Inspire Medical Systems, Inc.

Greetings and welcome to the Inspire Medical Systems second quarter 2021 financial results call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Bob Yedid, with LifeSci Advisors. Thank you, Bob. You may begin.

Thank you, Paul, 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 and six months ended June 30th, 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 meeting 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 financial and operational outlook, and improvements in market access are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC today for a description of these risks and uncertainties. INSPIRE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, August 3rd, 2021. And with those remarks, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob. And thanks, everyone, for joining the call today for our second quarter 2021 business update. In January 2021, the team worked through our normal seasonality as well as the resurgence in COVID-19. And in February and March, the team at Inspire delivered exceptional results, providing the confidence for us to significantly increase our 2021 revenue guidance. As this momentum has continued, we remain focused on our commercial execution. Recently, we received clarity on the reimbursement front with the publishing of CMS's proposed 2022 payment rules, which will be an overall positive for our business, especially when considering the impact of the FDA-approved two-incision implant procedure. More on these important developments shortly. Let's begin with a discussion on revenues. In the second quarter of 2021, we generated worldwide revenue of $53 million, which was an increase of 335% compared to the second quarter of 2020, which of course was impacted by COVID. This growth was driven by several factors, including the increased capacity at new and existing centers, increasing patient demand for Inspire Therapy, our ability to improve patients' access to care with their advisor care program, and finally, the positive reimbursement environment for Inspire Therapy. With the availability of multiple vaccines, the impact from COVID was insignificant to our second quarter performance. Of course, most recently, the emergence of the Delta variant has led to an increase in COVID cases and this has affected a small number of our centers, primarily in the Southeast US. With that said, we continue to have confidence in the outlook for our business in 2021 due to our strong performance in the first half of the year, 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 $210 to $213 million from our previous guidance of $192 to $196 million. This guidance represents an increase of 82 to 85% 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 outcome from Inspired Therapy. With that, let's now get into the details surrounding the second quarter, beginning with capacity. During the quarter, we added 63 new US implanting centers, ending the period with a total of 535. This is well above our prior guidance of adding 36 to 40 new centers. We continue to experience a growing demand for new centers and physicians seeking to add Inspire Therapy to their practices. As an example, in the second quarter, we executed a national pricing agreement with community health systems, a publicly held hospital system with 84 hospitals and 30 ambulatory surgical centers across 16 states. With this continued strong demand, we are increasing our guidance and now expect to open 48 to 52 new centers per quarter for the remainder of the year. This increase in new centers includes a growing number of ASCs which have increased at a slightly higher rate than the addition of hospitals. ASCs which offer a more efficient care setting now make up 19% of our total U.S. centers. This compares to 16% at the end of 2020. 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 13 new sales territories in the second quarter, bringing our total to 130. This is above our guidance of adding eight to nine new territories, and we expect to maintain a strong pace throughout the remainder of 2021. Therefore, we are increasing our guidance and now expect to add 10 to 11 new territories per quarter during the second half of the year. We also increased the number of field clinical representatives by adding 10, ending the second quarter with 61. Further, we remain dedicated to scaling our sales management and training teams to optimize our ongoing expansion and focus on strong patient outcomes and center productivity. Regarding productivity, 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 to the growth from opening new centers driven by the pandemic limiting procedures at existing centers. As expected, we have experienced a significant rebound in the first half of 2021 with the great majority of our growth coming from increased procedures at existing centers. However, we need to be careful comparing these results to the first half of 2020 As again, 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. Our second key area focus is to improve our ability to assist patients interested in Inspire Therapy by making a connection with a qualified healthcare provider. Our outreach programs continue to be very effective in generating interest in Inspire Therapy, primarily through the InspireSleep.com website. For the first half of 2021, the number of visitors to our website was over 3.2 million, an increase of 21% year over year. In addition, approximately 49,000 physician contacts were established via the website through the first six months of the year, representing a significant 77% year-over-year increase. This increase was largely driven by our refreshed outreach programs, including new TV commercials, which began airing in January, along with a substantial increase in participation in community health talks about Inspire Therapy. A very important aspect for improving a patient's experience with Inspire is to continue to broaden our call center concept, the Inspire Advisor Care Program, or ACP. We ended 2020 with approximately 180 of our centers utilizing the ACP, answering about 25% of calls to physicians. Today, we have about 400 centers on the ACP receiving almost 60% of the calls. Just yesterday, we launched the second version of our ACP, which included changing to a new vendor. This vendor provides improved scalability, patient communication, and data tracking. Our plan is to continue to expand the ACP to most of our centers by year-end. This will enable the great majority of patient calls to be answered through the ACP. Our initial experience is that the ACP provides a more efficient pathway for patients to learn about Inspire Therapy and make an appointment with a qualified healthcare provider. With that, I'd now like to reiterate the importance of our two-incision implant procedure, which received regulatory approval in the U.S. in March 2021. Importantly, this procedure eliminates the need for a third incision, which significantly reduces the average procedure time for inspired therapy while providing additional therapy benefits. The FDA and European approvals were supported by a clinical study comparing the 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. In the real-world clinical setting, we have seen even greater reductions in procedure times. From a practical standpoint, this savings in procedure time may allow surgeons to add another inspired procedure in a single day. As previously, most surgeons would typically limit scheduling to two cases per day. In the United States, Surgeon training for the two-incision procedure has been completed, and 99% of all cases now utilize this approach. This is a good transition to reimbursement and coding. As many of you know, Aspire Therapy now has a dedicated CPT code, 645X1, that cannot be utilized by competitors and will ensure reliable reimbursement. The new code will formally take effect on January 1st, 2022. And in the last few weeks, CMS announced the proposed 2022 payment rules for physicians, as well as for hospitals and ASCs. First, in regards to the proposed physician payment. Back in early 2020, Medicare reimbursed physicians $635 per INSPIRE procedure via the existing CPT Category 1 code 64568, which was originally developed for vagal nerve stimulation. Then, in June and July of 2020, the Medicare local carriers, or MACs, issued local coverage determinations providing coverage for Medicare payments, and these LCDs provided for an additional payment of approximately $400 for placement of the pressure sensor. Medicare would often provide only partial payment or none at all, depending upon the site of service. Therefore, the new dedicated CPT code will resolve these issues that physicians commonly experience regarding payment. The proposed physician payment, if approved, would value the INSPIRE procedure at $870 as a national average Medicare payment. With regional adjustments, the range of Medicare payments will be between $800 and $1,050. We will work with CMS during the comment period to potentially improve the rate at which RVUs are reimbursed, but we are pleased with the proposed physician payment as CMS accepted the recommendation from the rec committee, which conducted a survey of surgeons experienced with the INSPIRE procedure to specifically measure the amount of work required. Further, a new Category 1 code was also approved for the drug-induced sleep endoscopy procedure. This payment will increase from $68 in 2021 to $114 in 2022, a 67% increase. Regarding facility payments, the positive news is that the new CPT code continues to map to the same Level 5 neural Ambulatory Procedure Code, or APC. The CMS proposed payment for this APC increased by 3% for a national average Medicare payment of just over $30,000. For ASCs, we believe the recently announced draft facility reimbursement was calculated by CMS without the reference to the extensive claims data that exist for Inspire Therapy procedures. Specifically, there is no history with the use of the new code 645X1 as all prior reimbursement procedures were coded using the prior base code 64568. We intend to meet with CMS at the August panel review, provide all the claims data on the procedures that took place in hospitals as well as in ASCs. Our goal is to ensure that the final reimbursement level for INSPIRE procedures in ASCs is appropriately established. For reference, the 2022 national average payment proposed for the original base code, 64568, reflects an increase to just under $25,000. On the commercial insurance policy front, as of May 20th, Anthem is now providing coverage of Inspire Therapy. Importantly, Anthem was providing approval through the prior authorization process and conducted a mid-cycle review of the Inspire technology, resulting in this positive coverage policy serving 42 million. Anthem is the last large carrier to issue coverage of Inspire Therapy and inclusive of Medicare brings their total to approximately 260 million covered lives in the United States. Moving on, Europe also had a very strong quarter driven by increased procedure volumes, particularly in Germany and the Netherlands. We expect growth of Inspire to continue in Europe, especially as there has been very limited impact from COVID recently. As a reminder, effective January 1st, 2021, Inspire Therapy is now integrated into the German hospital reimbursement system with a formal DRG, which represents another positive indicator for our European business. Further, we will be adding additional centers in the Netherlands after positive changes in the reimbursement policy in that country. In Japan, The formal listing of Inspire Therapy in the Japan National Health Insurance Payment listing occurred as expected in June. Moreover, our exclusive distribution agreement with Japan Lifeline, a leader in the distribution of innovative medical technology in that country, is off to a strong start. Even with the difficult COVID situation in Japan, we continue the launch planning process and are holding joint marketing and regulatory committee meetings with JLL. We are preparing for the first physician training course and continue to plan for the first device implants by year end and intend to commence formal commercial efforts in Japan beginning in 2022. Switching gears to R&D. Similar to the past three quarters, we increased our R&D expenses year over year as we continue to invest in enhancing our technology platform. The Inspire Cloud, our cloud-based patient management system, continues to expand with the addition of a substantial number of centers in the US and in Europe who are using the tool. Further, the second version of the Inspire Sleep app was released for use on patients' smartphones. This app interfaces with Inspire Cloud and allows physicians to collect clinical data from patients directly. The next step is connectivity with the INSPIRE device. And to this end, during the second quarter, we submitted to the FDA the new Bluetooth-enabled patient remote. This new remote will collect data from the implanted system, which will then be uploaded to INSPIRE Cloud via patient's smartphone. We are targeting a commercial launch of the new patient remote following FDA approval late in 2021. Logger term, the design work for our fifth generation Inspire Neural Stimulator 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 the average 11-year battery life without the need for recharging. The Inspire 5 Neural Stimulator will provide several enhancements and most notably, will eliminate the pressure sensing need. All sensing will be inside the Neural Stimulator using an accelerometer to measure the respiratory waveforms. Over the years, we have demonstrated the benefits of closed-loop stimulation and shifting this enhanced sensing capability internal to the pulse generator, will make Inspire 5 the state-of-the-art neural stimulator. In summary, we continue to experience significant momentum in all key aspects of our business. Implant trends remain highly positive, recent reimbursement updates will have a beneficial impact on our business, and the positive coverage decision from Anthem was an important recent achievement. Our enhanced outreach efforts are facilitating additional connections between patients and qualified physicians. Moreover, we continue to be well positioned to assist patients as they progress on their inspired 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 our existing centers as well as to increase capacity by training new centers. An important aspect of this anticipated increases in utilization and capacity is the continued expansion of our ACP. We also intend to achieve further advancements and reimbursement that build upon our recent positive coverage decisions and leverage the new two-incision procedure continue our efforts to strengthen the growing body of clinical evidence in support of inspired therapy, and invest in the continued development of a 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.