Inspire Medical Systems, Inc.

Greetings, and welcome to Inspire Medical Systems' first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bobby Didd, with Life Science Advisors. Thank you. You may begin. Doug, thank you. And thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the first quarter ended March 31, 2020. A copy of the press release is available on the company's website. I'd like to remind you that on this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including without limitation, regarding the impact of COVID-19 on our business operations, financial results, and financial condition, investments in our business, our expectation that the vast majority of postponed inspirotherapy procedures will be rescheduled, full year 2020 financial and operational outlook, future positive insurance coverage of Inspire Therapy, and improvements in market access are based on 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, May 5th, 2020. And with that, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob, and thanks, everyone, for joining us today for this Business Update conference call. I trust everyone is staying safe and healthy as we work through this COVID-19 pandemic. At Inspire, We remain focused on the safety and well-being of our employees who continue to find innovative solutions to support inspired therapy and patient needs, even as we operate in a remote work environment. The good news is that we have restarted implants in Germany and in the United States. In fact, we have already conducted implants at centers in three states and have implants scheduled over the next couple of weeks in approximately 10 additional states. It will take time to ramp up to where we were at the beginning of the year, but we have had a significant number of patients who were either previously scheduled for the INSPIRE procedure and delayed, or who have received a prior authorization approval and have not yet been scheduled. With respect to our first quarter results, following an extremely strong January and February, The impact of the COVID-19 global health pandemic was felt through the postponement of substantially all implant procedures beginning in the second week of March in both the US and Europe. Our worldwide revenue in the first quarter of 2020 was 21.3 million, which was still an increase of 31% over the first quarter of 2019. Moreover, We have continued the prior authorization process to obtain approval during the current period. In addition, we continue to engage and educate physicians and patients through our online platform using virtual health talks and telemedicine. Finally, we also continue to engage patients through our refocused direct-to-consumer marketing strategies. Though our priorities here have shifted, from radio and TV and larger markets affected by COVID-19 towards more digital and TV in smaller markets. We will expand on each of these shortly. Given the rapidly evolving environment and the uncertainty regarding when and how quickly activities will resume at hospitals, we communicated a few weeks ago that we have withdrawn previously announced full year 2020 financial guidance. At this date, we remain unable to accurately estimate the impact of the pandemic on our business and financial results. Now turning to our operating results in the first quarter, we added 28 new U.S. implanting centers and ended the period with a total of 327. To qualify as a new center, the criteria has always been when the site completes training, has potential patients, and is ready to proceed with inspired procedures. As many of the new centers in process have also been put on hold due to the pandemic, the timing of them opening will vary state by state. We will continue to identify new centers, including ambulatory surgical centers, or ASCs, and focus on the training and contracting at these centers, and we will complete the process once they are again scheduling surgical procedures. Finally, recruiting additional ASCs will be a focus moving forward as the INSPIRE procedure is an outpatient procedure, and as we will discuss shortly, the reimbursement within ASCs has improved. We believe ASCs may provide some additional capacity for the surgeons, and many of our existing surgeons also have privileges at an ASC. I'd also like to highlight a national purchase agreement we entered into with 150 hospital systems that operates in 20 states and the District of Columbia. Inspire Therapy is offered in only a couple of their facilities today, and this agreement provides the potential for training many additional hospitals, as well as several ASCs operated by this system. Moving on. we created nine new territories in the U.S., which brings our total to 82. In addition, we added three regional managers and now have a total of 17 at the end of the first quarter. These new centers and territory and regional managers will have a positive impact on our long-term growth and will drive continued growth in therapy adoption. As we previously discussed, In order to focus on growing utilization at existing centers, we continue to increase the number of field clinical representatives, or FCRs, available for case coverage to provide training and implant support to clinical professionals. We ended the first quarter with 28 FCRs, up from 22 at the end of 2019. We intend to continue targeting regions that could benefit from additional FCRs, but until inspired procedures resume at a more normalized rate, we will limit the number of FCRs we hire in the near future. The switch gears to market access or reimbursement, where we continue to execute on our two key strategies, which are to expand the number of positive written coverage policies and concurrent with this process, continue to obtain individual prior authorizations. First of all, let me begin with the significant progress recently achieved with Medicare. I am pleased to report that during the first quarter, five of the seven Medicare Administrative Contractors, or MACs, issued their final local coverage determinations, or LCDs. which are effective and cover patients in 37 states. Just recently, Wisconsin Physician Services announced that their draft LCD will be formally issued and effective on June 14. That leaves just one MAC, Palmetto, which covers seven states in the southwestern part of the U.S. to issue their policy and we expect this to happen in the near future. Once published, these seven MACs will essentially have issued national coverage for the Medicare age population. There are approximately 40 million Medicare patients and an additional 20 million lives under commercial Medicare plans known as Medicare Advantage. In addition, we currently have 53 positive policies for inspirotherapy representing approximately 165 million covered lives. As a point of reference, we had approximately 83 million covered lives at this time last year. We expect that our momentum with these positive coverage policies will continue throughout to 2020. Now that we have a significant number of positive coverage policies, our focus turns to standardizing indications across these policies. For example, just today we learned that UnitedHealthcare published an off-scheduled update to our coverage policy, raising the BMI limit from 32 to less than 35, which is consistent with the standardized Medicare BMI indication. Our market access team will continue to work towards standardizing policies with other commercial health plans. Turning to the prior authorization metrics, as I noted earlier, we continued to prepare and submit prior authorizations throughout the quarter as we were able to work remotely with clinical sites and patients. As such, in the first quarter, our internal reimbursement team supported 929 prior authorization submissions. This compares favorably to the 722 submissions in the first quarter of 2019, and it's down only modestly from the 988 submissions in the fourth quarter of last year before the impact of the pandemic. In terms of prior authorization approvals, 761 patients received approval in the first quarter. This represents a substantial increase of over 71% compared to the 400 and 43 approvals in the first quarter of 2019. And despite the COVID-19 related disruption, it's a slight increase from the 751 approvals in the fourth quarter of last year. As a reminder, we will continue to report on these fire authorization metrics in 2020. But as we have said previously, our long-term goal is to reduce the burden of individual fire authorizations by working with commercial payers to develop positive coverage policies. Thus, given the growing number of positive coverage policies at commercial health plans, in addition to the progress achieved with Medicare, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. We do not intend to continue to report on them after this year. With the first quarter results presented, let's discuss how we are preparing for a more normalized operating environment. First, we have worked with all of the implanting centers to maintain a detailed list of all postponed cases and all approved cases that have not yet been scheduled. Once the impact of COVID-19 on the healthcare system begins to subside, we are highly confident that our business is well positioned for significant further growth. There are a number of key reasons for this. First, for previously scheduled procedures, we expect the vast majority of these to be rescheduled as these are patients who are clearly committed to finding relief for the obstructive sleep apnea. They have been through a sleep study, tried and failed CPAP, taken the time to learn about inspirotherapy, and are committed to moving ahead with our implants. we firmly believe that most of these patients will return to the schedule when it is possible to do so. Second, while some hospitals in certain parts of the US, like New York and New Jersey, have been inundated with COVID-19 patients, many others have not. Therefore, the postponement of a significant number of surgical procedures has been highly detrimental to hospital revenues. As such, we expect hospitals to be motivated to schedule more profitable surgical procedures as expeditiously as possible when they are able. Inspired therapy can certainly be considered a higher margin procedure for a hospital due to the reimbursement level for the implant procedure that is done on an outpatient basis. As a reminder, the national average Medicare payment increased to $29,000 of the beginning of 2020. Commercial reimbursement at centers is approximately 1.4 times the Medicare payment. Moreover, the average payment to surgeons for an Inspire implant increased $450 following the finalization of the Medicare LCDs. This increase is for the work to implant the sensing lead, which is the add-on code and previously did not carry any payments. the average Medicare reimbursement for the base code was approximately $600 to $800. And therefore, this $450 increase is significant for the ENTs. The other major change that the COVID-19 pandemic has mandated is the use of virtual tools and telemedicine to safely connect patients to healthcare providers. As I've noted earlier, During this time, we have continued our patient outreach program, albeit in a new manner. With stay-at-home orders, we limited spending on radio and focused more on digital communication, including Google Ads and Facebook. We leveraged a revised television campaign focused only on smaller markets and those not as significantly impacted by the pandemic. We also utilized our website to focus on the use of virtual tools and highlighted in the physician finder to identify which physicians are able to use telemedicine. Another key change was converting previously in-person community health talks to virtual health talks with the same effectiveness yet in a safe and convenient location. We believe many of these tools will remain effective even after the pandemic. In the first quarter of 2020, the number of visitors to our website was approximately 1.5 million, which is an increase of 69% year over year. In addition, there were over 14,000 physician contacts established via the website, representing an increase of 48% year over year. However, as we've said previously, even with all the web traffic, we believe a relatively small percentage of patients reaching out to the health care providers end up with an Inspire implant. Therefore, we initiated a call center concept called the Inspire Advisor Care Program. As a reminder, the primary purpose of this program is to assist patients in connecting them with the appropriate health care provider based on their specific needs, which in turn should improve our overall conversion rate. We are pleased with the results of the program in the initial two markets during the first quarter and have since expanded to an additional seven markets regarding our international activity. Patient flow was steady and improved from fourth quarter levels at centers in Germany and the Netherlands. In the Netherlands, implant activity resumed in the first quarter following the formation of the required oversight committee to review and approve inspired therapy cases. As in the U.S., all inspired procedures were suspended due to the pandemic, but the encouraging news is that cases have resumed in Germany in April, and we are hopeful the number of scheduled cases will increase throughout the remainder of 2020. We continue to drive towards a reimbursement decision in Japan and remain actively engaged with the authorities there. We remain confident in achieving a mutually agreeable solution, and while again delayed due to the pandemic, due to the COVID-19 pandemic, we recently met with the Ministry of Labor, Health, and Welfare to renew the documentation review. We also continue to achieve progress with regulatory authorities in Australia. We expect to receive regulatory approval in that country in 2021 and are working to obtain reimbursement concurrently, although we cannot assess the timing nor the effects from COVID-19. Here in the United States, we were excited to recently announce that the FDA has approved an expanded age range for the Inspired Therapy to include 18 to 21-year-old patients. as compared to the previous minimum age requirement for patients to be 22 years old. Based on our discussions with the FDA, we believe that this is the initial step in the pediatric approval process with the potential for further expansion to lower age groups. We will conduct additional research on the specific characteristics of OSA in the pediatric population, including continuing the ongoing clinical study for adolescents with Down syndrome. Switching gears again. You will note that our R&D expense has increased year over year in the first quarter as we continue to invest in enhancing our technology platform. The Inspire Cloud project, our cloud-based patient management system, continues to progress with the addition of many centers in the US and Europe who are using this tool. We intend to launch the INSPIRE app on patient smartphones shortly, which will take the next step in involving patients in the managing the OSA, as well as create interconnectivity through the INSPIRE cloud. We also have active projects to improve the physician programmer and the patient remote control. Longer term, the design activity for our fifth generation INSPIRE neurostimulator is ongoing. As I have said previously, we anticipate that this will be a multi-year effort to develop the INSPIRE V device and gain regulatory approval. We are actively conducting feasibility trials with several technology innovations, which will make the INSPIRE V neurostimulator state-of-the-art and expect that it will further improve the performance of the system, including simplifying the implant procedure. Importantly, The strong long-term fundamentals of our company that I've just reviewed are well supported by a solid balance sheet that was recently further strengthened by the successful equity financing which generated 124.7 million of net proceeds and closed in mid-April. We are appreciative of the support from all the investors that participated in this offering and intend to utilize this capital to continue executing on our growth strategy, which is primarily focused on the U.S. market and with the objective of first, increasing patient flow at existing centers, and second, training and opening new and planning centers. In summary, despite the negative short-term impact from COVID-19, we are very encouraged about the direction of our business along with our focus on improving utilization and our conversion rate, further advancements and reimbursement, including Medicare, that build upon our recent positive coverage decisions, a growing body of clinical evidence, and a robust R&D platform, we are confident that we remain well-positioned for the long-term success. With that, I'd like to turn the call over to Rick. for his detailed review of our financials. Rick. Thanks, Tim. As Tim noted, we were extremely pleased with our financial performance in January and February prior to the outbreak of the COVID-19 virus in March. For the first quarter of 2020, total revenues were $21.3 million, a 31% increase over the $16.2 million generated in the first quarter of 2019. U.S. revenue in the first quarter was 19.3 million, an increase of 34% over the 14.4 million in the first quarter of 2019. This increase was volume-driven from both existing territories and the addition of new implanting centers. In the first quarter, European revenue increased 9% to 2.1 million. Our U.S. average selling price in the first quarter was $24,000. compared to 23,400 in the prior year period. The European ASP was 22,300 during the quarter, which was consistent to the first quarter of 2019. Our gross margin in the first quarter was 84.6% compared to 82.4% in the first quarter of 2019. This notable improvement was primarily due to manufacturing efficiencies which led to cost reductions with our third-party contractors. Despite the ongoing COVID-19 pandemic, we have not experienced a disruption in our supply chain and maintain sufficient levels of inventory. Total operating expenses for the first quarter were $34.5 million, an increase of 56% as compared to $22.2 million in the first quarter of 2019. This planned increase was primarily due to the expansion of the U.S. and European sales organizations as well as increased direct-to-patient marketing programs, continued product development efforts, and general corporate costs. In light of the ongoing uncertainties, we are taking a thoughtful approach to our spending but expect operating expenses to increase as we continue to invest in these initiatives. Our net loss for the first quarter was $16.1 million, compared to a net loss of $8.2 million in the first quarter of 2019. The diluted net loss per share for the first quarter of 2020 was $0.67 per share, compared to $0.35 per share in the same period last year. The loss of revenue in March due to the COVID-19 pandemic negatively impacted the net loss in the first quarter, despite our improved gross margins. As of March 31, 2020, our cash and investments totaled $142 million, compared to $156 million at December 31, 2019. As Tim mentioned, on April 16, we completed a follow-on offering in which we sold 2.3 million shares of our common stock and received net proceeds of $124.7 million. We view this financing in the current environment, which included several top-tier health care investors, as validation of the significant long-term potential of our business. As communicated on April 13th, we have withdrawn our previously announced full-year 2020 financial guidance due to the rapidly evolving health care environment and continued uncertainties resulting from the impact of COVID-19. At this date, Inspire cannot predict the extent or duration of the impact on our financial results. We will continue to evaluate the impact of the COVID-19 pandemic on our business and intend to provide additional information in the future. The weighted average number of shares outstanding for the first quarter was 24.2 million. We anticipate the weighted average number of shares for the second quarter will be approximately 26.3 million. In summary, despite the recent impact of the COVID-19 outbreak, we are confident that the long-term fundamentals of our business remain solid. With our strong balance sheet, we are well positioned to continue executing our growth strategy and navigate through this challenging period. With that, we are concluded with our prepared remarks. Doug, can you please open the call for questions? Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session.

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