It's a combination of all of the programs, that's really showing the return and what gives us optimism going forward.

I appreciate it thanks.

Thanks Ravi.

Thank you.

And I show. Our next question comes from the line of Larry <unk> from Wells Fargo. Please go ahead.

Hey, Tim.

Rick Thanks for taking the question I'll Echo my congratulations on another really really strong quarter here.

Tim I guess I'd love to get your thoughts.

Hear your latest thoughts on the <unk> data we saw this quarter I know, it's early but love to hear your views of what.

What we should be.

Think about that.

Absolutely.

It's kind of difficult to interpret because the data that was released really wasn't too extensive it was just kind of high level.

Feedback just talking about the primary outcomes, but it did appear that they had some success in certain populations.

And we're not quite sure what the Venn diagram intersection is between indicated patients for our future at Nevada versus.

Inspire is so we're confident that in the end.

Our pharmaceutical to treat sleep apnea will really be a positive for us.

I think we need to kind of highlight that it's still many many years before the final indication will be identified as certainly before any kind of pharmaceutical solution would be approved by the FDA, but we think it's more to the mild to slightly moderate that would be tend to be more <unk>.

A metric to inspire which is more moderate to severe.

Patients, but again, it's encouraging for the overall field thats encouraging.

The sleep apnea patients I think it will create an extensive amount of awareness.

For which we will we will be there to be able to take care of the patients who are looking for and indicated for inspire.

Thanks and just.

Quick one quick one for me on the last call.

When I asked about the AHRI. The BMI increase you said it would increase the total market by about 20% I don't think downs was included in that but is that still how youre thinking about those three indications increasing the total addressable market by about 20%.

So but that again is our target our Tam our charter market and that is such a large number it really gets down to how do we reach those patients how do we build capacity to serve that population, but it certainly is an expansion right along the lines that you highlight there Larry.

Alright, thanks for taking the questions guys.

Thank you.

And I show. Our next question comes from the line of Adam meter from Piper Sandler. Please go ahead.

Hi, Tim Hi, Rick Thank you for taking the questions and congrats on the nice quarter.

I wanted to start off by asking about <unk> and if I heard correctly I think you said, 23% of your U S centers are now.

Do you have a.

Our procedure volume mix that you can share between the two different settings of care curious if youre seeing better throughput in one setting versus the other and then just as we look ahead.

How do we think about where the ASC mix could go in the future both number of centers and volumes.

Absolutely I think the number of <unk> was really a good avenue during the Covid challenge timeframe for physicians to open up an additional site of service to be able to take care of the patient because they can control the scheduling there a little bit better and provides another level of flexibility in it.

Again goes to the the opportunity to increase <unk>.

<unk> at center. So there is some.

Flexibility in the.

Scheduling there don't have the exact number of procedure mix that are conducted in the ASC versus.

Hospitals, setting our outpatient part of a hospital session but.

I think it's probably slightly less than the 23% of our overall number overall number of centers.

Got it and then I guess just as you look ahead, Tim any any color on how that mix could evolve and then I had one quick follow up thanks.

Absolutely we did get the final reimbursement numbers that were published.

During our call and the good news for US is the ASC payment the National average Medicare payment was increased to over 25000.

And last year. It was below 25000 like 24800, so thats a little bit of positive more positive momentum from that standpoint.

Hospital payment is.

Down less than $100 or less than several hundred dollars. So.

Really good news from a reimbursement standpoint by the way that it did not.

<unk> is a new level of 6% APC, but I think overall the reimbursement is becoming such that it is going to be acceptable for ASC to be able to provide the therapy, especially when you look at the commercial Medicare mix and so it just it continues to open a door for us to add more.

More ASC and in the future I think it will be.

Appropriate place to do the inspire procedure, especially when we go to.

Inspire five when we're talking about eliminating one of the the leads itself to lead and incorporating that inside the can so I think it'll be an ongoing trend for years to come.

Very helpful. Tim Thank you and it's actually a nice segue into the follow up just on the the.

The Gen five stimulator I think I heard you say, it's still tracking to late 'twenty three.

I was hoping you could just kind of flush out a little bit more detail.

Exactly where that system is.

Today.

Its needed to do prior to submission and just kind of how to think a little bit more about timelines and granular detail. Thank you.

Absolutely we have to complete the qualification testing the production qual.

We have a lot of testing to do we have to complete all of the.

Production test equipment and have that all validated and have the entire package ready to go to the FDA and the FDA gets a significant amount of time to review.

This package, especially being a class III active implantable medical device. So we'll come a lot of very good it's going to be tight to get this package submitted in the beginning of the year to target the approval late in 2023, but we're still working very diligently.

Diligently to be able to do that but we do we're confident in the current design, but we have to do all the proper steps to make sure that qualification testing is.

All completed correctly properly and documented and then <unk>.

Packaged and sent to the FDA for their review.

Thank you.

Okay.

Thanks, Dan.

Thank you.

And I show. Our next question comes from the line of Chris Pasquale from me from Research. Please go ahead.

Thanks, Hey, Tim Hey, Rick.

It's hard to see it from your numbers, but I'm curious to what extent you're running into any issues with staffing at hospitals or physicians.

August .

It's something we hear a lot about on your peers calls, but not yours.

<unk> center productivity to be even better than we're seeing in staffing was better or you just figured out ways to work around it without it really holding the business back.

Well couple of things, we certainly one of our staffing challenges.

Is.

Having people at the office.

Directly accept phone calls from adviser care program right.

After the chest don't have people sitting in their answering the phone towards looking at developing techniques and technologies to improve our connection with MTF is thats, probably our biggest staffing challenges.

Hospitals afcs have staffing challenges there is no question Novartis. The good news is as.

As you know we have line et cetera patient the worst scheduling out probably four or five weeks in advance. So we're just a little ahead of the game to be able to get our cases schedule and to be able to take advantage of the open block times. When we have them. The second advantage. We have is if a physician has two cases.

<unk> in a day with the reduced overtime. They can oftentimes kind of add in a third case in that same day. So we just have different levels of flexibility to be able to improve the utilization, but as I mentioned before our capacity continues to be.

Our limiting factor and we need more of our time, we're working with the E&ps to get that and we're also looking at opening additional centers and one of the avenues as to continue to open ASC that give the emts and additional.

Outside of service, but Youre correct, no we don't specifically site.

Or staffing it is an issue.

That's helpful.

And then the guidance for this year calls for a ratio of center adds to rep hires of about five to one so far youre running at closer to three to one just curious why that's been a little different than you thought or is it a function of just opportunistic hiring and you're seeing a lot of great candidates to add to the sales force or you're expecting to add more sites.

So far yes.

I guess as a combination thereof at as being opportunistic and planning forward, but with that we've been able to increase the utilization at existing sites.

Such that we can purposely.

Lower the number of centers that each individual territory manager of managers.

And allowing them to become more productive and then as we did the price increase remember last.

Last quarter were slightly in.

In the midrange for opening new centers, and I think that was maybe a little bit of a.

Effect on it but for the most part it's just being opportunistic and forward planning.

Great. Thanks.

Thank you.

And I show. Our next question comes from the line of Rich <unk> from <unk>. Your line is open.

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

Wanted to I wanted to focus a little bit on the P&L R&D.

Came in a bit higher than we modeled SG&A was a touch lower.

On the margin.

Percentage of sales as well so just how should we think of these two items going forward should we think of R&D staying at elevated levels. I know you have a lot going on with your gen five and remote patient monitoring.

Into next year, and then I have a follow up on gross margin.

Yes, I think R&D is a little bit of a timing in the third quarter, because we completed several projects, but that being said we have a lot of activity with the whole sleep digital system, that's going to really help utilization down the road. The inspire five is right in the middle of the qualification testing and we're building up.

All the qualification units. So it is an expensive time of.

That overall project, so it's going to stay a little bit high right now, but it's important to.

For their future prospects with the patient so we're going to continue that activity and then gross margin as Rick talked about earlier, we did the.

Right off of the excess inventory from the Silicon based leads.

And the Bluetooth remote.

Okay, I guess before getting the gross margin, though on the SG&A side, I mean, you generate a little more leverage I think the unusual there.

Louis margins with the exception of <unk> 'twenty, one that I can see for SG&A. So do we just kind of think of R&D remaining a bit elevated and youre starting to get some leverage on SG&A or or.

Should R&D remain elevated and SG&A comes back and then I do have a follow up on the gross margin.

Yeah, Hi, rich its Rick.

Yes, we have demonstrated some improvement in leverage but.

We're not really focused on.

On profitability, we know what's important but.

I would maintain we will continue those investment levels for R&D going forward, but we will continue to get some improvement on the SG&A line as we continue to.

<unk>.

Expand our commercialization is because we're so early in those efforts we want to focus on the top line.

Okay, Great and then just on gross margin.

Just could you comment a little bit.

The supply chain and what you may be having to do on the spot market or chip component parts, how much safety stock do you guys carry on hand at the right level and when you talk about returning to 85% gross margin as you move into 2023 or eventually.

Whats being contemplated in there if anything for potential.

Supply chain disruption.

Right. So we talked about this in our Q2 call that that we would potentially sometime in the second half of the year have some obsolescence charges with the introduction of our new products and that occurred in the third quarter, we don't expect to have additional.

Charges in the fourth quarter and so.

The amount of the charge was about 260 basis points, but in addition, there are some some higher prices for other components.

But also.

We're trying to have a.

A larger number of days of inventory on hand.

Its challenges, but we're continue to fight through it and our team they are monitoring it closely and managing the issues on a daily basis, so with that said.

Gross margin will be higher in the fourth quarter, and we're still sticking with our guidance of $83 to 85 for the full year and then that coupled with the continued increase in our ASP from our from our price uplift that longer term, we expect to be around 85%.

Okay. Thanks, a lot.

Thanks Rich.

Thank you.

And I show. Our next question comes from the line of Phil Coover from Goldman Sachs. Please go ahead.

Yes, I think that was me. Thanks for taking the question guys. A few clean up items, if I could I didn't hear much about the MRI compatible approval to happen early in the quarter I know backlog kind of lead times for patients are a little bit extended right now but is that something you heard feedback on from from our sales force and kind of.

What's the early indications of the benefit that youre going to see there.

Yes, thanks for bringing that up.

Great success for the team to be able to get the full body MRI really puts ease of mind to the patients concerned about having a future.

MRI and I think it's probably still pretty early in that the timing it takes for us to schedule. The cases as such that those patients will be just coming through.

In the near future, but very very promising and we're doing additional work to even expand that further we will certainly be inclusive with inspire five when that is approved.

But very.

Very important approval and does really help patients.

And patient flow.

Okay.

Really helpful and any kind of line of sight or quantification of the amount of patients that are going to be coming through relatively short order or is that a noticeable impact on <unk> or is it kind of a longer term.

The longer term to really have a big impact because of the significant number of.

Patients we have in the pipeline through our direct.

Consumer approach, so it's hard to kind of distinguish specifically, which ones, we're holding back because of MRI, but it's certainly a positive going forward.

Okay. That's helpful.

No not too much discussion on the international side I know that currency is a headwind, but it looks like 10 points might have been down a little bit as well just any comments on western Europe anything one time or vacation I know it was talked about a lot at the end of <unk> and anything you'd call out in Western Europe for the commercial efforts internationally. Thanks.

In the first quarter, we did have COVID-19.

It is pretty strong in the first quarter, we saw good rebound in the second quarter to cover a lot of the first quarter cases third quarter always has a European vacation I think.

Europe , probably hasnt rate more than the U S. But so there's always a seasonal seasonality with that I think the key is in Germany. We did have new guidelines come out in regards to where oral appliances are between CPAP and inspire and our teams kind of working with the physicians to be able to get the <unk>.

<unk> documentation.

In place to be able to take that out, but I think Germany is still doing very very well, it's still makes up the bulk of our business, but we're seeing really good activities in the Netherlands were opening up additional centers. We as we've mentioned France is a highlight with their new reimbursement, we've opened up the UK and our training additional center there.

And then not to mention Switzerland, Austria.

A lot of strong activity there.

So the German situation it sounds more like a potential deferral kind of air pocket situation with the oral appliances that's fair.

Exactly in those patients is still there we know or the appliance indication does not match.

Inspire and inspire teach treats the again the moderate to severe.

That's that's not a group that can be treated with oral appliances. So again. It just takes time to be able to work through the documentation, but again I don't think Germany was up that much anyways, but thats one of the challenges that we have to work with all of our sites there.

Okay, alright, thanks, a lot them congrats on the quarter Scott.

Thank you.

And our.

Our last question comes from the line of Suraj Kalia from Oppenheimer. Your line is open.

Good afternoon timber could you hear me alright, yes.

Yes, Suraj how are you.

Congrats on a great quarter.

Tim you mentioned.

Out of the new sites and I'm paraphrasing here, you're pushing to have them do.

Multiple cases per month.

Tim maybe if you could characterize the 844 overall installed base.

One person to fill is currently doing multiple cases per month.

Oh, that's a really good question.

We don't have the specific numbers in front of us, but we know that that top quartile of those are the centers that are doing 100 implants per year.

The next quarter or those that are doing Bob you're about two per month. So it's hard to kind of argue how many of those but.

In the in the area of if you could just kind of column quadrants right.

And our half of them being productive and and the other half underway there.

Got it.

Jim.

In terms of DTC I know I'd asked this question many quarters ago love to get your perspective now.

How do you have now defined our rely.

Tcf worked in a given region.

Specifically.

Im also trying to look are there any regions, where that has demonstrated so sustainment in that region. I E. You don't need to do any advertising or target that the region. It's it's a well oiled machine and it's on its own.

Yes, we do have examples of that because as we continue to grow their brand.

And really tie in with other sleep position to be in partnership with the E&ps and we start to get more of a natural physician referral. There are certain areas that do demonstrate that that being said suraj, we still do national.

TV, so it's really kind of hard to isolate specific areas to be able to do that evaluation, but we do know that's an important part the other side of direct to consumer is patients may see an AD. They will come to the website. They will be educated but they won't necessarily go through the adviser care program.

Because they want to speak to their Doctor first and so there is a lot of patients that will indirectly come through the branding and be able to be part of a direct referral from our position or from a sleep physician, even private practice. So I think you'll see that trend continue to change and we're very happy with the return.

We know it's driving slowed to the website, we know it's influencing patients.

Also influencing private practice physicians in their education of inspire and the awareness of the brand.

And it's influencing sleep physicians, because that's such an important part of our business going forward.

Yes.

Are there any staffing issues.

Specifically on the on the sleep lab side of the equation.

If you could talk about thank.

Thank you for taking my questions. Thank you Suraj and thank you for asking that question. Yes. There is and the key is we need to develop tools to make it easier for the sleep physicians to manage more patients that by definition is what we brand sleep sync and this is a patient portal.

That allows them to be able to work remotely with patients because of the new remote allows us to upload data.

From the implanted product amphora remote via the patient smartphone to the sleep sync system.

And we are working.

Towards getting to remote patient programming to really make it more efficient for a sleep physician to be able to manage more patients and then finally, we partner with two of our minority investments are normally Ansar data and these are players that help build efficiencies with.

Sleep, because not only do we need to work capacity with E&ps, but we also need to work efficiencies with the sleep physicians. So very very good question. Thank you very much.

Thank you.

I show no further questions in the queue. At this time. This concludes the Q&A session for the conference I would now like to turn it back to Kim for any closing remarks.

Thank you very much just one final comment.

Want to thank you all for joining the call today as always.

We are grateful to the growing team of dedicated inspire employees for their enthusiasm hard work and continued motivation to achieve success and consistent patient outcomes.

It's very 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 Asia 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. Please stay safe and healthy. Thank you very much.

Thank you. This concludes today's conference call you may now disconnect.

Okay.

So.

<unk> team of dedicated inspire employees for their enthusiasm hard work and continued motivation to achieve success and consistent patient outcomes.

The team's commitment to patients remains.

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Good afternoon, My name is <unk> and I'll be your conference operator today at this time I would like to welcome everyone to the inspire medical systems third 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.

I'll ask a question. During this session you will need to press star one on your telephone you will then hear an automated message advising your hand is race.

I'll now hand, the conference over to your first Speaker <unk> <unk>, the Vice President of Investor Relations at inspire you may begin the conference.

Thank you Joanne and thank you all for participating in today's call. Joining me are Tim Herbert President and Chief Executive Officer, and Ricky Ho Chief Financial Officer.

Earlier today, we released financial results for the three and nine months ended September 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 outlook and improvements in market access are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ accordingly, you should not place undue reliance on these statements.

Please see our filings with the Securities and Exchange Commission, including our quarterly report on form 10.

Form 10-Q filed with the SEC today.

For a description of these risks and uncertainties.

<unk> disclaims any intention or obligation except as required by law.

Date, or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.

Conference call contains time sensitive information and speaks only as of the live broadcast today November one 2022 with that it is my pleasure to turn the call over to Tim Herbert Ken.

Thank you Ed scheme.

Thanks, everyone for joining our business update call for the third quarter of 2022.

We are excited to again report on a very strong quarter with significant progress across all elements of our business.

As always in right upfront, we again reiterate our commitment to patient outcomes to ensure that each patient has the best possible experience with inspire therapy.

During today's call we will highlight many key accomplishments that demonstrate our ongoing focus to the patients including improvements in access to therapy technology advancements introduced and in development.

And planned activities to broaden the population that can benefit from inspire.

With that let's review our results.

In the third quarter, we generated revenue of $109 2 million.

Representing a 77% increase compared to the third quarter of 2021.

We remain confident in the outlook of our business for the remainder of 2022.

And therefore, we are increasing our full year revenue guidance to a range of $384 million to $388 million from our previous guidance of $354 million to $362 million.

This guidance represents an increase of 65% to 66% over full year 2021 revenue of $233 million.

Our growth continues to focus on and is driven by utilization improvements at existing sites as well as the activation of new centers.

We will continue this balanced approach to growth and highlight that in the third quarter utilization improved significantly at existing centers and was the leading factor in growth during the quarter.

We further increased our capacity by adding 59, new implanting centers ending the period with a total of 844 centers.

At the end of the third quarter ambulatory surgical centers made up 23% of our U S centers.

Regarding the U S sales team, we created 18, new sales territories in the third quarter, bringing our total to 209 four.

For the fourth quarter, we continue to expect to add 11% to 12 new territories.

We also increased the number of field clinical representatives by adding nine ending the third quarter with 109.

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.

And eight area Vice presidents.

We expect increased productivity from the team, resulting in additional inspire procedures, while maintaining and improving patient outcomes.

Paramount to this is in 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 nine months of the year the number of visitors to our website was over $10 million, an increase of 98% year over year.

And from these visits we had approximately 60000 physician contacts.

Of note.

These physician context represent calls and E mails to our adviser care program or directly to a physician's office and do not include participating participation in community all tax or referrals directly from a patients health care provider.

In the third quarter, we refined our national TV advertising campaign to improve reach and a more efficient manner.

Through our ACP, we closely monitor the success rates of connecting patients with healthcare providers and are continuing to develop and implement technology advancements to further streamline this process.

From a euro U S reimbursement perspective.

We do not expect any major changes when the final <unk> rules are released today.

The most pressing topic was the addition of a level six neuro APC or ambulatory procedure code.

Which was.

Proposed to be implemented back in July , but if this were reversed.

Would expect that inspire would be included as part of this new APC.

From a site of service or physician reimbursement, we had very little change from the July proposed rule and do not expect any material changes when the final rule is released.

Moving on.

During the quarter International revenue was less than 3% of global revenue, reflecting the significant growth in the U S market.

There are many positives in our international business and I'd like to start by highlighting France.

Following many years working with the French authorities, we have been approved for countrywide reimbursement at rates consistent with those are established in other countries around the world.

Therefore, we are in the final process to have inspired listed on the French registry as early as the beginning of 2023 and the team is preparing for commercial launch in that country.

In Singapore, we are building momentum with additional procedures at our flagship centers, which are on track to become regional centers of excellence.

The adoption in Japan remains slow.

But we are energized by the recent activity primarily with the scheduling of procedures at new sites.

Further we have hired a full time country manager in Japan to oversee activities and support the growth of awareness and adoption of inspire therapy.

Turning to R&D.

We are very excited about our new Bluetooth enabled patient remote which we recently launched this new remote is a key part of our next generation.

Our next generation inspire digital platform branded sleep sync, which enables remote therapeutic monitoring.

The new patient remote and a web based patient management portal.

Please note that we previously described the sleep sync as inspire cloud.

We expect the sleep sync digital health platform will become an important tool for physicians to monitor patient experiences and outcomes.

Before year end, we plan to submit our upgraded physician programmer for FDA review this new programmer connect with sleep sync and is key to the next step of providing remote patient programming.

Also in the third quarter, we began the commercial launch of our new Silicon based stimulation and setting leads which provide improved manufacturer ability easier system implantation increased long term performance and enhanced reliability.

Longer term, we continue to work on the design of our fifth generation inspire neurostimulator.

Inspire device device.

Eliminate the pressure sensor and incorporate setting inside the neuro stimulator using 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.

To this end two key regulatory submissions were sent to the FDA to expand the inspire indication.

We submitted a request to approve inspire for the pediatric population with down syndrome.

We have been working with the physician for quite some time to collect sufficient clinical evidence to support approval for this important group of kids.

The second request is to increase the upper limit of our indication to include patients who have in Avenir hip hop Nick index of up to 100 events per hour. The current indication is approved for patients with nahi of up to 65 events per hour.

In this same submission we also requested approval to modify the warning for patients with a body mass index of up to 32.

And with our current data we submitted a request to the FDA to increase the BMI warning to patients with a BMI of up to 40.

With this second submission the FDA provided a breakthrough device designation, thereby reducing expected review time.

Our core focus for 2022 remains increasing utilization at our existing centers.

As well as increasing capacity by opening and training new centers.

The continued expansion of our call center and investment in our DTC campaign.

These initiatives.

We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive 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 third quarter of 2022 was $109 2 million a 77% increase from the $61 7 million generated in the third quarter of 2021.

On a sequential basis revenue grew 19% compared to $91 4 million in the second quarter of 2022.

U S revenue in the third quarter was $106 3 million, an increase of 82% from the $58 3 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 a higher number of territory managers.

On a constant currency basis outside the U S revenue declined 2% year over year, while on a reported basis revenue decreased 14% from the prior year period to $2 9 million due primarily to a 12% reduction in foreign currency exchange rates.

The U S average selling price in the third quarter was 24400 compared to 23900 in the prior year period.

The increase reflects our price uplift that began in may.

We expect U S 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 2500 during the quarter compared to 23500 in the third quarter of 2021, which.

Which was driven by unfavorable exchange rates.

Lower asps for distributor sales in Asia.

Gross margin in the third quarter decreased to 81, 9% compared to 86% in the prior year period.

Due to inventory obsolescence charges and higher cost of certain component parts.

As we previewed on our second quarter call. The introduction of the new silicone leads and the new Bluetooth enabled patient remote remote.

Resulted in an inventory obsolescence charge of $2 8 million, which we booked fully in the third quarter.

We do not anticipate additional inventory charges related to these new product introductions, and therefore expect gross margin in the fourth quarter to be higher than the third quarter.

Though still impacted by higher cost of certain component parts.

For the full year, we continue to expect gross margin.

Between <unk>, 83% to 85%.

Longer term, we expect gross margin to return to prior guidance levels of about 85%.

Total operating expenses for the third quarter were $106 6 million, an increase of 70% as compared to $62 9 million in the third quarter of 2021.

This increase was due to the expansion of our sales organization increased direct to consumer marketing programs continue.

Continued product development efforts and 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 third quarter was $16 8 million compared to $10 3 million in the prior year period.

The net loss per share for the third quarter was <unk> 60.

Compared to the net loss per share of <unk> 38 in the third quarter of 2021.

The weighted average number of shares outstanding for the third quarter was $28 2 billion.

We anticipate that the weighted average number of shares for the fourth quarter will be approximately $28 9 million.

Moving to the balance sheet, we ended the quarter with cash and investments totaling $428 million.

During the quarter, we completed an equity offering with net proceeds of $244 million and paid off our $20 million of outstanding debt.

As of September 30, we had no remaining debt.

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 in recent implant trends provide us with confidence in the outlook for the remainder of the year.

With that our prepared remarks are concluded.

You May now open the line for questions.

Thank you Sir.

As a reminder to ask a question you would need to press star one one on your telephone.

Please standby, while we compile the Q&A rosner.

And I show. Our first question comes from the line of Travis Steed from Bank of America. Please go ahead.

Hey, congrats on a great quarter again.

I guess looking at looking ahead, maybe just talk about puts and takes on 2023 would be helpful. At this point.

$50 to 62 centers add per quarter is the right way to think about it and we should see continued increases in utilization as well I know the street that 35% revenue growth right now and just curious if thats a place you're comfortable with at this point as well.

<unk> insurance plans in the fourth quarter, we always expect a normal seasonality as we move into Q1, we will continue to drive utilization. We think we have further upside there.

Just we can need to continue to work capacity and efficiencies and help that patient flow through the centers, but we need to continue to keep adding additional centers to so we'll keep that balanced growth from that standpoint, we'll continue to add territory managers in line with a cadence for which we have been.

Running for many years now and the exciting news is we will continue with our improvements and.

Product development and release of new technologies, specifically around the sleep sync system.

Okay, that's fair any any comment on that.

The street is that today would be helpful. As well just a follow up to about and then I had a question on the Opex.

Which has been growing roughly in line with revenue growth just I guess the question is can you keep spending at this level and why not move forward, we will start to see a little bit of a divergence between revenue growth and opex and a little bit better operating margins.

Absolutely we will get into the Q1.

Annual revenue plan at a later date, but getting into the the Opex R&D was high in the quarter, because we had several <unk>.

Very key accomplishments, primarily with the silicon based needs with the new remote and as well as progress with the inspire five device moving into qualification and that more of a timing and some of the R&D charges. So we think we'll be able to manage that moving forward, but again.

Great quarter with significant significant accomplishments with with the R&D line.

Okay, great and congrats again on the good quarter.

Thanks Travis.

Thank you.

And I show. Our next question comes from the line of.

Jon Block from Stifel. Please go ahead.

Great. Thanks, guys and good afternoon.

Jim maybe just help us out a lot of good detail in the press release sort of around your initiatives.

To expand the market, but can you just give a little bit more granular on the next steps on the move from the BMI call. It.

Up to 40, and any timing with the FDA and then I'm. Just also curious any feedback from the industry. The industry sponsors want to move the BMI from 32% to 40 are you hearing any feedback from the E&P is going down that road and then I've just got a shorter follow up.

Absolutely I think the.

The primary driver.

We're the first submission with the pediatric population with down syndrome has been long coming as we discussed before we wanted to work with the FDA in a position to get a broader.

Indication, but we don't think Thats fair for that population and we did have the evidence to be able to support that credit goes out to mass eye and ear for their persistence and collecting this clinical evidence.

That has gone to the FDA. So we're very excited about being able.

To help the kids.

The HII is a good win rate because patients with IHI above 65 up to 100 really don't have any other options and we would try to work with those patients to try and get a prior authorization approval off label, but.

It's always up to the scrutiny of the insurance payers and certainly it's a problem with with Medicare. So we think thats going to be a very streamlined straightforward approach.

Going to BMI will be a little bit careful with that and I remember that's not an indication that's only a warning and for a patient with a higher BMI. They still cannot present with complete concentric collapse.

At the level of the soft palate, and we use a sleep endoscopy sleep endoscopy to be able to come.

Managing that but it certainly does open the door to to expand the coverage with Medicare as with the commercial payers to get above a BMI of 32 or a BMI of 35.

You're usually mid 20% <unk> could you just help us out here or is this just a function of.

Typical inspire conservatism or is there anything to call out of what you may have seen exiting <unk> into the month of October .

Gives you a little bit more pause thanks for the time guys.

Really no no pause John I mean, we haven't changed our guidance strategy. We're excited about the future of continuing to focus on increasing utilization at existing centers and adding new centers.

As well as the other drivers we talked about with trying to improve our conversion with ACP and various initiatives that we are implementing there so.

We're excited at the opportunity, but we always put forth guidance that we can stand behind.

Fair enough thanks, guys.

Thanks, Chad.

Okay.

Thank you.

And I show. Our next question comes from the line of Robbie Marcus from Jpmorgan. Please go ahead.

Oh, great. Thanks for taking my questions and congrats on a nice quarter.

Amit.

Maybe to start this.

Going back on my math, it looks like your best.

Quarter of units per Rep utilization per center.

How it fills out across the user base would be helpful.

Yes, I don't think any.

Single digit number of centers would ever be able to move the dial that we're seeing it's an across the board.

Focus and it's multifactorial I think the.

Going back to the two incision going back to the new CPT code with stable reimbursement consistent payment levels and allowing sir.

Surgeons to dedicate more of their time to be able to provide inspire implants is what's really driving the utilization we've always had the patience.

Accounts that doing multiple cases.

In a month, because that's what drives proficiency and it also drive improved patient outcomes, because the whole practice is more efficient and managing the patients being able to.

Focus on patient flows with centers and continue to add or block time and overall capacity.

Great maybe a follow up to that.

Now annualize the <unk>.

<unk> C Pap recall or.

Or at least the startup that you've had what 10 months now.

Your national advertising program, how much of a durable tailwind do you think this is do you think the interest will continue to grow over this time in any kind of.

Metrics, you could put on how well the national program advertising program has.

Has paid back for you.

And.

Any way to size the benefit of the CPAP recall, thanks, a lot guys.

Again, we're going to we're going to be consistent with what we said about the CPAP recall, we don't think it has a significant.

Significant impact we know those patients that are coming through the pipeline.

That have been affected by that but we don't think its a key.

Tailwind or future headwind for our business. We know that there is a significant amount of patients who are simply unable to benefit from CPAP and who are coming through.

Outreach program and coming through the adviser care program and looking for inspire so we think thats really important I think from the beginning of the year when we.

<unk> started the national TV campaigns, we saw.

A real strong bolus of interest because the beginning of the year. We are out in every market in the United States and Thats a lot of markets that haven't seen any.

Messaging from inspire and the path. Since then we go to a rotational program and various regions still nationally.

But most recently, we're starting to go to a more advanced.

Kathy if were going to higher level.

Programming as an example, you may see us on the today show Good morning America.

It's a combination of all the programs, that's really showing the return and what gives us optimism going forward.

I appreciate it thanks.

Thanks Ravi.

Thank you.

And I show. Our next question comes from the line of Larry <unk> from Wells Fargo. Please go ahead.

Hey, Tim.

And Rick Thanks for taking the question I'll Echo my congratulations on another really really strong quarter here.

Tim I guess I'd love to get your thought.

Hear your latest thoughts on the <unk> data we saw this quarter.

No it's early but love to hear your views of what.

What we should be.

Think about that.

Absolutely.

It's kind of difficult to interpret because the data that was released really wasn't too extensive it was just kind of high level.

Feedback just talking about the primary outcomes, but it did appear that they had some success in certain populations and we're not quite sure what the venn diagram intersection is between indicated patients for a future app nomad versus where inspire us.

So we're confident that in the end.

Pharmaceutical to treat sleep apnea will really be a positive for us I think we need to kind of highlight that it's still many many years before the final indication will be identified as certainly before any kind of pharmaceutical solution would be approved by the FDA, but we think it's more.

More to the mild to slightly moderate that would be tend to be more complementary to inspire which is more moderate to severe patients, but again, it's encouraging for the overall field thats encouraging for the sleep apnea patients I think it will create an extensive amount of awareness for <unk>.

We will we will be there to be able to take care of the patients who are looking for and indicated for inspire.

Thanks, and just a quick one quick one for me on the last call when I asked about the AHRI. The BMI increase you said it would increase the total market by about 20% I don't think downs was included in that but is that still how youre thinking about those three indications increasing the total addressable.

Market by about 20%.

I think so but that again is our target our Tam our target market and that is such a large number it really gets down to how do we reach those patients how do we build capacity to serve that population, but it certainly is an expansion right along the lines that you highlight there Larry.

Alright, thanks for taking the questions guys.

Yeah.

Thank you.

And I show. Our next question comes from the line of Adam meter from Piper Sandler. Please go ahead.

Hi, Tim Iraq. Thank you for taking the questions and congrats on the nice quarter.

Wanted to start off by asking about <unk> and if I heard correctly I think you said, 23% of your U S centers are now.

<unk> do you have a.

Procedure volume mix that you can share between the two different settings of care curious if youre seeing better throughput in one setting versus the other and then just as we look ahead.

How do we think about where the ASC mix could go in the future both number of centers and volumes.

It goes to the the opportunity to increase.

Capacity at centers. So there is some.

<unk> in the.

Scheduling there don't have the exact number of procedure mix that are conducted in the <unk> versus <unk>.

Hospital setting our outpatient part of a hospital session but.

I think it's probably slightly less than the 23% of our over lumber overall number of centers.

Got it and then I guess just as you look ahead, Tim any any color on how that mix could evolve and then I had one quick follow up thanks.

Absolutely we did get the final reimbursement numbers that were published.

During our call and the good news for US is the ASC payment the National average Medicare payment was increased to over 25000.

And last year. It was below 25000 like 24800, so thats a little bit of positive more positive momentum from that standpoint.

Hospital payment is just down less than $100 or less than several hundred dollars. So.

Really good news from a reimbursement standpoint by the way that did not publish a new level six APC, but I think overall the reimbursement is becoming such that it is going to be acceptable for ASC to be able to provide the therapy, especially when you look at the commercial Medicare.

Mix and so it just it continues to open a door for us to add more ASC and in the future I think it will be.

Appropriate place to do the inspire procedure, especially when we go to.

Inspire five when we're talking about eliminate one of the the leads and sensing lead and incorporating that inside the cat. So I think it'll be an ongoing trend for years to come.

Very helpful. Tim Thank you and it's actually a nice segue into the follow up just on the Gen.

Gen. Five stimulator I think I heard you say it is still tracking to late 'twenty three.

I was hoping you could just kind of flush out a little bit more detail exactly where that system is.

Today, what's needed to do prior to submission and just kind of how to think a little bit more about timelines and granular detail. Thank you.

Absolutely we have to complete the qualification testing the production qual.

So we have a lot of testing to do we have to complete all the.

Production test equipment and have that all validated and have the entire package ready to go to the FDA and the FDA gets a significant amount of time to review.

This package, especially being a class III active implantable medical device. So we'll come a lot of very good it's going to be tight to get this package submitted at the beginning of the year to target the approval late in 2023, but we're still working very diligent.

Eligible to be able to do that but we do we're confident in the current design, but we have to do all the proper steps to make sure. The qualification testing is all completed correctly properly and documented and then package that set to the FDA for their review.

Thank you.

Thanks, Dan.

<unk>.

Thank you.

And I show. Our next question comes from the line of Chris Pasquale from me from Research. Please go ahead.

Thanks, Hey, Tim Hey, Rick.

It's hard to see it from your numbers, but I'm curious to what extent you're running into any issues with staffing at hospitals or physicians.

Well because this is something we hear a lot about on the appears calls but not yours.

Center productivity would be even better than we're seeing a staffing was better or you just figured out ways to work around it without really holding the business back.

Well couple of things, we certainly one of our staffing challenges.

Is.

Having people at the office.

Directly accept phone calls from adviser care program right. The ETF is just don't have people sitting in their answering the phone toward looking at developing techniques and technologies to improve our connection with MTF is that's probably our biggest staffing challenges.

Hospitals afcs have staffing challenges there is no question about it the good news is.

As you know we have line of sight to our patient the worst scheduling out probably four or five weeks in advance. So we're just a little ahead of the game to be able to get our cases schedule and to be able to take advantage of the open block times. When we have them. The second advantage. We have is if a physician has two cases.

<unk> in a day with the reduced overtime. They can oftentimes kind of add a third case in that same day. So we just have different levels of flexibility to be able to improve the utilization, but as I mentioned before our capacity continues to be.

Our limiting factor and we need more or time, we're working with the e&ps to get that and we're also looking at opening additional centers and one of the avenues as to continue to open ASC that give the emts and additional.

Site of service, but you are correct no we don't specifically site.

Or staffing it is an issue.

That's helpful.

And then your guidance for this year calls for a ratio of center adds to rep hires of about five to one so far youre running at closer to three to one just curious why that has been a little different than you thought or is it a function of just opportunistic hiring and you're seeing a lot of great candidates to add to the sales force or are you expecting to add more sites.

So far yes.

I guess as a combination thereof at as being opportunistic and planning forward, but with that we've been able to increase the utilization at existing sites.

Such that we can purposely.

Lower the number of centers that each individual territory manager manages.

And allowing them to become more productive and then as we did the price increase remember last.

Last quarter were slightly in.

In the midrange for opening new centers I think Dallas maybe.

Maybe a little bit of a <unk>.

Effect on it but for the most part it's just being opportunistic and forward planning.

Great. Thanks.

Thank you.

And I show. Our next question comes from the line of Rich <unk> from <unk>. Your line is open.

Alright, thanks for taking the questions and congrats on another great quarter.

So just wanted I wanted to focus a little bit on the P&L R&D.

Came in a bit higher than we modeled SG&A was a touch lower than on.

On the margin.

As a percentage of sales as well so just how should we think of these two items going forward should we think of R&D staying at elevated levels. I know you have a lot going on with your gen five and remote patient monitoring.

Into next year, and then I have a follow up on gross margin.

Yes, I think R&D is a little bit of a timing in the third quarter, because we completed several projects, but that being said we have a lot of activity with the whole sleep sync digital system thats going to really help utilization down the road. The inspire five is right in the middle of the qualification testing and we're building up.

All the qualification units. So it is an expensive time of <unk>.

That that overall project, so it's going to stay a little bit high right now, but it is important too.

For their future prospects with the patient so we're going to continue that activity and then gross margin as Rick talked about earlier, we did the.

Right off of the excess inventory from the Silicon based leads.

And the Bluetooth remote.

Okay, I guess before you think the gross margin, though on the SG&A side I mean, you generated a little more leverage I think the unusual there.

Margins with the exception of <unk> through 'twenty, one that I can see for SG&A. So do we just kind of think of R&D remaining a bit elevated and youre starting to get some leverage on SG&A or or or.

R&D remained elevated in SG&A comes back and then I do have a follow up on the gross margin.

Yeah, Hi.

Rich it's Rick.

Yes, we have demonstrated some improvement of leverage but.

We're not really focused on.

On profitability, we northern part but.

Would maintain we will continue those investment levels for R&D going forward, but we will continue to get some improvement on the SG&A line as we continue to.

Expand our commercialization is because we're so early in those efforts we want to focus on the top line.

Okay, Great and then just on gross margin Rick just could you comment a little bit.

Apply chain and what you may be having to do on the spot market or chip component parts, how much safety stock do you guys carry on hand is the right level and when you talk about returning to 85% gross margin as you move into 2023 or eventually.

Whats being contemplated in there if anything for potential.

Supply chain disruption.

Charges in the fourth quarter and so.

The amount of the charge was about 260 basis points, but in addition, there are some some higher prices for other components.

But also.

We're trying to have a.

A larger number of days of inventory on hand.

Its challenges, but we're continue to fight through it and our team they are monitoring it closely and managing the issues on a daily basis. So.

With that said.

Gross margin will be higher in the fourth quarter, and we're still sticking with our guidance of 83 to 85 for the full year and then that coupled with the continued increase in our ASP from our from our price uplift that longer term, we expect to be around 85%.

Okay. Thanks, a lot.

Thanks Rich.

Thank you.

And I show. Our next question comes from the line of Phil Coover from Goldman Sachs. Please go ahead.

Yes, I think that was me. Thanks for taking the question guys. A few clean up items, if I could I didn't hear much about the MRI compatible approval that happened.

Early in the quarter I know backlog kind of lead times for patients are a little bit extended right now but is that something you heard feedback on from from our sales force and kind of what's the early indications of the benefit that youre going to see there.

Yes, thanks for bringing that up.

Great success for the team to be able to get the full body MRI really puts ease of mind to the patient.

Concerned about having a future.

Brian I think it's probably still pretty early in that the timing it takes for us to schedule. The cases as such that those patients would be just coming through.

In the near future, but very very promising and we're doing additional work to even expand that further we will certainly.

Being inclusive with inspire five when that is approved.

But very.

Very important approval and does really help patients.

And patient flow.

Okay.

Very helpful and any kind of line of sight or quantification of the amount of patients that are going to be coming through relatively short order or is that a noticeable impact on <unk> or is it kind of a longer term.

Longer term to really have a big impact because of the significant number of <unk>.

Patients we have in the pipeline through our direct.

Consumer approach, so it's hard to kind of distinguish specifically, which ones, we're holding back because of MRI, but it's certainly a positive going forward.

Okay. That's helpful.

No not too much discussion on the international side I know that currency is a headwind, but it looks like 10 points might have been down a little bit as well just any comments on western Europe anything one time or vacation I know it was talked about a lot at the end of <unk> and anything you call out in Western Europe for the commercial efforts internationally. Thanks.

In the first quarter, we did have COVID-19.

Hit us pretty strong in the first quarter, we saw good rebound in the second quarter to cover a lot of the first quarter cases third quarter always has a European vacation I think.

<unk> documentation in place to be able to take that out, but I think Germany is still doing very very well, it's still makes up the bulk of our business, but we're seeing really good activities in the Netherlands were opening up additional centers. We as we've mentioned France is a highlight with their new reimbursement we've opened up the UK.

And our training additional center there.

And then not to mention Switzerland, Austria.

A lot of strong activity there.

So the German situation it sounds more like a potential deferral kind of air pocket situation with the oral appliances, that's fir exam.

Exactly.

Those patients are still there, we know or the appliance indication does not match.

Inspire and inspire teach treats the again the moderate to severe.

And that's that's not a group that can be treated with oral appliances. So again. It just takes time to be able to work through the documentation, but again I don't think Germany was up that much anyways, but thats one of the challenges that we have to work with all of our sites there.

Okay, alright, thanks, a lot Tim congrats on the quarter Scott.

You.

Thank you.

And our.

Our last question comes from the line of Suraj Kalia from Oppenheimer. Your line is open.

Good afternoon timber could you hear me alright, yes.

Yes, Suraj how are you.

Congrats on a great quarter.

Tim you mentioned.

Out of the new sites and I'm paraphrasing here, you're pushing to have them do.

Multiple cases per month.

Tim maybe if you could characterize the 844 overall installed base.

One person to fill is currently doing multiple cases per month.

Oh, that's a really good question.

We don't have the specific numbers in front of us, but we know that that.

That top quartile those are the centers that are doing 100 implants per year.

The next quarter those that are doing Bob you're about two per month, so hard to kind of argue how many of those but.

In the in the area of if you could just kind of column quadrants right.

And our half of them being productive and then the other half other way there.

Got it.

Tim.

In terms of DTC I know I'd asked this question many quarters ago love to get your perspective now.

Do you have now defined our ROI of your DTC effort in a given region.

Specifically.

So trying to look at there.

Any regions with that has demonstrated so sustainment in that region I E. You don't need to do any advertising or target that region. It's it's a well oiled machine and it's on its own.

Yes, we do have examples of that because as we continue to grow their brand.

And.

Kind of hard to isolate specific areas to be able to do that evaluation, but we do know that's an important part the other side of direct to consumer is patients may see an AD. They will come to the website. They will be educated but they won't necessarily go through the adviser care program because they wanted to speak to.

Third Doctor first and so there is a lot of patients that will indirectly come through the branding and be able to be part of a direct referral from our position or from a sleep physician, even private practice. So I think youll see that trend continue to change we're very happy with the return we know it's driving.

<unk> slowed to the website, we know it's influencing patient.

It's also influencing private practice physicians in their education of inspire and the awareness of the brand.

And it's influencing sleep physicians, because that's such an important part of our business going forward.

Are there any staffing issues.

Specifically on the on the sleep lab side of the equation that.

If you could talk about.

Portal that allows them to be able to work remotely with patients because of the new remote allows us to upload data.

The implanted product amphora remote via the patient smartphone to the sleep sync system.

And we are working.

Towards getting to remote patient.

Programming to really make it more efficient for a sleep physician to be able to manage more patients and then finally, we partner with two of our minority investments are normally Ansar data and these are players that help build efficiencies with sleep because not only do we need to work capacity.

With E&ps, but we also need to work efficiencies with the sleep physicians so very very good question.

Very much.

Thank you.

I show no further questions in the queue. At this time. This concludes our Q&A session for the conference I would now like to turn it back to Kim for any closing remarks.

Thank you very much just one final comment.

I want to thank you all for joining the call today as always.

We are grateful to the growing team of dedicated inspire employees for their enthusiasm hard.

Good work and continued motivation to achieve success and consistent patient outcomes. The asbury team's commitment to patients remains unmatched and is the most important element to our success.

Just 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 Asia 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. Please stay safe.

And healthy thank you very much.

Thank you. This concludes today's conference call you may now disconnect.

Q3 2022 Inspire Medical Systems Inc Earnings Call

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