Inspire Medical Systems, Inc.

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems Q4 and full year 2021 conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. Thank you. Megan Rohkamp, Director of Financial Reporting at Inspire, you may begin the conference.

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, we released financial results for the three and 12 months ended December 31, 2021. A copy of the press release is available on our website. On this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including without limitation, Those relating to our operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2022 financial and operational outlook, and improvements in market access are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, which we anticipate filing with the SEC within the next couple of weeks, 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, February 8th, 2022. And with that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Megan. And thanks, everyone, for joining the call today for our fourth quarter and full year 2021 business update. I'm pleased to report today that the Inspire team once again delivered extremely strong results in the fourth quarter, as we continue to focus on commercial execution and leveraging the increased number of hospitals and ambulatory surgical centers offering Inspire Therapy. This increased capacity continued to provide important flexibility during the quarter due to the regional challenges driven by the COVID resurgence. In addition, our improved process of connecting patients with healthcare providers through our advisor care program is consistently increasing the number of patient appointments for Inspire Therapy. In the fourth quarter, revenue was again very strong, as we generated worldwide revenue of $78.4 million, which was an increase of 70% compared to the fourth quarter of 2020. For the full year, we generated worldwide revenue of $233.4 million, which was an increase of 102% compared to 2020. The outbreak from the Omicron variant had a moderate impact on our business late in the fourth quarter. Importantly, as was the case with the Delta variant in the third quarter, because our centers are geographically distributed across the country and not overly concentrated in any one particular area, The impact on our business was localized and therefore minimized. Another important factor in managing COVID in these areas was our ability to work with implanting centers to shift some procedures to regional hospitals and ASCs, which were less affected by COVID and staffing issues. We are proud of our field teams and the healthcare providers' grit and resiliency and keeping INSPIRE cases moving and thereby ensuring patients were able to receive their therapy. As INSPIRE is an outpatient procedure in the United States, it does not impact the availability of hospital beds, therefore allowing centers to continue to perform INSPIRE cases. In Europe, and specifically in Germany, we experienced a more pronounced impact as INSPIRE procedures in Germany do require and overnight hospital stay. As we entered the first quarter of 2022, Omicron is having a more meaningful impact on our business as compared to late in 2021. The Omicron variant has led to staffing shortages in hospitals and ASCs, has impacted Inspire employees, including territory managers and field clinical representatives, and has resulted in numerous rescheduled procedures due to patients testing positive for COVID on the day of their procedure. These factors, along with our normal Q1 seasonality due to high deductible insurance plans resetting at year end, has affected procedure volume during the early part of the first quarter. As you will recall, we had a similar COVID surge in January of 2021, and as we moved into February, we were able to increase the number of scheduled cases and get back to a normal procedure flow. We expect the same phenomenon this year as we work through the seasonality and the Omicron surge. Despite these challenges and in light of the currently forecasted decline in COVID cases, we are confident in the outlook for our business in 2022 based on our progress to date. As such, we are providing full-year 2022 revenue guidance in the range of $318 million to $326 million, which represents an increase of 36 to 40% over full-year 2021 revenue. Rick will provide additional details of our financials in a few minutes. Before discussing the specifics of our business, I reiterate our primary focus remains on the patients to ensure that each and every one has the best possible outcome from Inspire Therapy. I am pleased to report that we have now surpassed 20,000 patients treated with Inspire Therapy, a significant milestone for our company. We will discuss U.S. operations shortly. But I want to begin by highlighting some important recent international achievements. First, we are very happy to announce that the first INSPIRE procedure was performed at Tokyo University in Japan last week. Clearly, this first implant is a significant milestone, but it is just the beginning as our teams are training several additional centers as we prepare for the full commercial launch in Japan. Our products in Japan are commercially available through our exclusive distribution arrangement with Japan Lifeline. And along with the physicians, JLL has worked closely with the INSPIRE team to accomplish this key milestone as well as prepare for broader therapy adoption in Japan. Following this same approach and taking this regional expansion a step further, We have entered into agreements with distribution partners in Singapore and Hong Kong, and we are planning for the first implants in these new territories in 2022. In Europe, we are also very happy to report that the first two INSPIRE procedures in the United Kingdom were completed last week. This again required the team's focus to work through the reimbursement in the UK, as well as the new regulatory environment. the core European business had a solid fourth quarter, but as mentioned, procedures in Germany were impacted by the Omicron surge. As with the US, we expect procedure volumes in our European markets to return to normal levels as we move through the first quarter. In the US, the growth was driven by both increases in capacity as well as a very strong patient demand resulting from from our direct-to-consumer programs, beginning with capacity. In the fourth quarter, we added 81 new U.S. implanting centers, ending the year with a total of 684. We continue to experience growing demand for new centers with physicians seeking to add Inspire Therapy to their practices. Specifically to the fourth quarter, we opened several sites which helped to alleviate the pressures from the Omicron surge. These sites will remain active as many are ASCs and provide additional capacity going forward. In fact, at the end of 2021, ASCs made up 22% of all US centers compared to 16% at the end of 2020. We will continue to stay focused on opening new centers and therefore maintain our guidance of 52 to 56 new centers per quarter in 2022. As we did back in the second quarter of 2020, during the beginning of COVID, we are conducting a deep dive into all centers and we'll be focusing the team on the active centers. As such, over the course of the second quarter, we expect to deactivate between 25 and 30 centers or less than 5%. Ultimately, our decisions to maintain centers is based on our assessment of their ability to deliver consistent, high-quality outcomes for patients receiving inspired therapy. We will routinely monitor and ensure the field team is focused on accounts that can provide the greatest benefits to the patients moving forward. Regarding the US sales team, We created 16 new sales territories in the fourth quarter, bringing our total to 157. And we expect to maintain the strong pace during 2022. Consistent with our prior guidance, we anticipate adding 11 to 12 new territories per quarter this year. We also increased the number of field clinical representatives by adding eight, ending the year with 79. We remain dedicated to scaling our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. We ended the year with eight area vice presidents, and each will have an area business manager whose primary purpose is to recruit and open new centers. Conversely, the focus of the territory managers is to cultivate existing centers to increase utilization. Together, this provides a balanced approach to therapy adoption growth and a strong foundation moving forward. In 2021, approximately 60% of our growth was the result of increased procedures at existing centers and approximately 40% was from newly added centers. We are careful when comparing these two factors, especially given the varying impact that COVID has had on procedure volumes over the past two years, especially in 2020. We will maintain focus on both areas and expect that increased utilization at existing centers will remain a slightly larger contributor to our growth as compared to training and opening new centers. As part of growing center utilization, we remain focused on improving our ability to assist interested patients with making a connection with a qualified healthcare provider. Importantly, our outreach programs continue to be very effective in generating interest in Inspire Therapy, primarily through the InspireSleep.com website. For the full year 2021, the number of visitors to our website was approximately 7.3 million. an increase of 52% year-over-year. From these visits, we had approximately 95,000 physician contacts, representing a significant 53% year-over-year increase. There are two contributing elements to these physician contacts. One is through community health talks, and the second is through our ACP. After tracking these for some time, we characterized the community health tox is more educational while most appointments originate from the ACP. Therefore, we are now only reporting on the physician contacts through the ACP as this provides greater accuracy when we are reviewing appointments and therapy conversion rates. We ended 2021 with over 550 centers or 80% of the centers on the advisor care program, up from just 180 the previous year. The second version of our ACP was launched in the third quarter with a more experienced vendor. We are extremely pleased with the program and intend to continue expanding our ACP throughout 2021 and include many technology advancements to improve our ability to help patients make appointments as well as to help them through the overall process. To summarize, our direct-to-consumer initiatives in 2021 significantly contributed to the approximately 9,000 inspired procedures last year. We intend to continue investing in direct-to-consumer activities throughout 2022 and beyond. as we now have geographic coverage across the United States. In January, we made a switch to buy national TV advertising, whereas previously purchased within local markets. National buys are significantly more cost-effective and provides greater exposure. In early January, these national ads led to several of the highest single day number of hits to our website ever. Our focus in 2022 will be on improving our conversion rate. This will be accomplished by improving patient education on our website and improving physician contacts to patient appointments and finally on to INSPIRE procedures. Transitioning to reimbursement and coding. As of January 1st, the new CPT codes for INSPIRE were in place and effective and the final physician, hospital, and ASC payments have been published. The 2022 national average Medicare payment to the hospital is $30,063 and $24,828 to the ASCs. The physician's professional services are reimbursed separately. and the national average Medicare physician fee for the implant is $888. Finally, the national average Medicare reimbursement to perform the drug-induced sleep endoscopy is approximately $115, which is the first time physicians have been compensated for this diagnostic procedure. As a general rule, commercial reimbursement is about 1.4 times Medicare rates. switching gears to R&D. 100% of INSPIRE procedures that occurred in Q4 made use of the two-incision surgical technique. The use of this technique resulted in both a benefit to the patient as there is one less incision and a significant benefit to the physicians as it reduces surgical time to approximately 90 minutes from the previous average of 120 minutes. On the product development side, we are very excited to announce that the FDA has approved our new Bluetooth-enabled patient remote. This new version allows information from the implanted neural stimulator and the patient remote to be uploaded to the Inspire Cloud via a patient's smartphone, making it easier for physicians to monitor Inspire patients. We are conducting a soft launch of the new remote in the first half of this year to provide a full system-level test of the patient remote and InspireCloud interface. We are planning for a full product introduction at the American Academy of Sleep Medicine meeting in June of this year. The InspireCloud patient management system continues to expand as we add centers in the U.S. and in Europe, and InspireCloud will become an important tool for physicians to monitor patient experience and outcomes. This tool will further expand capacity as physicians can more efficiently manage a greater number of patients. The next step for our digital program is to upgrade our physician programmer. This project is ongoing and we expect to submit for FDA review later this year. The project will allow the programmer to also connect with InspireCloud, which is key to the end goal of providing remote patient programming, which we are targeting for 2023. Moving on, during the fourth quarter, we formally submitted to the FDA our request for full-body MRI compatibility. The FDA has been involved during the extensive MRI evaluation process, and we expect approval within the 180-day review window. This approval will not require any changes to the existing INSPIRE system. Longer term, the design work for our fifth generation INSPIRE Neural Stimulator continues to progress. This fifth generation device will eliminate the pressure sensor and incorporate sensing inside the Neural Stimulator using an accelerometer to measure respiration. We are targeting FDA approval in late 2023. The Inspire 5 device will utilize the existing form factor and will maintain the average 11-year battery life without the need for recharging. Collectively, these technology enhancements will further strengthen patient outcomes as well as improve patient and physician experience with Inspire Therapy. In summary, we continue to experience significant momentum in all key aspects of our business, and our determined approach to operating in a COVID environment has resulted in continued growth in the adoption of Inspire Therapy. Our focus on patient outcomes and our unique ability to reach and educate potential patients provides our confidence in the continued growth of INSPIRE. To reiterate, our core focus for 2022 is to increase utilization at our existing centers as well as to increase capacity by opening and training new centers. An important aspect of the anticipated increases in utilization and capacity is a continued expansion of our call center. While the most recent surge in COVID cases driven by Omicron will have a short near-term impact on our business, 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.

Thanks, Tim. As Tim noted, the INSPIRE team delivered a strong fourth quarter and full year 2021. Total revenue for the fourth quarter of 2021 was $78.4 million, a 70% increase from the $46 million generated in the fourth quarter of 2020. US revenue in the fourth quarter was $75.6 million, an increase of 77% from the $42.7 million generated in the prior year period. The growth in the US reflects a number of factors, including a larger number of implanting centers, broad policy coverage, and an increased number of territory managers and other sales and clinical team members. In the fourth quarter, revenue from outside the US decreased 13% to 2.8 million. The average selling price in the fourth quarter in the US was $23,900. which was consistent with the prior year period. The ASP for the rest of the world was $22,700 during the quarter compared to $23,600 in the fourth quarter of 2020. The lower ASP was primarily driven by exchange rates and the initial sales of distributed products in Japan, which occur at a transfer price lower than the ASP for products sold directly. Gross margin in the fourth quarter improved to 85.8% compared to 84.4% in the prior year period due to manufacturing efficiencies and higher sales volume. Total operating expenses for the fourth quarter were $69.1 million, an increase of 50% as compared to the fourth quarter of 2020. This increase was due to the expansion of our sales organization increased direct-to-consumer marketing programs, continued product development efforts, and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued growth and to make investments in key commercial and development initiatives. Our net loss for the fourth quarter improved to 2.4 million compared to the 7.5 million net loss in the prior year period. The net loss per share for the fourth quarter was 9 cents compared to a net loss of 28 cents per share in the fourth quarter of 2020. The weighted average number of shares outstanding for the fourth quarter was 27.4 million. We anticipate that the weighted average number of shares for the first quarter of 2022 will be approximately 27.5 million. For the full year 2021, our total revenue was 233.4 million. a 102% increase from the $115.4 million generated in the prior year. The U.S. revenue was $221 million, an increase of 108% over 2020. For 2021, revenues from outside the U.S. increased 34% to $12.4 million from the prior year. Our net loss for the full year 2021 improved to $42 million compared to the $57.2 million net loss in the prior year. The net loss per share for 2021 was $1.54 compared to a net loss of $2.19 per share in 2020. Historically and similar to other elective procedures, we have experienced seasonality in our business. In the U.S., we have higher procedure volumes in the fourth quarter as patients with high deductible health plans seek to schedule procedures prior to their deductibles resetting at the beginning of the year. Given the significant progress we've made in scaling our business, and despite the headwinds from the Omicron variant in January and normal seasonality that we see at the beginning of the calendar year, we are providing full-year 2022 revenue guidance in the range of $318 to $326 million. which would represent growth of 36 to 40% over the full year 2021 revenue. Moving to the balance sheet, as of December 31, 2021, our cash and investments totaled $224 million, compared to $234 million at the end of 2020. This strong cash position allows us to remain focused on executing our growth strategy of increasing productive Increasing procedure volume at existing centers and training and opening new implanting centers. In summary, we have significant and sustainable momentum throughout our business and we remain well positioned to achieve long-term growth. We are extremely pleased with our performance for the year and are excited to continue executing on our growth strategy in 2022. With that, our prepared remarks are concluded. Chris, can you please open up the call to questions?

Yes, sir. Everyone, to ask a question, you need to press star 1 on your telephone. To withdraw your question, please press the pound key. Our first question comes from Robbie Marcus of J.P. Morgan. Your line is open.

Oh, great. And I already said congratulations on the quarter a month ago, but I'll add it again, especially on a really nice guidance here.

Thank you, Ravi.

So, Tim, you touched on – you gave us the metrics for web traffic in fourth quarter, and you made some promising comments on how the national campaign is going so far. But I was wondering if you could give us any – you know, any qualitative or quantitative commentary on what it's been like in first quarter in terms of increase versus normal levels. And do you think that the increases are coming just from the advertising, or do you think maybe some of the market recalls are helping you as well?

Well, I think it's probably a combination. I think that the advertising is driving most of the activity because we've gone to national levels. We are now reaching areas that had not previously had direct to consumer advertising or running some of the TV ads. And, uh, these are, we now have, uh, inspired centers across the U S so we're able to reach into those centers. And so most of the activity is, is really coming from those pockets of, or centers that, that just did not have any prior exposure. So we're pretty confident that the advertising is driving the web activity. Now, that being said, certainly within those communities are patients who are dealing with the recall efforts, and I'm sure they're motivated to get to the website, get educated, and make inquiries. So it is a combination of the two, I'm sure.

Great. And then Rick, I didn't hear it in the script, but we got great sales growth. How should we think about the spending in 2022 to support that? Thanks a lot.

Sure. We're still early in the early innings of our commercial rollout. And so we're still heavily investing in our operating expenses. We're continuing to invest in adding territory managers aggressively as well as adding centers. In addition, we see a return on investment with our DTC spend, so we've increased that. That increased about 80% in 2021. From an overall dollar perspective, we will continue to make those investments in DTC, but the growth will slow. Operating expenses grew 50% in the fourth quarter over the prior year. We're going to continue to make those investments. We know profitability is important. We have shown some leverage in our business in the fourth quarter compared to a year ago, but we're going to continue to make those investments. We want to make those investments that will drive years of future revenue growth rather than optimizing our P&L.

Great. Thanks a lot. Appreciate it. Thanks, Robbie.

Thank you. Our next question comes from Danielle Intelsey of SVB Lyric. Your line is open.

Hey. Thank you so much. Good afternoon, guys. Thanks so much for taking the question. Congrats on a really great end to the year. I had a question. They're both kind of on guidance. Well, I guess the first question really, Rick, is how to think about the cadence through the year and particularly Q1. I appreciate you're not going to give quarterly guidance, but even just directionally, you know, you've been so early in the launch and then layer COVID on top of it. seasonality is tough to decipher on our end, you know, what the impact of seasonality is. Looking back last year, you know, again, there was COVID muddying the waters, but I think you were only down about 12% or so sequentially. Consensus has you down almost 20% sequentially this first quarter versus the just reported Q4. Just wondering if you could talk a little bit about qualitatively how to think about that and maybe the cadence through the year and just one quick follow-up.

Sure, right. We only provide annual guidance and our guidance strategy has not changed at all. We're watching the first quarter really closely because of the Omicron variant because it did impact Q4 and we are seeing some impact at the beginning of the first quarter. Also, we do have seasonality. So Despite that, we have provided guidance on an annual basis that we're comfortable with. And with this aggressive guidance, it does represent 36% to 40% growth over our 2021 revenue. But again, we're watching Omicron closely. I know very recently case numbers have gone down, but we had a big impact in January. Yeah. we are tracking that closely, but on overall basis, you know, we feel, obviously feel comfortable with our guidance put forth.

Okay. Okay. That's, that's fair. And then on total year guidance for the year, just curious about what's reflected in that from a COVID perspective and maybe more importantly from a, you know, from a not hospital staffing, sorry, but like a staffing perspective, perspective as we move through the year, you know, trying to get our hands around what the impact or what the recovery, I'm sorry, could look like given the staffing issues that a lot of these healthcare systems and ASCs are dealing with. So what's reflected as we think about a recovery at the low end and the high end of the range? And thanks so much.

You bet, Danielle. Good to talk to you. Well, we're tracking... like everybody, COVID and we see the anticipation that COVID is really kind of settling down. We've been able to operate pretty successfully in a COVID environment already. Obviously we're going to be a little bit careful at the beginning of the year as we set the full year guidance to make sure that we have the pure confidence coming out of the guidance into the first quarter, second quarter, and then throughout the rest of the year. We'll continue to be aggressive in opening centers and scaling the sales team, the field team, and increasing our training team as well. So we're planning that we will be able to stay on top of COVID as we have in the past, but be a little bit careful as we kind of set up in the beginning of the year here.

Appreciate that. Thank you.

You bet.

Thank you. Our next question comes from Chris Pascal of Guggenheim. Your line is open.

Thanks. Good afternoon, guys. I wanted to start with the new center start guidance. So the 52 to 56 per quarter, I'm assuming that's a gross number, and then we should net out the 25 to 30 that you're going to kind of cull in the second quarter. Is that right?

That's correct, yes. We set guidance to open 52, 56 new centers, absolutely. And then as an overall – we'll take out that 25 to 30 centers who really haven't been contributing caseload anyways, right? So we're just allowing the team to really focus those centers that have been able to really take care of the patients.

Yeah, and that really plays right into my next question, which is how productive those centers are stepping away from have been. Do you have a rough sense of how many cases those centers might have done in 2021?

Well, I think that's kind of the start of it. For the most, one of the first things we look for is those centers that really haven't had much activity over the last year, and then we look in over the last couple years, and then we can see if they have already been removed from our website, and then we go and talk to the center to see who's involved at the center. And in a lot of cases, the surgeon has moved away and gone to a different location or there's different aspects to it. But for the most part, they haven't contributed a lot of cases or helped a lot of patients over the last year.

Okay, that's helpful. And then just lastly for me, I thought the announcement on Singapore and Hong Kong was interesting. Is that a sort of first step towards looking at mainland China, or is that an entirely different ballgame that's still going to take you quite a while to expand into? Thanks.

Yeah, it's a yes to both. I mean, it is certainly an expansion in the Asian market, and Singapore and Hong Kong, it's really focused on just a couple hospitals in each of those locations that are very prominent institutions. But it also does kind of open the door to start building on our pathway into China, which, as you know, is a significant project on its own. But, yes, we're excited to open up these two new territories, but it also has inspired with a greater presence in the area and allows us to really start looking at a broader expansion, including South Korea as well.

Thank you. For our next question, we have Adam Mater of Piper Sandler. Your line is open.

Hey, guys. Congrats on the nice finish to the year, and thanks for taking the questions here. Wanted to start with one on direct-to-consumer advertising and some of the encouraging trends that you're seeing to start 2022. I guess it would be helpful just if you could level set us on kind of where the conversion rate is today, you know, from DPC spend and website traffic and, you know, where do you think that kind of hit rate can go in the future and where are the key levers there? And then I'd have follow up.

Fantastic. Well, we kind of mentioned in the script a little bit that we realized a lot of the contacts from the community health tech, they're really kind of more educational and, and, the patients are able to get the information they need and process and usually come back and go through the advisor care program. Therefore, we're really focusing on the contacts with the advisor care program and starting to characterize what is our conversion rates with those. We don't have the precise numbers yet, but we do think we're getting out of the high single digits and into maybe 10 to low teens. But we also think that is the key opportunity. And it's being able to make sure we find techniques to help patients get an appointment with a center. And we're starting to use email a little bit more, some texting approach. We also are working with patients to remind them to attend their appointments and to follow up with them to make sure that they receive the proper information that they were looking for. So there's a lot of techniques that we can use through the whole process of educating them and getting them through the system and to be able to have an implant. So our goal is to get that to the middle teens, if not even higher, because that's really the ability for us to really start to grow the adoption of the therapy.

That's really helpful, Tim. Appreciate the color. And then just for the follow-up, Maybe I'll ask about the progress that you're making from an ASC side of things. I think I heard in the prepared remarks 22% of your US centers are now ASCs. Can you give us a flavor for kind of volume mix between hospital outpatient and ASC today, kind of where that fits? And I'm just curious if you have kind of any data that you can share around utilization trends between those two different sites of care? Is the ASC showing some kind of encouraging throughput trends? Thanks for taking the questions.

Absolutely. So while the ASCs make up 22% of the centers today, they're still new and up and coming. Therefore, they're not quite making up 22% of our implants today. They're still trailing behind there, and that's going to be a little bit of a trailing factor, but that will catch up. Well, we're going to keep opening up more ASCs, so it's going to be chasing each other along the way. Interesting enough, when we start looking at centers, not just ASCs but also hospitals, and those opened in the last several years tend to have a higher utilization. And that's a lot because of the training that we're doing and setting expectations of doing a certain number of cases per month. And also you've got to remember the new centers, they don't, have the old education of the struggles of obtaining prior authorizations. They're entering the world of INSPIRE with a solid reimbursement where we can get approvals in just a few days. And they can be assured that they're getting proper payment levels. And so they don't have that bias to be able to open up more OR times and OR slots and commit more of their practices. So I think in general, centers open up in the last few years will have a higher utilization. But I do think as we get further down the pathway, yes, I think ASCs really have the ability to even accelerate that further.

Great. Thanks, Tim.

Thanks, Adam.

Thank you. Next we have Larry Beagleson of Wells Fargo. Your line is open.

Hey, Tim. Hey, Rick. Thanks for taking the question. So two for me. First, just a short-term question. Tim, I understand January was tough, but as cases come down, what are you seeing and how much visibility do you have on scheduling? And I'm curious what you're seeing there. And I had one follow-up.

Well, we certainly see the schedule. We have access to it. We know COVID was again, or the Omicron was a regional impact again. But at this time, it's not just hospital beds, it's really the staff and Omicron spread so quickly that we actually had patients. And as we've mentioned in the notes, now we were dealing with employees too, that they're unable to cover cases. So we're moving people across different territories to be able to cover cases. We're able to do that. But I do think that as we come out of January, just like in 2021, we're able to kind of hit our stride again in February and March. So same phenomena with our seasonality, but just again, like in 2021, just impacted by the COVID research, but we're encouraged by what all of us are witnessing with a reduction of COVID cases, which is certainly welcome.

Thanks for that. And Just on the Philips recall, Tim, are you guys able to track INSPIRE patients that were subject to the Philips recall? And if so, what are you seeing and did you bake anything into the 22 guidance for that? Thanks for taking the question.

Thanks, Larry. I think we certainly know that we have a benefit from the recall. We certainly know that patients are coming to the website and talking to doctors and looking to find an alternative because they simply don't have the ability to use their CPAP. We can't get them approved through the insurance companies. It's difficult for us to accurately quantify that. We do get some indications from the advisor care program. We certainly get indications from the prior authorization work that we do when we submit to United Healthcare and the commercial payers that these are patients coming from Philips. But we don't really have an overall impact Certainly yourself and others have reported on subjective measures when you speak with physicians and they talk about how they feel, how many cases they see on a weekly basis. So we know it does have an impact. Again, we just have a difficult time to accurately quantify it. But we do kind of build in just overall flow when we set our guidance.

Got it. Thank you, guys.

Thank you.

Thank you. Up next, we have Emmett Hazan of Goldman Sachs. Your line is open.

Hey, thanks. It's Phil on for me. Um, you know, a lot of, a lot of the questions have been asked, but I thought maybe try and drill in just a little bit to clarify things. Um, in your prepared remarks, you talked about staffing and, and COVID related issues kind of in, in, in, in conjunction with each other, uh, almost as though they were similar issue. I'm wondering. if there's staffing issues beyond sort of COVID disruption that are contemplated in your 22 guidance. And if not, what gives you confidence that staffing shortages that are seen across the rest of healthcare aren't going to inspire at the same level?

Sure. Thanks, Earl. I think that we have a little bit better line of sight scheduling cases. And so when we talked about the fourth quarter at your conference, we talked about how we're able to schedule cases about three to four weeks out. So right after Thanksgiving, we were really scheduling cases into the last week of December, which is always the most competitive week for OR time in the US. But having a little bit of forward look on it to schedule those cases gives us a little bit of an advantage to not be too impacted by the staffing challenges. At the end of the year and early in January, the staffing affected how much OR time could be open. And if the staff was focused on working on the floor where the COVID cases were, and that's always a challenge that we have to deal with, but having a little advanced notice gives us a little bit of an edge to be able to get those cases scheduled. Certainly less impacted in the ASCs and less the specific staff and the specific surgeon. test positive themselves. That obviously affects staffing. But we think that short term, we don't think it's going to really have a significant impact as we move through the first quarter here.

Okay, that's great extra color. And then, you know, I know that you guys have a little bit of a unique situation on the gross margin line, but there's another strong 85%, 86% and things really improve throughout the year. I'm wondering if there's a kind of a risk of the inflationary environment that we have going on here. could potentially impact numbers at some point down the road with that relationship you have on the contract manufacturing side. Thanks.

I think that we have some significant technology advancements coming down the road with, well, the new Bluetooth remote was approved, the new physician programmers in the works, full-body MRI, and then especially the fifth-generation Inspire Neural Stimulator. We did have a new code set in place, and so it does – provide the proper reimbursement for hospitals, ASCs, and now even physicians. So I don't think we're going to have any kind of compression issues on price. I think it might be in the U.S. might have a little bit more of an opportunity over the midterm that it is a risk of compression.

Okay. Thanks a lot, Tim.

You bet, Phil. Thank you.

Thank you. Next, we have John Block of Stiefel. Your line is open.

Great. Thanks, guys. Good evening. I don't know if I'm beating this up a little bit, but just the first question, I guess, is specific to the cadence or a different way of attacking it. So if I look at 2021, 1Q was about 17% to 18% of full-year revenues, again, for 2021. And Other years, you always saw the seasonality, to be clear, but other years it was like 19%, 19%, 19% plus. And you keep on referring back, Tim, to this seems like a similar playbook to what you experienced in 2021, right? A pretty rough January, but then finding your footing in Feb and March. And so when we think about that cadence, is that the right way to weight it, if you would, or for it to shake out, is for 1Q22 to fall a lot closer to the 21 playbook on Feb? you know, full year waiting versus what we saw in the prior three or four years?

Well, obviously, we're pretty early in the quarter, right? But the January certainly stacks up close to 21 with a combination of seasonality as well as another COVID research, right? So that's why we kind of described that a little bit just to make sure people are aware of that. But again, pretty early in the quarter, but we still want to stay kind of aggressive with the overall annual guidance.

So I guess I'll leave it at that. Okay, fair enough. And then maybe just to shift gears, I mean, you talk about the utilization drivers, ASCs, and, you know, ACP advisory care program. I might be mistaken, but, you know, think back to coverage. And I thought for some coverage policies in the past, you talked about going back to some of the payers and trying to get you know, a BMI revised down. Hey, it was 35. Can you get it down to 32? Is that still in the cards? Has that at all been, Tim, do you think a gating factor to growth? And, you know, if so, where are you with some of those initiatives?

Yeah. Actually, it's a little bit of the opposite. Some of the payers actually came out with a limitation of BMI 32. We're trying to get them off. No, it's okay. And Medicare really helped out with that. So when all those local coverage determinations came out, And Medicare came out and set the bar at BMI 35. All the commercial payers like United and Aetna and Anthem, all their Medicare Advantage programs have to match that. So they have to honor the 35. And United, as an example, they just came back and added increase from 32 to 35 on their commercial policies as well. We'll continue to work through that. Today, we're really focused on the logistics of implementing the new code. And you can imagine that every single center and every single software package and every payer has to convert over to the new CPT code. So today we're just focused on the brick and mortar of just getting the new code in place, make sure everybody's building the new code and working through that logistics. Once we get that done, that'll be done in the next month or so. We'll kind of get back to the policy work and really work into standardizing all the policies across the board. So I don't think it really is a limiting factor to growth, simply that we just have so many patients inquiring about Inspire and our conversion rates are still growing, but we have so much opportunity that in itself I don't think the policies really are a key driver. One element, you brought this up, I'll talk about it, We will be talking to the FDA. The label that we have with the FDA does have an upper limit of AHI 65. And we have been collecting data over the years. Most insurance companies policies do not have an upper limit, including the Medicare policies. So we're going to be working with the FDA to see if we can't do an indication expansion to help those patients with the higher AHI so they're not considered off label. So there's a lot of work that we're doing to continue to expand expansion as well as continue to standardize policies across the board.

Perfect.

All good. Thanks, guys. You bet, John. Thank you.

Thank you. And we have Siraj Kalia of Oppenheimer & Company. Your line is open.

Good afternoon, Tim. Rick, can you hear me all right? Yes, Siraj. How are you? Hope everyone is safe and healthy. Hey, so Tim, let me address the FY22 guide from a different angle.

Okay.

The guidance implies even if I remove the 25 non-performing sites, forgive me if I got the publication wrong, but the 25 sites I remove that, you would be exiting FY22, give or take 870, 875 sites. If I remove OUS approximate contribution, The math is implying roughly a utilization of about 3.6 implants per quarter per center, which seems to be a step down. Are there other new centers, quote unquote, low volume centers? Are there some other mitigating factors? Maybe if you could tie the FY22 annual guide from a utilization perspective, any color would be great.

Yeah, okay. Two things. The easy answer to that is look at the number of centers we open in Q3 and Q4. And we open, I think, 81 here and 72 in the third quarter. So you have 153 centers in the last two quarters. And the key with them is they are such a short window to be able to operate in. If you took them all in average, they could only operate for three months. And so they would never be at the overall utilization. So you almost have to kind of remove those other 153 centers from your numbers. Cause we're seeing actually a step up in utilization and that's like the key driver. Remember the hundred, all the centers that opened in 2021 are considered new centers and the 60% of our growth was coming from existing centers that were open in the prior year. So you're on the right path. I've tracked with your math, but you've got to be a little careful on the centers that we open late in the year because they're not contributing to utilization yet. They need a little bit more time to be able to do more cases over the calendar year.

Yeah, Tim, I'll take it offline. The methodology is the same throughout, but anyway, I'll take it offline and we can go over the math. Hey, Tim, on the new site, you know, if you can, in the U.S., what do you characterize as the pool of new sites? And specifically for FY22, forgive me if I missed this, how do you look upon new stores versus same store or old stores? Thank you for taking that question.

Sure, Suraj. As a rule, when we talk about same store sales, Any center that was open in 21 or before is considered an existing center. And the new stores or the new centers are those that are opened in the current calendar year. I know that causes a little bit of challenge because there's a lot of centers that opened in 2021 that will not have a full year of performance. And they may have as little as five days because they opened up late in December to do their first procedure. But that's what we do, because we always characterize our centers by class, the class of 2014, which was our initial year, 15, 16, 17, 18, all the way through. And so when we do the measurement of contribution of growth, we only use those centers that are in the current calendar year are used to contribute to the growth. Very good. All right, Raj, thank you. very much.

Thank you. I don't see no further questions in the queue. I will turn the conference back over to Tim Herbert for closing remarks.

Thank you all for joining the call today. As always, I am grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve successful and consistent patient outcomes. The Inspire team's commitment to the patient remains unmatched and is the most important element of our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts as we remain focused on further expanding our business in the U.S., Europe, and now Japan. 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 year ahead. Please stay safe and healthy.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.