Inspire Medical Systems, Inc.

Greetings and welcome to the Inspire Medical Systems Incorporated second quarter 2020 conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead, sir.

Thank you, Operator, and thank you all for participating in today's call. Joining me today are Tim Herbert, President and Chief Executive Officer, and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the three and six months ended June 30, 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, operations, financial results, and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full-year 2020 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. See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10Q, 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, Tuesday, August 4, 2020. And with that, I'll now turn the call over to Tim Herbert. Tim?

Thank you, Paul. And thanks, everyone, for joining the call today for our second quarter of 2020 Business Updates. I'd like to begin by emphasizing how very proud I am of the INSPIRE team and how they stuck together through all of the challenges experienced during the second quarter, resulting in a strong close. More importantly, we are now in a very strong position to continue the ramp in the second half of the year. As expected, the impact of the COVID-19 global health pandemic was felt throughout the second quarter and with the postponement of a significant number of implant procedures in both the U.S. and in Europe. Even with these delayed cases, for the second quarter, our worldwide revenue was $12.2 million, which was a decrease of 32% as compared to the second quarter of 2019. We realize that COVID will be with us for some time, but our recent experiences have shown that health care providers have adapted and identified safe methods to continue to treat patients. In fact, with the recent surge in COVID cases, we have had only a few centers suspend inspired procedures. As such, implant activity has significantly increased over the last couple of months. To put this in perspective, at the end of April, only 2% of our centers were conducting implant procedures. At the end of May, this number increased to 24%. By the end of June, 51% of our centers were conducting implants. And while the data is early, it suggests more than 60% have implanted in July, and we are working with all centers to get them scheduling cases. We do know the great majority of centers are conducting office visits once again. This encouraging trend is provides us with confidence in the outlook for our business for the remainder of the year. Therefore, we are now able to provide new full-year 2020 revenue guidance of between $88 and $92 million. Of course, as you know, the operating environment for surgical procedures continues to evolve as COVID persists and even spikes in some regions. So while we are confident in our guidance, we will continue to monitor the impact of the pandemic. Rick will get into specifics later, but we are also reiterating our guidance on gross margins, as well as the key operating metrics of opening new centers and territories. Let's discuss what's driving our positive outlook for the business. At the core is the quick ramp of centers performing Inspire implants. as well as many patients in the process of receiving inspired therapy. During the pandemic period, the team remained focused and very active with healthcare providers to ensure that facilities and patients were prepared once cases were able to be scheduled. We previously discussed how we are concentrating on four distinct patient groups. The first group are those patients whose cases had to be postponed due to COVID, and we are achieving excellent success in rescheduling these procedures. The second group of patients had completed their workups and obtained insurance approval, but were not able to schedule their implant. And again, we are now successfully scheduling these cases. The third group of patients were unable to complete their final assessment due required for insurance prior authorization, which is the drug-induced sleep endoscopy. As you recall, all sleep endoscopy procedures were also postponed. The positive news is that all centers performing Inspire implants are also performing the sleep endoscopy procedures and therefore continuing to build their practices. The final group of patients are those new to Inspire therapy and whose initial contact with their healthcare providers was through newly adopted virtual tools, such as Community Health Talk on Zoom or Microsoft Teams, and their initial requirements were using telemedicine. The key focus of the Inspire team was to ensure that once we started implanting at centers, that the ramp could continue without facing any gap or slowdown of procedures due to not appropriately building the pipeline during the pandemic. What we're experiencing is that our patients are clearly committed to addressing their obstructive sleep apnea. They have been through a sleep study, tried but are unable to benefit from CPAP, taken the time to learn about Inspire Therapy, worked with their physician to ensure they're a good candidate, obtained insurance approval, and are now committed to moving ahead with the Inspire procedure. As we review some of the key initiatives from the second quarter, What was most critical for us was to stay active in educating new patients. Creating this awareness was largely due to the direct-to-consumer activities we continued during the quarter. With stay-at-home orders in place, we initially limited spending on radio and focused more on digital communication, including Google ads and Facebook. We leveraged a revised television campaign focusing on our smaller markets that were not as significantly impacted by the pandemic. During the latter half of the second quarter, we resumed radio and TV initiatives in our larger market as the impact of COVID lessened in those areas. We're also utilizing our website and virtual tools to help patients connect with physicians, and in many cases, through the use of telemedicine. In the first half of 2020, the number of visitors to our website was 2.6 million, which is a robust increase of 45% year-over-year. In addition, over 28,000 physician contacts were established via the website, representing an increase of 47% year-over-year. Moreover, in order to increase the percentage of patients reaching out to healthcare providers, resulting in an Inspire implant, we continued to expand our call center concept called the Inspire Advisory Care Program. As we've said before previously, the primary purpose of the Advisory Care Program is to assist patients in connecting with the appropriate health care provider based on their specific needs, which in turn should improve our overall conversion rate. We have seen positive results from the advisor care program to date, so we expanded it to include 77 centers and expect to continue expanding the program throughout the year. We also recently launched the Inspire Sleep app, which in combination with our Inspire Cloud is the basis of our digital patient management system. This system will continuously be enhanced And the first version of the app allows patients to learn about Inspire Therapy and connects them with an Inspire-trained physician. This past week, we launched the second version of the app, which interacts with Inspire Cloud and enables the collection of clinical data, such as patient quality of life and satisfaction questionnaires. So it is clear that the patient interest in Inspire Therapy remains high even during this COVID period. And beyond this, hospitals and physicians have lost significant revenues due to the pandemic and are motivated to schedule patients and get implants moving again. The good news here is that inspired therapy is considered a high-margin procedure for hospitals due to the reimbursement levels for the outpatient procedure. As we previously discussed, the national average Medicare payment increased to $29,000 at the beginning of 2020, and commercial reimbursement is approximately 1.4 times the Medicare payment. The proposed 2021 outpatient payments were released today, with a proposed increase of $850 to this code, if approved, which should be released in October. Moreover, as I said on our last call, the average payment to surgeons for an Inspire implant increased by about $450 following the finalization of the Medicare policies or local coverage determinations or LCDs. This increases for the work to implant the sensing lead, which is the add-on code 0466T, and previously did not carry any payments. the average Medicare reimbursement for the base code of 64568 was approximately $600 to $800, and therefore this increase of $450 is significant for the surgeons. The proposed 2021 rule reduces the base code surgeon payment by just $48 if approved. Let's stay with 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, the major accomplishment in the second quarter was the significant progress we achieved with Medicare. I am pleased to report that all seven of the Medicare Administrative Contractors, or MACs, have now issued and implemented their final LCDs, and Inspire has 100% Medicare coverage in all 50 states. There are approximately 40 million Medicare patients and an additional 20 million lives under commercially sponsored Medicare plans known as Medicare Advantage. The inclusion criteria in the LCDs are very consistent across the U.S., and provide some impactful changes such as increasing the BMI limit from 32 up to 35. In addition, we currently have 56 positive policies from commercial health care plans representing approximately 182 million covered lives. As a point of reference, we had approximately 125 million covered lives at this time last year. We continue to expect that our momentum with these positive coverage policies will continue throughout 2020. The most recent positive coverage decision was received from Cigna, which provides health insurance coverage for approximately 16 million members in the U.S. In the second quarter, our internal reimbursement team supported 566 prior authorization submissions. This compares to 735 submissions in the second quarter of 2019 and 929 submissions in the first quarter of this year. When the sleep endoscopy procedures were suspended back in March, this slowed the number of patients able to submit for an insurance pre-approval. As we mentioned, these patients are again scheduling their endoscopies and we have already experienced an uptick and prior authorization submissions. The news regarding prior authorization approvals is also positive. The approval rate has dramatically increased due to the large number of commercial insurance policies. In fact, 541 patients received an approval in the second quarter, which represents a modest 7% decrease compared to the 579 approvals in the second quarter of 2019. Along with the increased approval rate, the median time for an insurance approval is now down to approximately 11 days from 25 days in 2019. Given our improved reimbursement environment, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. And as we've previously stated, We do not intend to continue to report on them after this year. In the second quarter, we added 16 new U.S. implanting centers. The number of new centers was limited as we were not able to schedule implant procedures and therefore have several sites that will start in the second half of the year. Further, during the pandemic period, we took the time to retrain all implanting centers and review the current state of these centers. The process resulted in the deactivation of 15 centers for reasons such as surgeons relocating, as well as where the location no longer has an active and effective team to manage an inspired therapy program. Even though this is a relatively small number of centers, we believe this action allows our sales, marketing, and clinical teams to focus their efforts on centers that will have attractive returns for our business. Therefore, with 16 new centers and 15 deactivated centers, we ended the period with a total of 328 centers in the U.S. We will continue to identify new centers, including ambulatory surgical centers, or ASCs, and focus on training and contracting at these centers. As a reminder, recruiting additional ASCs will remain a focus moving forward, That inspires an outpatient procedure, and as I said earlier, the reimbursement within ASCs has improved. Moving on, we created nine new territories during the quarter, which brings our total to 91 territories in the U.S. Importantly, we did not slow our cadence of hiring territory managers to ensure we are in a strong position once cases were able to resume. These new centers and territories will have beneficial impact on our long-term growth and will drive continued growth in therapy adoption. Regarding our international activity, patient flow was steady in Europe and continued to improve throughout the second quarter similar to the U.S. and specifically in Germany and the Netherlands. We expect that the number of scheduled cases in Europe will continue to increase throughout the remainder of the year. In Japan, we are driving towards a reimbursement decision and remain actively engaged with the authorities there. We continue to meet with the Ministry of Labor, Health, and Welfare to finalize the documentation process and expect to have a reimbursement decision in Japan this year and plan for a limited commercial launch in 2021. 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. In the second quarter, the FDA approved an expanded age range for Inspire Therapy to include 18 to 21-year-old patients. Several commercial payers have already revised their policies to reflect this pediatric indication, and we expect that others will follow suit throughout 2020. We will continue conducting additional research on the specific characteristics of OSA in the pediatric population, including our ongoing clinical study for adolescents with Down syndrome. Switching gears again. Similar to the first quarter, our R&D expenses increased year over year in the second quarter as we continued 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 U.S. and in Europe who are using the tool. As I noted earlier, we recently launched the Inspire app on patient smartphones. as an educational tool, and the second version released this week interfaces with the Inspire Cloud. These are just the first steps in establishing interconnectivity between the patient and their healthcare provider with a long-term plan to improve outcomes by tracking patient activity and adherence and monitoring for any issues with device use. 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 continues. As I have said previously, we anticipate that this will be a multi-year effort to develop the Inspire 5 device and obtain regulatory approval. We are actively conducting feasibility trials with several technology innovations, which will make the Inspire 5 Neurostimulator state-of-the-art and expect that it will further improve the performance of the system including simplifying the implant procedure. In summary, we are aggressively focused on continuing to advance our business. Implant activity is increasing, and we are well-positioned to assist patients as they progress on their Inspire therapy journey. We remain focused on improving utilization and our conversion rate, achieving further advancements and reimbursement that build upon our our recent positive coverage decisions, growing the body of clinical evidence in support of inspired therapy, and the continued development of our robust R&D platform. We are extremely excited about our future prospects and are confident that we continue to be well-positioned for long-term success. With that, I'd like to turn the call over to Rick for his detailed review of our financials.

Thanks Tim. As Tim noted, despite the ongoing COVID pandemic and its impact on our second quarter financial results, we are excited about the outlook of our business for the remainder of 2020 and beyond. Focusing on the results of the second quarter of 2020, total revenues were $12.2 million, a 32% decrease from the $18 million generated in the second quarter of 2019. U.S. revenue in the second quarter was $11 million, a decrease of 30% from the $15.8 million in the prior year period. In the second quarter, European revenue decreased 47% to $1.2 million. Our U.S. average selling price in the second quarter was $23,800, which was consistent with the prior year period. The European ASP was $22,200. during the quarter as compared to $21,900 in the second quarter of 2019. Our gross margin in the second quarter was 84%, compared to 82.8% in the prior year period. This modest improvement was primarily due to manufacturing efficiencies, which led to cost reductions with our third-party contractors. Despite the ongoing COVID pandemic, we have not experienced a disruption in our supply chain and we maintain sufficient levels of inventory. Total operating expenses for the second quarter were $33 million, an increase of 43% as compared to $23.1 million in the second quarter of 2019. This increase, 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. The operating expenses of $33 million in the second quarter were sequentially down by $1.5 million from $34.5 million in the first quarter of 2020. In light of the ongoing uncertainties, we continued to take a thoughtful approach to our spending, but expect operating expenses to increase as we return to growth and remain focused on investing in our commercial and development initiative. Our net loss for the second quarter was $23.1 million compared to $7.7 million in the second quarter of 2019. The diluted net loss per share for the second quarter of 2020 was $0.88 per share. compared to $0.32 per share in the same period last year. The decrease in revenue in the second quarter due to the pandemic negatively impacted the net loss in the second quarter, despite our improved gross margin. Importantly, we continue to operate from a position of financial strength. We completed a successful equity financing in April, which generated revenue $124.7 million of net proceeds. So we have a strong balance sheet which enables us to execute 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 implanting centers. As of June 30, 2020, our cash and investments totaled 242.6 million. The weighted average number of shares outstanding for the second quarter was 26.3 million. We anticipate that the weighted average number of shares for the third quarter will be approximately 26.8 million. As Tim mentioned, while we are not yet operating in a normal pre-COVID healthcare environment, implant activity has increased over the last several weeks. With that said, we are providing new full year 2020 revenue guidance of between $88 and $92 million, which represents 7% to 12% growth from full year 2019. We continue to expect full year 2020 gross margin guidance between 82% and 84%. Furthermore, we reiterate our guidance to open 20% to 24% new centers per quarter, and add six to seven new territories per quarter. Our guidance is based on our current outlook. However, the operating environment for surgical procedures continues to evolve as the pandemic persists, and this could have an impact on our ability to achieve these projections. In summary, despite the impact of COVID on our business, we are confident that we are well positioned for sustained success. With our strong balance sheet, we are aggressively executing our growth strategy and advancing our business. With that, our prepared remarks are concluded. Jerry, could you please open up the call for questions? Thank you.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your question is in the queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. The first question is from Amit Hazan. Goldman Sachs, please go ahead, sir.

Oh, thanks, and hey, good afternoon. Let's actually start with the guidance and see if we can get you to comment a little bit about how you're seeing the sequential cadence and whether, you know, if we kind of take a linear approach to this, it looks like we would get something like maybe flattish growth in the third quarter and then up to 25% plus range in the fourth quarter. If you agree with that, if that's the right way to think about the guidance and then it'd be really helpful if you talk to your confidence in that skew in the fourth quarter in particular and what you're seeing in either backlog or new patient generation as you talk to generally that gives you the confidence that this is the right range.

Great. Thank you very much. As you saw from the numbers by monthly, the number of centers that are becoming active, jumping up from 25 to 52, up 60% in July, we continue to see that ramping. And it is a combination of working through the backlog of existing patients that had to have their cases postponed. But as we mentioned, we really worked hard to make sure we built practices in the pipeline so we didn't have what we're calling an air gap or a lag. once we started to ramp those procedures. So I think the way you're describing guidance is directionally correct. We want to continue to keep getting closer to normal in Q3 and really be able to help a lot of people when we get into the fourth quarter. And so I think that we have good confidence in the guidance and directionally in the way that you're describing that as well. It's going to be a process to work through Q3 into Q4.

And as my follow-up, maybe focus on the south just as kind of a learning experience for you as we've seen infections rise in many of these southern states where you're active. And what you're learning from that, it's obviously very different than what we saw in March, April. but are you confident in what you're seeing and the ability of these facilities to continue procedures or just would love to get color on that specific regions where we're seeing infections at high level today?

Absolutely. Well, I have the honor of spending time with each of our regional managers and area vice presidents at the end of every quarter to kind of get a good feeling for where they are with their region and what confidence they have and Specifically, we've met with Texas and Arizona and Florida. And so Florida is one of the areas that is postponing cases, particularly in Miami and starting up the eastern coast. But we're continuing implants in Orlando and Jacksonville, but we're monitoring that closely. South Carolina has a challenge in that one region right there that they're seeing some challenges there. and a couple centers in Houston. But other than that, we've been leaning forward, been being creative and finding alternative ways for patients to get their devices, including, as we talked earlier, about opening up ASCs and being able to go to the ASCs that are owned by a lot of these same hospitals. So we're monitoring that closely, but we think it's pretty limited at this time. And we're watching those patients, too, and we'll get them scheduled back in those centers as soon as possible.

Great stuff. Thanks so much.

The next question is from Bob Hopkins, Bank of America. Please go ahead, sir.

Oh, great. Thank you, and good afternoon. Thanks for the detail. Just a quick question on the guidance again for the back half. Could you give us a sense as to what percentage of the back half comes from kind of already identified in backlog procedures or scheduled procedures versus, you know, new demand that you anticipate over the rest of the year? Do you have any sense for that?

Oh, it'd be just a rough estimate, Bob. It all started when you and I talked months ago when we started talking about the four buckets, and we call them groups of patients here, and to make sure that we just didn't work through the backlog and all of a sudden we didn't have enough patients to be able to continue going forward. So that's why we continued. the direct-to-consumer and a lot of the television going forward to bring patients to the website. So I think what we're experiencing in June is really working through a great majority of the past cases, and that will carry a little bit into Q3. But I think when you get into the second half of the third quarter and most of the fourth quarter, you're going to be into the second, third, and more importantly, into the fourth group of patients. And so we're not relying on the patients that had their cases postponed. We want to be able to get them scheduled quickly and be able to get them their implant as soon as possible. Did I indirectly answer your question?

Yeah, yeah, no, no, that's helpful. I mean, I know those are hard numbers to come by, but I'm just wondering, you know, again, how much is kind of visible versus new business you need to win. Maybe one other way of kind of providing confidence is any chance you provide – revenue for July, just so we can sort of, you know, see where you are as of July. You know, again, normally wouldn't ask, but it's unique circumstances. Thank you.

No, I don't have it in front of me, but, I mean, I can say that you said the number of centers going up increased to 60%, and we're able to get good OR time with our physicians. So we're confident that we're going to have a good July and a good Q3. and really focused on not stopping there but continue to ramp all the way through Q4, as Amit was talking about, with how do we look at the guidance for the rest of the year.

Okay. And then just one other quick follow-up on those 15 centers. I assume those were a tiny percentage of revenues, but just, you know, was curious for a little more color there whether that was you guys sort of giving up on them or them quitting their procedures. And, again, I assume it's not a big deal in a very small percentage of the total, but just curious if there's any additional color there. And then I'll drop. Thank you.

Absolutely. So during that pandemic period, we routinely retrain our centers because we have updated implant procedures, updating procedures on programming, patient selection. And then when we push that training out to centers, we can do that virtually. And the centers and the physicians actually sign off on that. And how we started that whole process, we looked for centers that really haven't done implants over the last year. We said, okay, let's look at this. How much time are we spending at those centers? And they're great people. They take care of patients. We appreciate that. But if they're not really active and they don't have the support team to be able to support and inspire a program, we went back and talked to the territory managers and talked to the centers and determined that now is not the right time for them. So to your point, yeah, those 15 centers weren't really – contributing implants and revenue anyways, but now we get to clean it up, and so the territory managers don't waste mind, share, or even time with those centers, and we can drive those patients to the active and effective centers. Great. Thank you.

Thanks, Bob. We have a question from Richard Newbitter, SVD, Lee Rink. Please go ahead, sir.

Hey, Tim. It's Jamie on for Rich. So quick question. I wanted to start just back to the guidance. I think you had said in your prepared remarks that, you know, in the areas where there are some recent surges, some centers have limited their procedures. So I guess just, you know, following the line of question on guidance, to what degree is the potential for centers limiting cases baked into the 88 to 92 million? And then I'll have a follow-up.

I think we account for that in that 88 to 92. We know that several of those centers aren't able to schedule cases today but they're not waiting too long and we don't expect it's going to be a long period of time before we can help those patients and help them get scheduled to get their procedure and as I mentioned in Texas we're trying to move several of those cases to ASCs. What I didn't mention is Arizona was another hot spot in California and we're not seeing any slowdown there so We are confident in the guidance that we gave you, and we're going to find solutions to be able to work through that, we think.

Got it. Okay. And then you mentioned ASD, so that was kind of a nice lead into my next question. Can you appreciating that kind of the ASB is still a pretty small percentage of your business. Could you just maybe give us a sense or remind us, you know, what the percentage of your business is today and then kind of how you expect that to potentially evolve over the second half and into 21, you know, with COVID potentially being an incremental tailwind on top of the improved reimbursement?

Yeah, I think it's probably still less than 10% of our business today as we even start up. When we start looking at new centers in the third quarter, I think you'll see an uptick in ASCs. I think the reimbursement has gotten a little bit stronger. The new proposed rules today also increased the average Medicare payment for ASCs for 2021. So there's a little bit more incentive for the ASCs to be able to get started. So I think it's relatively small today, but it'll have more of an importance going in through the year. And then really when we start getting to 21 and beyond is when you're going to see more of a percent of our business and percent of our implants being driven and conducted in ASCs. And not necessarily because of the COVID pandemic. I think it's a natural step for an outpatient procedure like ours. If you take the spinal cord stimulator, sacral nerve stimulator technologies, maybe half to two-thirds of those cases are performed in ASCs. And so it's just an efficient way to be able to treat patients. So I think now that reimbursement has been, for the most part, locked in, it's a natural progression to move to ASCs.

Thanks for taking my question.

Thank you. We have a question from Chris Pasquale, Guggenheim. Please go ahead, sir.

Thanks. Tim, the overall trends are certainly encouraging, but honestly I'm a little surprised that 40% of your customer base still hasn't come back online at this point. On the one hand, that's good because it means those that have are quite productive, but do you have a sense for why the sites that are still down haven't come back? Are they prioritizing other types of patients first, or is there an issue with sleep centers in those regions? We'd just love any thoughts you have there.

Yeah, first off, the numbers it gave you is active implants. Those are implants that have been performed. And so I think that there's a greater percentage that have implants scheduled. So as an example, the VAs are still shut down. VAs have not started yet. And it's going to take a little bit of time to kind of get them going, although that's a small, probably 5% of our business. So I think it's going to continue to grow, Chris. I think The number of procedures that are actually, number of centers that are conducting office visits is very high. Those that are doing telemedicine are high, those screening patients. I think sleep studies are increasing significantly, although a lot of those are being done with home sleep testing. So yes, I guess why on one hand it is a limiting number of that percent of centers that have already performed an implant, I think a greater number have them scheduled, and that's why we have confidence in leaning forward that that number is going to grow quickly. Okay.

And then can you share some early data on the impact the call center is having on your conversion rate in the places where you've had it for a little while? What have you seen there?

Well, early on, we started that call center on the first week of March in New York and Houston, of all places, right? Yes. That's right when the pandemic hit, and so it pretty much stopped New York. And then what we did was we added several additional centers to start collecting some information and to start debugging the system to find out what works well, what percentage of phone calls to the call center can we convert to appointments. And we're still working through those numbers. We're going to report those. But about three-quarters of the patients that we are now getting to Clinics for appointments are, in fact, qualified patients. And one of the concerns early on is that patients that were just making appointments, they weren't qualified for Inspire. They needed help, and we want to get them to a different health care provider. But a lot of people have never had a sleep study before. Well, we need to get them to a sleep physician where they can get their initial diagnostic, and they can try a mouth guard, or they can try a CPAP unit, And then knowing some of those, we'll circle back. And what we want to do is kind of triage the calls coming in and make sure qualified patients who are ready get appointments with the health care providers that prescribe Inspire. So a lot more to come on data there, but we're up to 77, which how many centers do we have? 328. So we're just at the beginning, just at about a fifth of the centers now. So we have a ways to go. but we've had a chance to really take a lot of phone calls, debug the system, really identify what's working well, and we've made a lot of corrections to improve the process, and we'll keep ramping new centers as we work through the rest of the year. Thanks. Thanks, Chris.

We have a question from John Block, Stifel. Please go ahead, sir. Great.

Thanks, guys. Good afternoon. So I'd sort of build on a couple of earlier questions, but just want to take a step back and ask about the drop ratio of patients that you expect to experience from COVID. So, Tim, you know, maybe oversimplify, but of the patients you expected to undergo upper airway STEM in 2020 at the beginning of the year, you know, what do you see now? Do you believe you're going to ultimately recapture 80% plus, 90% plus? I'm just curious what you're hearing from your sales guys, and then I've got a separate follow-up.

Okay, so you're looking at patients who are already in the pipeline and being diagnosed and including those that may or may not have had their sleep endoscopy. We want to capture the great majority of those. So if they are in a physician practice, we want to make sure that we stay on top of that. What we're trying to do is make sure that in the interim period when we continue to direct the consumer that we don't have a big fall off in the number of calls and the number of patients in the center. That's where it's really difficult to track those numbers. But the call center, we get some evidence that we're able to capture those patients. And with the use of virtual tools and telemedicine, we're able to build practices. But I think that period is when we probably saw the greatest fall off and then we're going to have to continue on. But again, remember, we had 2.6, 2.8 million people come to the website and 26,000 people reach out to a doctor. So the patient interest remains very, very high. And we just have to stay on top of our game and work with the centers to make sure we capture those patients.

Okay. Got it. And then maybe as a follow-up question, and Chris alluded to this earlier, but I also want to ask about the centers. So they're ramping. You gave the helpful metrics, 60% in July, active implants. But is there a common denominator on the centers? And, you know, is it strictly just the geographics? argument is it is a tenor argument i'm just trying to figure out if the 60 percent um you know are some of those at a much higher utilization of upper airway stims relative to uh to some of the other centers maybe if you could just talk to that tim yeah i can talk that without really talking about covid i think if you look at the end of 19 we talked about we had one center over 100 implants we had several centers in the you know upper test so there's

There's always a range of utilization, and Randy Bann, our chief commercial officer, always talks about how many centers can you get doing two implants a month, and really just start with that simple, simple metric to be able to grow that number, and it's still a little bit limited right now, so of that 60%, you have some centers who have significant amount of OR time and are really scheduling those cases quickly, and there's others still just ramping up. So it's going to be a whole distribution across the board, but really utilization continues to be our key focus, and hence that's why we're even deactivating those 15 sites.

Okay, and if I could just maybe ask Part B of that question, and maybe just to be more straightforward, the 60% of centers, in your opinion, do they account for 40% of your overall volume and 19% or 80% of your overall volume? Again, just trying to figure out where they were skewed in terms of utilization of your overall base?

That's a very good question. I don't have that answer. I don't think it at no way could it exceed 40%, but we'll go back and look at that. I think it actually is a small percent, because remember how many new centers we opened last year, and the new centers that were opening didn't conduct a lot of implants last year, but they're set up to be really productive centers. And so we also remember we ended the quarter with 91 territories. So we're really starting to get a good number of territory managers out there who all have active centers, and so we're really kind of spreading it out and keeping utilization an important factor across the whole geography. Got it.

Very helpful. Thanks, guys.

Thank you, John. We have a question from Adam Mader, Piper Sandler.

Please go ahead, sir. Hey, guys. Thanks for taking the questions. Maybe to start, just one on the reimbursement front. And apologies if I missed this in the prepared remarks, but any update regarding either Anthem or Humana, just latest expectations there from when we might see a decision from those payers and then add a follow-up?

We know from Anthem, we've been in communication with them. We know that the American Academy of Olarngology, which is the ENT society, We know that they have been in communication with Anthem and really made sure that they stress what this is an important therapy for them to write policy on. We believe that their annual review is between the end of August, September, and we're consciously optimistic they're going to write policy in that time frame. We have a couple other papers and new studies coming out. We're going to surely get that to them as soon as those are accepted and which is only additional evidence for the safety and efficacy, but we do think Anthem is working on it, and we're cautiously optimistic. Humana has a significant part of the business is Medicare Advantage, and by definition with the LCDs in place, they must cover for Medicare Advantage. So we also think it's just a matter of time before Humana rights policy The other key players in there that we don't have policy yet, Florida Blue is we've been working with, and First Coast, the MAC in Florida, is on the campus of Florida Blue. We know that they are reviewing and believe to be writing policy. And then near and dear to our heart, all the Inspire employees have Blue Cross Blue Shield of Minnesota, which doesn't cover. But I'm looking over my shoulder. We can see their office, and we'll continue to work them very hard. But we believe that they're going to be writing policy in the very near future as well.

Okay, that's very clear. Thanks for the color there, Tim. And then just for the follow-up, maybe I'll ask you about new account ads. So you're guiding to new centers of, I think it was 20 to 24 per quarter for the back half of the year. Can you maybe just talk about your line of visibility there on new center ads? And then I'm wondering... how the VAP process has maybe been impacted with COVID-19. Just any color there would be great. Thank you so much.

Absolutely. Thank you very much, Adam. Well, our visibility has been pretty good lately because there are so many centers that were very active and wanted to get activated in the second quarter. We were unable to do that because they couldn't schedule their first cases. So those are the centers that will get up and running early in the third quarter, but we also have a group of other centers that have been in the process. I think the value add committees or the VACs you referenced have continued to work during the COVID period, right? They were still there. We're still able to kind of push those through, and so we do have line of sight. Remember last year, we also went and hired four area business managers, one for each of the area vice presidents, whose sole job it was to hunt new centers and find centers that can drive utilization and really be able to treat a number of patients. And we're just starting to see a lot of those centers start coming through in the second half of the year. So we have very good visibility to that, and we're pretty confident in the guidance that we're giving you that we'll be able to open that.

Rick? Yeah, hey, Adam, I'd like to add to that as well. In addition, we add... additional hospitals through some of these national agreements that we recently entered into, such as Ascension. So we've gone through the value analysis committee on a network-wide basis, and they have 150 different hospitals as well as 30 ASCs. And so we don't have to go through that process. We just need to find an interested ENT and get the patient flow going there. Also, we are going to focus on ASCs And those are standalone smaller facilities that really don't have as formal of a value analysis committee as large standalone hospitals. Okay.

Very helpful.

Thank you. Thanks, Adam. We have a question from Larry Bigelson, Wells Fargo. Please go ahead, sir.

Hey, guys. Thanks for taking the question. First, I... Hey, Tim, I wanted to come back to the 60% number. Sorry to beat a dead horse, but two-part question. One is what's the guidance assumed? What percent of centers are doing cases? And how much of an impediment is a sleep endoscopy test? And I had one follow-up.

Okay, great. I think by the end of the year, again, we deactivated 15 centers. So I'm going to challenge the field on Randy. that that number is going to be 100% of the centers we'll be implanting by the end of the year. And that includes new centers that we'll be bringing on by the end of the year. So we're going to continue to ramp and we'll continue to get these centers active. And, again, the only challenge we may have is if COVID persists in some of these hotspot regions, but we believe that they will be able to start scheduling cases or they will find an alternative to be able to do them maybe at an ASC. The second part of your question was in regards to a drug-induced sleep endoscopy, and put some color behind that. Early on in the COVID period, it was scored as a high-risk procedure because of the aerosol, because when you use a nasal scope, you can excite the airborne pathogens of COVID and makes it a little bit riskier for the healthcare providers. About a month or six weeks ago, that was actually downgraded, that NTs have formed procedures to make it a more safe procedure, and it was downgraded to just a moderate risk with guidance to use PPE when performing those procedures. So the centers that are doing the implants, equal number are doing sleep endoscopies. So both procedures go hand-in-hand, and so as we open up the new centers, we're able to do sleep endoscopies and build a pipeline right alongside.

Thanks. That's helpful. And, Tim, just one long-term question. You're adding, you know, six to seven new territories per quarter for the remainder of 2020. What's your ultimate goal here? You know, do you expect to continue to add at a similar pace next year? And, you know, where do you think you get to over the next few years? Thanks for taking the question. Okay.

Well, long-term, just real top level. We estimate there might be 4,000 hospitals. There might be 4,000 ASCs. and that's 8,000 total, and if we can be in a third of those, that's about 2,400. Did I do that right? And we'd like our territory managers to manage between six to eight centers, so you'd end up being close to 400 territory managers. I think we want to continue our cadence of growth because, Larry, back to the early days when we were talking early on, we continually add... But we never bring on a big bullet because we always control quality by controlling the patient outcomes and by adding cadence. Now, we've increased the cadence because we've increased the size of our training team, and we've been able to scale our training team just as we can scale the commercial team and scale the number of centers doing the procedure and scale the number of procedures that centers do. So it all works hand-in-hand, but we have a long-term view of where we want to go.

Thanks so much, Tim.

Thank you, Larry.

The next question is from Ravi Misra, Barenburg Capital. Please go ahead, sir.

Hi, Tim. Hi, Rick. Thank you for taking the question. So just one on the closed centers. Just, you know, you gave us some color that they haven't done in plants over the last year. Just curious, were they more recent to come online or are these some of the older centers in kind of that vintage analysis that you've given us on prior columns?

Yeah, there's a little bit of a spread. But I know there's a couple of those centers all the way back to 2014. And there'll be a group, some of them, and each year or each... Remember how we always talked about class? There'll be some in every class going forward. But some of them, it's... You know, you might have to shut one down because the surgeon moved, but you've got to remember you're opening up another one because that surgeon moved. And so... In the early days, we weren't as strict about training and identifying centers that had everything it took to be successful. And so some of these are the old legacy sites, you're right, that we're closing down. Others are because the surgeons just moved across town or across to a different state. But the key to it is as we went training through that, the 15th probably weren't contributing much revenue anyways. And we want to be able to focus our energy on those centers specifically that can build the utilization and can be able to increase the number of patients that they treat.

Great, thanks. So just a follow-up on that. It sounds like we should expect some level of churn in that space in the future going forward. And then maybe, you know, if I can add a 15th question or whatever you want to call it to the guidance that you gave for the back half of the year. I'm doing my math right. the patients treated per center to kind of get to the top end of your kind of guidance range assumes, you know, pretty much flat growth versus last year. Is that a reasonable way to kind of think about it? And what could take you beyond that? I mean, is this all virus related or is there anything else that could drive you above that number? Thank you.

Absolutely. In fact, Matt, what was the first question?

The first one was just about ongoing, how to think about the churn just in your centers on a future basis.

Oh, yeah. Okay. I'm sorry. I'm sorry. You got me on the second one. I started thinking about that, and I missed the first one. I don't think so. I think we went through one time. We really kind of retrained all the centers, and we really kind of leaned on the territory managers to identify those centers that we wanted to spend time at and those centers that it's not appropriate to. So, no, it's not an ongoing churn that we're looking through. you're always going to have a physician move or retire. But we always want to build depth at center. So there's two surgeons or a third surgeon to be able to continue on a program. So I don't think you're going to expect a lot of that churn going forward. As far as the guidance go, yeah, there is still some uncertainty as we ramp through the program. starting up the sites after post-COVID. So, of course, we're going to be careful about what numbers we give you, and it's probably going to show flat from a utilization standpoint as we ramp up those centers. And what can change? Well, the key is, number one, if this curve levels off, that's going to really help and be able to get more cases into the centers. We want to be able to open up Miami and the rest of Florida because, of course, that's they haven't been able to go back and work on all their Medicare cases because, remember, the Medicare policy just came online in the May-June timeframe. So there's still some things that we can work on. We're going to keep driving the call center to be able to drive more patients to centers, continue to increase that. We're going back to our direct-to-consumer, and we will start doing more television in the second half of the year. and focus that on areas that are able to treat more patients. So we're being very creative to make sure that we are in a good position to achieve and even exceed that guidance that we're giving you.

Thanks.

Thanks, Remy.

We have a question from Frank Tappanen, Lake Street Capital Markets.

Please go ahead, sir. Hey, thanks, guys, for squeezing me in here at the end. I'll just keep it to one to keep it quick. Just to touch on kind of some of the geographies that have not seen a recent reflux in COVID spikes in cases. So I'm curious about the current procedural volumes in the more normalized healthcare areas. What are you seeing there on the both procedure side as well as DICE procedures? Are you seeing some of those return to some pre-COVID levels, or how are you thinking about some of the less impacted areas right now?

Well, I mean, let's talk about New York, right? New York was so significantly impacted, but right now New York has some of the lowest rates there with very good controls, although the city's gone through a lot. We're seeing a very good rebound there. We're seeing some of the private centers, such as Long Island Jewish or the Northwell system, and over in Hackensack on that side, and even in Manhattan, those centers are coming back very strong, and they have a a strong backlog of patients to be able to take care of and being able to schedule those cases. So really like what we're seeing there. Philadelphia has always been one of our top cities as far as Thomas Jefferson and UPAN and several other sites there. They continue to grow and it's across the board. We're seeing increases in Arizona and California. Even the Mayo Clinic is very active and I don't want to leave out a city, but it's pretty much across the board. But you've got to remember the Medicare is having a really strong impact too because Medicare is now present or Medicare policy is present in every single state. And so these centers are confident that they're going to be paid for the Medicare cases and that's really going to help those cases as well. So it's pretty much across the board. Great. Thanks for taking my question.

Thanks, Brian. We have a question from Mike Oppenheimer. Please go ahead, sir. Good afternoon.

Thanks for squeezing me in here. I'm curious for competitive landscapes, specifically, I believe, Xcel got FDA approval for its dream trial back in June.

Absolutely. Well, we like investment in stimulation for sleep apnea. I think that gives credibility to the and I think that helps the stimulation for sleep apnea as a whole. That being said, yes, Nixoa did get ID approval to start their study in the United States. I think they still have a limited amount of data out there. They did publish a paper out of Australia of, I think they implanted 27 patients and showed data on 21 of those patients. So very, very early on, having only 20 patients, but I like that there's enough confidence in that data that they are starting out a new trial. Still believe they're probably four years away from any approval in the United States. They are conducting some clinical research in Europe as well. I don't think they've started any of their commercial activity. We haven't seen it yet, but I think it's, I like what they got going. They're They have some early feasibility, and they're able to conduct more work. But, again, I think they're probably four years away from approval, so it's our job to keep our heads down and keep doing our work. Living Over has been pretty quiet. We haven't heard from them for a while because they have the MTHERA system.

Okay, very helpful. And then if I could, just a couple very quick housekeeping questions. Rick, if you could just give us the European ASP again, and also if you guys have an updated total number of patient implants. I think it was 8,200 or so on your last call. Thanks so much.

Sure. Mike, on the ASP for Europe, 22,200 for the second quarter. and that is compared to 21,900 in the second quarter of 2019.

Great. Thank you. And do you have the total number of patients implanted, Candy?

Yeah, 9,100. Great. Thanks so much, guys. All right, Mike.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back over to Mr. Tim Herbert, President and CEO, for closing remarks. Please go ahead, sir.

Thank you very much, Jerry. Just quickly, thanks everybody for joining the call today as always. I'm grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve strong and consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I also wish to thank all the employees as well as the healthcare teams for their continued valiant efforts during this pandemic. and for their focus as we ramp up implant activity, once again, at many sites in the United States and Europe. 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 coming weeks and months. Please stay safe and healthy.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.