Inspire Medical Systems, Inc.

Greetings and welcome to the Inspire Medical Systems first quarter 2021 financial results conference 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 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. Bob Yedid, Investor Relations from LifeSci Advisors. Please go ahead, sir.

Thank you, Hector, 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 three months ended March 31, 2021. 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 and quarterly 2021 financials, 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. CR filings with Securities and Exchange Commission, including our quarterly report on Form 10Q, filed with the SEC today for 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. The conference call contains time-sensitive information, and speaks only as of the live broadcast today, May 4th, 2021. And with those remarks, it's my pleasure to turn the call over to Chairman Herbert, CEO. Tim?

Thank you, Bob. And thanks, everyone, for joining the call today for our first quarter 2021 business update. After closing a very strong 2020, we entered 2021 facing our normal expected seasonality, but also a significant resurgence in COVID-19. That said, the team at Inspire showed the resolve and bounced back to have a very successful first quarter to the new year. We remain focused on our commercial execution driven by increasing our capacity and in planning centers and improving the education process with patients. During this first quarter, we also achieved several very impactful development milestones highlighted by the FDA approval of the two-incision implant procedure. More on this in a little bit. Let's start with discussing our revenue. In the first quarter of 2021, we generated worldwide revenue of $40.4 million which was an increase of 89% compared to the first quarter of 2020, which of course was impacted by COVID. This growth was primarily driven by the increased number of procedures occurring at existing centers, as well as new centers and territory managers added in the quarter. As I mentioned, we did experience seasonality early in the year, driven primarily by the resetting of high deductible insurance plans. Further, the resurgence of COVID negatively affected procedure volumes in many of our sales territories early in the quarter. Despite this, procedure volumes in all of these territories rebounded nicely as the quarter progressed. We continue to monitor the situation, and we do not expect to see a significant impact going forward. Therefore, we have confidence in the outlook of our business for 2021 due to our strong performance in the first quarter, the positive trends in implant activity, and the planned expansion in the number of implanting centers and new territory managers. As such, we are increasing our full year 2021 revenue guidance to a range of $192 to $196 million from our previous guidance of $183 to $188 million. This guidance represents an increase of 66% to 70% over full year 2020 revenue of $115.4 million. As always, I would like to reiterate that our primary focus remains on the patients to ensure that each and every one has the best possible outcomes from Inspire Therapy. With that, let's now get into the details surrounding the first quarter, beginning with capacity. During the quarter, we added 47 new US implanting centers, ending the period with a total of 472. This is well above our prior guidance of adding 34 to 38 new centers. As such, we are increasing our guidance to open 36 to 40 new centers per quarter for the remainder of the year. As has been the case over the past several quarters, included In this increase in new centers, there's a growing number of ambulatory surgical centers that have increased at a slightly higher rate than the addition of hospitals. We will continue to add both hospitals and ASCs and expect to see a growing percentage of Inspire procedures being performed in ASCs. Regarding the U.S. sales team, we created 10 new sales territories in the first quarter, bringing our total to 117. While this is above our guidance, we continue to expect to add eight to nine new territories per quarter during the remainder of 2021. We also increased the number of field clinical representatives by adding seven, ending the first quarter with 51. During the rest of the year, We will also scale our sales management and training teams to optimize our ongoing expansion and focus on strong patient outcomes and center productivity. The addition of new centers and the continued build out of our field organization will increase our capacity and will remain one of our core focus areas throughout 2021 and beyond. As we said on our last call, Our challenge in 2020 was that the utilization was significantly impacted by the pandemic. And while we have achieved significant progress in the second half of 2020 and through the first quarter of this year, we expect this to further improve going forward. To make this point, historically, about 50% of our growth has been from opening new centers and about 50% was from increased procedures at existing centers. For the year 2020, however, this was skewed heavily towards the growth from opening new centers. We did see a very strong rebound in the first quarter with the great majority of our growth coming from increased utilization. We need to be careful comparing back to the first half of 2020 as that period was impacted by center shutdowns following the onset of the pandemic. That said, we expect growth between new and existing centers to be more balanced throughout 2021. The second key area of our focus is to improve our ability to assist patients interested in Inspired Therapy by making a connection with a qualified healthcare provider. Our outreach programs have been very effective in generating interest in Inspire Therapy, primarily through the InspireSleep.com website. To further streamline this process, we continue to broaden our call center concept, the Inspire Advisor Care Program, or ACP. As a reminder, the primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs. We ended 2020 with approximately 180 of our centers utilizing the ACP, answering about 25% of all calls to physicians. Today, we have over 280 centers on the ACP, and we plan to significantly increase the number of centers to nearly 500 by the end of 2021. This will enable the majority of patient calls to be answered through the ACP. We anticipate that the INSPIRE ACP will have a significant impact on our business and look forward to providing you with further updates on this program throughout the year. We also continue to utilize our website and online tools to help enhance awareness of INSPIRE therapy and help patients connect with physicians. For the first quarter of 2021, the number of visitors to our website was over 1.7 million, an increase of 7% year over year. In addition, approximately 27,000 physician contacts were established via the website, representing a significant year over year increase of 102%. This increase was largely driven by our refreshed outreach programs including four new TV commercials, which began airing in January, along with a substantial increase in participation in community health talks about Inspire Therapy. The most significant event of the first quarter that will improve utilization is the recent FDA approval of our two-incision implant procedure. And just today, we received European approval of the two-incision procedure as well. We believe this is an important milestone that will help drive increased adoption of inspirotherapy, and the qualitative feedback we have received from ENT surgeons to date has been very positive. Importantly, this new approved procedure, which eliminates the need for a third incision, will significantly reduce the average procedure time for inspired therapy while providing additional therapy benefits. This FDA approval was supported by a clinical study comparing this new two-incision approach to the original three-incision procedure. The results show consistency in the safety and efficacy of the therapy and reduced surgical time to just under 100 minutes on average which was a 26-minute reduction. Training for the two-incision procedure has ramped up significantly, and we are extremely excited about its potential impact on our business. From a practical standpoint, this savings in procedure time may allow a surgeon to add another InSquare procedure in a single day. As previously, most surgeons would typically limit scheduling to two cases per day. switching gears to reimbursement and coding. Specifically, as we discussed on our last call, the new CPT code was approved and the RUC survey process to determine the surge in reimbursement rates is ongoing and is expected to become effective January 1st, 2022. In July 2021, we expect that CMS will publish the 2022 proposed rule, which will list the new codes and proposed payments. From a facility perspective, the new CPT codes should not change the payment to the hospitals or ASCs. Further, a new Category 1 code was approved for the drug-induced sleep endoscopy or DICE diagnostic procedure, which has also been an ongoing challenge for the EMTs and facilities. Again, we will learn more when CMS proposes the new rules, which are expected to be released in July. Moving on, Europe also had a very strong quarter driven by increased procedure volumes, particularly in Germany and the Netherlands. We expect the growth of Inspire to continue in Europe as we are not currently seeing a significant impact from COVID in these two countries, which make up the majority of Inspire implants. As you know, Effective January 1st, Inspire Therapy is now integrated into the German hospital reimbursement system with a formal DRG, which represents another positive indicator for a European business. In Japan, we were thrilled to recently announce our exclusive distribution agreement for Inspire Therapy with Japan Lifeline, or JLL. a leader in the distribution of innovative medical technologies in that country. Importantly, this distribution agreement was entered into following successful completion of the reimbursement review of Inspired Therapy by the Minister of Health, Labor, and Welfare. Formal listing of Inspired Therapy in the Japan National Health Insurance Payment Listing is expected to occur in June. Our kickoff meeting with JLL is scheduled for next week, and we anticipate the initial implants of Inspire Therapy in Japan will occur during the second half of this year. The COVID pandemic is a serious concern in Japan today, and we will closely monitor as we build our training plans and work towards the first implants. Japan has a tremendous opportunity for Inspire. as it is one of the largest markets for medical technologies in the world. We look forward to providing you with updates on our progress in Japan over the coming quarters. Switching gears to R&D. Similar to the past two quarters, we increased our R&D expenses year over year in the first quarter of 2021 as we continue to invest in enhancing our technology platform. During the first quarter, we also received FDA approval of the new Inspire Physician Programmer Platform, which provides multiple key benefits for physicians when managing their patients' treatment with Inspire Therapy. We view this enhanced technology as a further demonstration of our long-term commitment to patients with sleep apnea. Next, the Inspire Cloud, our cloud-based patient management system, continues to advance with the addition of a substantial number of centers in the US and in Europe who are using the tool. As you know, in 2020, we launched the Inspire Sleep app for use on a patient's smartphone as an educational tool. This app interfaces with the Inspire Cloud and allows physicians to collect clinical data from patients directly. The new physician programmer platform the Inspire Cloud and the Inspire Sleep app are the first steps in establishing interconnectivity between the patient and their healthcare provider. The next step is FDA submission of the new patient remote, which will be Bluetooth enabled to allow data from the implanted system and the remote to be uploaded to the Inspire Cloud via patient's smartphone. We anticipate that the new patient remote will be submitted to the FDA within a couple of weeks and are targeting a commercial launch following FDA approval late in 2021. Longer term, the design work for our fifth generation Inspire Neurostimulator continues to progress. Once approved, we expect Inspire 5 to be commercially available late in 2023. The Inspire 5 device will utilize the existing form factor with plans to maintain average 11-year battery life without the need for recharging. After extensive trialing with the new sensing technique, we are excited to announce that the Inspire 5 neurostimulator will eliminate the pressure sensing leak. All sensing will be inside the neurostimulator using an accelerometer to measure the respiratory waveforms. Over the years, we have demonstrated the necessity for closed-loop stimulation, and this enhanced sensing mode internal to the neurostimulator will make Inspire 5 the state-of-the-art neurostimulator. In summary, we continue to experience significant momentum in all key aspects of our business. Implant trends remain highly positive. and we continue to be well-positioned to assist patients as they progress on their Inspire Therapy journey, including longer term through our investment in the development of multiple innovative technologies. To reiterate, our core focus for 2021 is to continue to increase utilization at existing centers, as well as to increase capacity by training new centers. We also intend to achieve further advancements and reimbursement that build upon our recent positive coverage decisions, continue our efforts to strengthen the growing body of clinical evidence, and invest in the continued development of our robust R&D platform. 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.