Inspire Medical Systems, Inc.

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Good afternoon. My name is Josh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems fourth quarter and full year 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I'll now hand the call over to your first speaker, Ezgi Yazda, the Vice President of Investor Relations at Inspire. You may begin the conference.

Ezgi Yazda Thank you, Josh, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buhl, Chief Financial Officer. Earlier today, we released financial results for the 3 and 12 months ended December 31, 2022. 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 law. All forward-looking statements including, without limitation, those relating to our operations, financial results and financial conditions, investments in our business, continued effects of the COVID-19 pandemic, four-year 2023 financial and operational outlook, and improvements in market access are based upon our current estimates and various assumptions. 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. Please see our filings with the Securities and Exchange Commission including our annual report on Form 10-K to be filed with the SEC by February 14th 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 7th, 2023. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Ezgi, and thanks, everyone, for joining our business update call for the fourth quarter and full year 2022. We are excited to report our first profitable quarter and a solid finish to a very strong year with significant progress across all elements of our business, As always, we first and foremost reiterate our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire Therapy. During today's call, we will highlight many accomplishments from 2022 that demonstrate our ongoing focus on the patients, including improvements in access to therapy, technology advancements, and planned activities to broaden the population that can benefit from Inspire. We will also discuss our outlook for full year 2023. We completed many important milestones in 2022, and there are now over 36,000 patients who have received Inspire Therapy. During the year, we received FDA approval of full body MRI compatibility and launched our silicone-based stimulation and something needs, along with the Bluetooth-enabled patient remote, Further, we made significant progress with our digital platform, including major updates to the Inspire SleepSync patient management system and the Inspire Sleep app. We also initiated a pilot of a digital scheduling tool, which we believe will significantly enhance patient access to care through our advisor care program. In addition, we submitted important indication expansions to the FDA, including for the pediatric population with Down syndrome and for patients with a high apnea hypopneic index. We raised over $240 million in cash, as noted previously, and in the fourth quarter, we achieved profitability for the first time, all of which gives us confidence as we enter 2023. With that, let's review our results. In the fourth quarter, we generated revenue of $137.9 million, representing a 76% increase compared to the fourth quarter of 2021. For the full year of 2022, revenue totaled $407.9 million, a 75% increase compared to full year 2021. Our growth continues to be driven by higher utilization at existing centers and supported by the activation of new centers. During the fourth quarter, we experienced challenges with our supply chain and as the demand for the silicone-based sensing and stimulation needs outpaced our ability to provide products due to issues with scaling the production lines. These challenges have been resolved and we are increasing our inventory levels. Despite these challenges, we were successful. in providing product for all scheduled procedures in the fourth quarter. Historically, we have experienced seasonality in the first quarter due to the reset of high deductible health plans at the start of the year. While this remains the case, the first quarter of 2023 may see slightly less seasonality due to the supply chain issues in the fourth quarter. With that said, we expect full year revenue to be in the range of $560 to $570 million, a 37 to 40% increase compared to 2022. In the fourth quarter, we continue to increase our capacity by adding 61 new implanting centers, ending the year with a total of 905 centers. At the end of the fourth quarter, ambulatory surgical centers made up 23% of US centers. And in 2023, we expect to continue to activate 52 to 56 centers per quarter. Regarding the US sales team, we created 16 new sales territories in the fourth quarter, bringing our total to 225 territories. We are increasing our guidance in 2023, and expect to add 12 to 14 sales territories per quarter compared to 10 to 12 per quarter in 2022. In 2023, we will continue to scale our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. As such, we modified our incentive compensation for the field organization to focus on higher utilization at existing centers. We will continue to enhance our ability to connect interested patients with a qualified healthcare provider. Our outreach programs are very effective in generating interest in Inspire Therapy, primarily through the InspireSleep.com website. For the full year 2022, the number of visitors to our website surpassed 13 million. an increase of 86% year over year. And from these visits, we had over 78,000 physician contacts. Of note, these physician contacts represent the calls and emails to an advisor care program or directly to a physician's office and do not include referrals directly from a patient's healthcare provider. From a U.S. reimbursement perspective, The final rules for 2023 were published in November and came in generally as expected, providing a stable reimbursement outlook for health care providers. Moving on, our international business continues to make strides, growing 28% in the fourth quarter over the prior year, despite ongoing headwinds from unfavorable exchange rates. During the quarter, international revenue was less than 3% of global revenue, highlighting the significant growth in the U.S. market. There were many positives in our international business during the fourth quarter, including the strong performance in Germany, the Netherlands, and Switzerland. Furthermore, following many years of working with the French authorities, we are in the final process to have Inspire listed on the French registry in early 2023 at reimbursement rates consistent with the rest of the world, and the team continues preparations for a commercial launch there. In Singapore, our flagship programs continue to perform at productivity levels consistent with U.S. centers. We also see momentum in Japan, with multiple centers doing first procedures in the fourth that have also completed or booked additional cases in the first quarter. In Hong Kong, we expect to complete our first procedures in February, and in Australia, we have resubmitted for reimbursement and should have a determination later this year. Turning to R&D, we recently submitted our SleepSync Physician Programmer for FDA review. This new programmer connects with our next generation sleep sync digital health platform, which is a key step toward providing remote patient programming. Longer term, we continue to work on the design of our fifth generation Inspire Neural Stimulator. The Inspire 5 device will eliminate the pressure sensing need and incorporate the sensor inside the neural stimulator using an accelerometer to measure respiration. We have finalized the design, and we are conducting operational and production qualification. We are still targeting FDA approval in late 2023, but depending upon the FDA review cycle, this could move into early 2024. Finally, we continue to conduct research and clinical trials to increase the number of patients who can benefit from Inspire Therapy. In the fourth quarter, we finished enrolling the first 300 patients in our predictor study, which is the first step to replacing the requirement for drug-induced sleep endoscopy procedure with an office-based measurement for patients with a BMI less than 32 and continue our plans for initial readout of the data in 2023. In summary, we are experiencing significant momentum in all aspects of our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy. In 2023 and beyond, we will continue to increase utilization at our existing centers while adding capacity by opening and training new centers. The ongoing expansion of our call center and investment in our DTC campaign supports these initiatives, and we are seeing enhanced productivity from these efforts. which is driving our improved financial performance. Finally, the many R&D achievements in 2022 highlight our commitment to improving patient outcomes and enhancing both the patients' and healthcare providers' experience with Inspired Therapy. We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term stakeholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Thank you, Tim, and good afternoon, everyone. Total revenue for the fourth quarter was $137.9 million, a 76% increase from the $78.4 million generated in the fourth quarter of 2021. U.S. revenue in the fourth quarter was $134.3 million, an increase of 78% from the $75.6 million in the prior year period. The growth in the U.S. reflects several factors including higher utilization at existing centers, the addition of new implanting centers, expanded direct-to-consumer marketing, and a higher number of territory managers. Revenue outside the U.S. increased to $3.6 million which is a 28% increase year-over-year on a reported basis, while units sold outside the US grew 43% year-over-year. The US average selling price in the fourth quarter was $24,900, compared to $23,900 in the prior year period. The increase reflects our price uplift that began in May of 2022. We expect US ASP to remain steady at the current level. The ASP outside the US was 20,400 during the quarter, compared to 22,700 in the fourth quarter of 2021, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the fourth quarter was 83.9%. compared to 85.8% in the prior year period, primarily due to higher costs of certain component parts and additional costs associated with the transition to our new silicone-based leads, partially offset by the price increase that began in the second quarter. Total operating expenses for the fourth quarter were $116.1 million. an increase of 68% as compared to $69.1 million in the fourth quarter of 2021. This planned increase was due to 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 long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $3.4 million in the fourth quarter compared to $15,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances. We had no interest expense in the fourth quarter having paid off our outstanding debt in the third quarter of 2022. We are proud to announce our first profitable quarter in the history of Inspire. Net income for the fourth quarter was 3.2 million compared to a 2.4 million net loss in a prior year period. The diluted net income per share for the fourth quarter was 10 cents compared to the net loss per share of 9 cents in the fourth quarter of 2021. The wave average number of diluted shares outstanding for the fourth quarter was 28.9 million. We expect Q1 Weighted average shares outstanding to be approximately 29.1 million. During the fourth quarter, we generated 24 million in cash, and we ended the year with cash and investments totaling 451 million. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers while training and opening new implanting centers. For the full year 2022, revenue totaled $407.9 million, or a 75% increase over $233.4 million. U.S. revenue was $394.8 million, or 79% year-over-year growth, while revenue outside the U.S. totaled $13 million, a 5% year-over-year growth despite foreign currency headwinds. Net loss for the full year 2022 totaled $44.9 million compared to $42 million in 2021, with the net loss per share of $1.60 for 2022 compared to $1.54 in the prior year. Moving on to 2023 guidance, we expect full year revenue to be in the range of $560 to $570 million, a 37 to 40% increase compared to 2022. Full year growth margin is expected to be in the range of 83 to 85%. As Tim previously noted, we expect to activate 52 to 56 new centers per quarter and establish 12 to 14 new sales territories per quarter in 2023. Given the prevalence of high deductible health plans, we have historically seen seasonality in our business. As Tim previously mentioned, we continue to expect revenue to step down sequentially in the first quarter of 2023 and will then increase throughout the year. In conclusion, our strong performance and business momentum provide us with confidence in our outlook as we enter 2023. With that, our prepared remarks are concluded. Josh, you may now open the line for questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. With dryer question, please press star 11 again. Please limit yourself to one question and one follow-up. Our first question comes from Travis Speed with Bank of America. You may proceed.

Hey, congrats on the profitability this quarter. And I think in the past, you said once you turn profitable, you wanted to stay profitable. So I don't know if this is the start of that because looking at the street has over $2 in loss for earnings next year. Should that be closer to flat to slightly positive?

Yeah, let me comment.

Hi, Travis.

Let me comment first on that Rick kind of jumped in. I think as we know, we wanted to get to profitability. We know how important it is from a business standpoint. I think moving forward, it will continue to be a desire of the organization. But we also know that in Q1, we do see seasonality there. So let me hand it off to Rick there.

Yeah, so we did demonstrate some improved leverage in Q4. And we also expect in Q1 that we would lose some leverage just due to our normal revenue seasonality. But we do intend to show improving operating leverage as we progress throughout the year. We're not changing our tone on profitability. We're going to continue to run our playbook. But it is important to understand that we do have a very disciplined approach in determining our spending and our investments across our business.

Okay, that's good color. And so, for OPEX, so something maybe in the 30% range, is that a good starting point? And I'm curious if you would hold that if revenues come in higher than expected for the year, or if you would also kind of grow OPEX upside with revenue upside over the course of the year. And then the other follow-up was on the comment on Inspire 5. You mentioned, I think, move into early 2024. I don't know if there was a change or something that drove that comment or if it was just more of a caveat.

I'll start, Travis. So as we did demonstrate that the revenue did outpace operating expenses in the fourth quarter, we're not going to guide on bottom line, which means also operating expenses at this time. And so we're going to continue to make thoughtful, disciplined investments, but we're really focused on driving that top line.

As far as the Inspire 5, I think we continue with the program. The design is frozen. We are going through the operational testing. We're building up the qual units. And we're building redundancies. We have multiple manufacturers for that product, again, to protect for supply chain. So always a little bit of challenge to work the schedule to get all the testing done and get the submissions in. But we're still going to be pushing really hard to get the approval by the end of 23. But we can see it. slide into early 24 if the cycle is tight.

Okay. Thanks for the questions. Thank you, Travis.

Thank you. Our next question comes from Robbie Marcus with JPMorgan. You may proceed.

Yeah. Thanks for taking the questions, and congrats on a really nice quarter.

Hey, Robbie.

Hey. Maybe starting with the guide, you know, you're coming off a really good growth year. Your guidance in terms of growth is still a really healthy rate for 2023, but a pretty significant decline in growth rate versus 2022. And by my math, it kind of looks like center utilization might be flat to down in the implied guide for 23. So anything other than your usual conservatism here that we should be thinking about implied in the guidance as we start the year?

Yeah, we want to be very consistent on how we put our guidance out there, how we look at the business at the beginning of the year. We already mentioned in the note that we want to continue to drive utilization and actually improve utilization at existing centers, in fact, to the point of putting additional incentives in there for the sales team. So, again, yes, we want to be careful putting guidance out early on. We like to position companies in and really have been strong across the board with all of our milestones.

Got it. And then, while not a huge part of sales today, the international constant currency growth number in fourth quarter was really impressive and a big step up from third quarter, it looked like. How should we think about the cadence of international throughout 2023? And can this be a starting to become a material contributor. Thanks.

Thank you very much, Harvey. I think we're very excited about international, and we know it's just days away before getting confirmation from the French authorities that we will be listed on the registry as an accepted product, fully reimbursed in France, and we're recruiting a country manager there. So we think France is going to have a good year. We think Belgium will follow that, as well as the Netherlands, is set up to have a strong year in 2023. And Germany, and then on top of that, even the UK has started doing cases too. So we like what's happening in Europe. On the other side, Singapore, Hong Kong will be doing the first case in just a few weeks. And Japan has really started to uptick a little bit. So I think it's going to be a measured success with the growth in international, but the key thing is still hovering around the 3% mark as far as global revenue, and we're not going to take our foot off the pedal of the United States. We want to continue to grow utilization and really focus on the U.S. market as well. So while I think you'll see continued growth internationally, our emphasis continues to be on the U.S. market.

Really helpful. Thanks a lot. Thanks, Bobby.

Thank you. Our next question comes from Adam Mader with Piper Sandler. You may proceed.

Hi, Tim. Hi, Rick. Hope you can hear me okay, and congratulations on the nice finish to the year. Maybe just to start, wanted to ask about direct-to-consumer expense and realize there's no guidance on OpEx, but just remind us kind of where 2022 DTC spend came in and how investors should think about spend in 23 and then just longer term kind of direction where this could go.

Sure. Hey, Adam. It's Rick. So we continue to make investments in DTC because it's very important for our pipeline. We talked about over 13 million visits to our website and 78,000 physician contacts. And so it's a very important part of our business. In the fourth quarter, our DTC spend was about 21 million. that's relatively flat over the third quarter but we're going to continue to increase that year over year in 22 we spent 74 million in 2022 and that was up about 55 percent over 21 where we spent 48 million We're going to continue to make those investments and grow our investments in VTC, but that growth will slow. It will be less than 55%, but we're not given specific guidance around what might be right now.

Okay, understood. Thanks for the color there. And then just for the follow-up, you guys give helpful color and guidance on new account ads. I'm curious if you are able to share some color on implanting physicians per account, You know, are there metrics you can share there? And how do you think about those trends going forward? There's clearly a lot of demand for your product. So wondering how you think about the importance of not just growing the account base, but also the number of docs at existing centers. Thanks for taking the question.

Absolutely, Adam. Great to hear from you. Thank you. It continues to be a focus, and it's one of the fastest ways to be able to increase capacity at an existing center is to add a surgeon. And so we'll continue with the focus on that. We don't have specific metrics here, but it is one of the key methods to work with centers to either grab additional OR time for the existing surgeons, but to also just train their partners to be able to have additional OR time because we know the demand certainly is there. So we'll continue to look forward and try to provide some more specifics on that, but it is certainly a key factor in for our field team to be able to grow capacity. Thank you. Thank you, Adam.

Thank you. Our next question comes from Rich Newither with Truist. You may proceed.

Hi. Thanks for taking the questions and congrats on another really great quarter. Solid finish to the year. I wanted to Maybe just start off on the 1Q seasonality comments in the context of the 4Q impact you called out on supply issues and maybe some deferral into the 1Q. Typically, you see, I think, in the last few years, about a 10% or low teens percentage decline, 4Q to 1Q. It sounds like you're suggesting that might be a little bit less than normal. So, A, is that correct that the 10%, you know, or less of a sequential decline or less than historical is a good way to think about it? Can you quantify what you think that supply pushout procedure, you know, demand pushout might have been?

Yeah, let's go back and talk a little bit about what we're talking about first. First, I think we've always kind of talked about like a 12% seasonality as we moved into Q1. But what we're talking about with these stimulation leads, remember in the third quarter when we transitioned from the polyurethane production line to the silicone production line, we built up a safety stock polyurethane. Then we had to stop and purge the line and get them back up and running. And we did that, but we have to be able to get up to volume. And then the process of scaling is when we ran into some of the challenges. So we went to more of a just-in-time delivery to support cases and would be holding some power level orders or things like that. But we were able to fulfill and closely track with scheduled procedures to make sure that we had all those products ready to go. And for cases that get scheduled in January and part of the just-in-time system, some of those may ship in January. So probably not a big number, but certainly wanted to bring awareness to that and that the seasonality still exists, but with the supply chain challenges, it might offset that a little bit, but just to make everybody aware of that. But the good news is the inventories are growing and the production lines are scaling up.

Okay, that's helpful. Got it. So it sounds pretty minor. You know, your normal seasonality is probably a good way to think about it. And then just on the account opportunity, you know, I think you're right under 1,000, you know, centers right now and planting centers. You've talked in the past about, you know, I know it's very high level, but I think something to the tune of the order of magnitude of 4,000 accounts in the U.S. that you could theoretically get, and I think you've also said there's 4,000 ASCs out there. Can you maybe just refresh our memory on kind of how you see that 1,000 install base, you know, progressing towards some account opportunity, and what is the right account opportunity?

Yeah, good question. So, yeah, when we took that 4,000 and 4,000 got to a total of 8,000, and then we just assumed about a third of those centers would have capability or would be doing Inspire and that put our target market at 2,400 and I think over the last couple quarters we've been spending more time evaluating that because we've been recognizing in smaller communities physicians are setting up centers that don't require patients to take long drives into more of the larger city centers. I think we're going to continue to evaluate that. I think the number of centers that we can move to will far exceed the 2,400. And we've already demonstrated in some towns in Idaho, Montana, even in Jackson, Wyoming, that there are very productive accounts in these smaller communities. And we can really leverage the community doctors to be able to offer, inspire and have more community-based care. So I think that story continues to evolve, and we will continue to increase the number of centers capable of treating patients with INSPIRE.

Thank you very much.

Thanks, Rich.

Thank you. Our next question comes from Larry Beagleson with Wells Fargo. You may proceed.

Good afternoon. Thanks for taking the question, Tim and Rick, and ASCII. I wanted to ask on the guidance and the new indications and label changes. Tim, what are you assuming for the timing, you know, downs, AHI, BMI, and the impact that you're assuming in the guidance?

Got it. We're very optimistic with the pediatric population with Down syndrome. I think that we've been working closely with the FDA to answer questions that they have. They've come and done an audit on the clinical data, so we know that they're progressing in their review as well. And so we're optimistic that that should happen in the first half of the year, which I think is really exciting. As far as the high AHI and the warning for BMI, think that also is progressing we're working with the fda again and a little bit earlier stage so that'll take a little bit longer to be able to get that approval but certainly confident that that's coming through and it does have the proper designation to help accelerate the review at the fda so we expect both of those in the near future and and uh should have a impact on the business so we did try to kind of build that into the guide that we put forward. I think in both of those populations, it'll be a little bit of a slow uptick as we get awareness out there and to be able to incorporate that into the existing practices. The good news is a lot of the pediatric hospitals or the children's hospitals are affiliated with some of the larger institutions that already do INSPIRE today. So we already have an INSPIRE present. Hopefully that will streamline our ability to get those centers up and running on the pediatric front. So more to come on that. We're very excited about that population. It's near and dear to our heart. And we're working with the societies and the parents and family groups to be able to build awareness of that.

Just one follow up on pediatric down. Why do you think the uptake will be low there? um they're relatively well or you know well organized community if you will um you know i think their the clinical need seems pretty pretty high here um you know you've been working on this for a while um so why why do you expect the uh you know uptake in that population uh to be slow thanks for taking the questions thank you larry i think the um oh it's we've been working on it for years and you've seen the clinical studies and then enrollment those studies and still

A relatively small number of patients have received Inspire in that pediatric group. I think it's just a new therapy and a new option for the families and the doctors to be able to understand. So I think this is going to be an educational process like any new indication or like any new therapy or in introducing Inspire into any new country. There's just always just a little bit of a slow adoption curve as as people learn about the therapy and become comfortable with it and increase the prescription of the therapy.

All right, fair enough.

Thanks a lot. Thanks, Gary. Thank you. Our next question comes from John Buck with Spiegel. You may proceed.

Thanks, guys. Good evening.

Rick, maybe first one for you. Do you have an EBITDA number for the quarter? I'm counting around $15 million. I just don't have the cash flow statement. So maybe just your thoughts on around $15 million. And if so, I believe you guys would be evened out positive for full year 22. Maybe just provide your thoughts on how that would look or trend for full year 23.

Yeah, so stock-based compensation was about $15 million. So in rough terms, John, we're about 18 million roughly in EBITDA positive for the fourth quarter. And so that stock-based compensation expense has increased. Again, that will increase. We're also going to continue to make investments along all facets of our business, R&D, sales and marketing, and so on. And so with that, We expect that, you know, we'll lose leverage in the first quarter with our seasonality, but then gain that back as we progress throughout the year. But, again, we're not providing any guidance on OPEX or bottom line at this time.

Yep, I got it. But I guess maybe just as a follow-up to that, you know, if you were EBITDA positive for full year 22, which you just confirmed, and you expect leverage not for one Q, but over the course of 23 – we can just sort of draw our own conclusions from there. Is that a fair statement? That's fair. Okay, perfect. And then, Tim, just talk to us, if you don't mind, on the ASCs a little bit. I think it came in again 23%. Is that representative as a percent of the overall procedures? And maybe more importantly, how do you see this playing out and evolving over time? I think initially you were excited about those potentially being higher utilization settings, the reimbursements improve there. You've got a good number or percentage of commercial payers to talk to us and how that can help, you know, act as an overall driver for utilization for Inspire longer term. Thanks.

I think we continue to be excited about it. I think this may be a little bit more of a post-COVID phenomenon where the hospitals are really active again. And so while we're still at 23%, we're still growing the number of ASCs, but we're growing the number of hospitals as well. And that's not too surprising. I do think the utilization impact that we're seeing is part of a factor of the ASCs. I think right now we're running maybe 20% of our procedures are done in ASCs, even though ASCs make up 23% of the centers, what that means is they're taking more of their fair share of the procedures. So that's really good to see the utilization growing in both centers, but particularly in ASCs. As we continue to progress, I think we'll continue to look for further sites of service. But as we know, the reimbursement in hospitals continues to be very, very strong and our ability to Garner OR time to take care of the patient continues to grow, and that is evidenced by the increased utilization across the board. So we're not taking our focus off ASCs, but we continue to leverage all the hospitals that want to participate with INSPIRE as well.

Got it. Thanks, guys. Thanks, John.

Thank you. Our next question comes from Mike Pollack with Wolf Research. You may proceed.

Mike Pollack Good evening. Thank you for taking the question.

First topic, the comment on modifying incentive compensation for your field force to focus on higher utilization at existing centers. I guess, can you level set? Is this a notable change? Is it a subtle change? What did the framework look like before? What does it look like now? And I guess, why make this change for 2023?

Absolutely. Well, first off, it's an important part of the compensation for the field, especially the territory managers, but the management team shares in the same compensation structure, so they're all very consistent. We have different groups of people. We have the area business managers, as you know, that focus on opening new centers, and the territory managers that are responsible for cultivating the existing centers to increase utilization. In the past, we used to compensate more. Everybody gets their base comp. And of course, they get their commissions based on implants and revenue and units sold. But we have added components. In the past years, it's been based on what we call patients expecting therapy or more around patients in the prior authorization process. But as we continue to mature, it's important that we shift that from individual patient count to more utilization at site. So we've kind of switched over the parameters starting this year to really focus more on the utilization site. So I think we just presented it at the national sales meeting just a week ago, and the team's very excited about the progress that they made last year as well as the prospects moving forward.

My second one, if I may, a leverage-related question.

You report SG&A in a consolidated line. I don't see a breakout in filings or the like of S&M versus G&A. I'm just curious, as you assess kind of the leverage that you're seeing in the model, is there a variance worth calling out as to how your G&A spend is getting leveraged versus S&M? Just if you could frame up like, you know, where G&A is as a portion of total, and is that getting materially better versus S&M, or are they about trending the same? Any color there would be great. Thank you so much.

Hey, Mike, it's Rick. So we have demonstrated leverage across all those line items, R&D, G&A, and sales and marketing as over the fourth quarter and throughout the year in 2022. Again, we're going to lose that in Q1 with seasonality. But even R&D, we're continuing to make investments. R&D was 19% of revenue in the third quarter. That was 15%. in the fourth quarter. G&A is in that 10% to 12% range. And we expect to continue to be in that ballpark in that range going forward.

So we're getting leverage across all lines. Thanks, Mike.

Thank you. Our next question comes from Chris Pasquale with Nefron Research. You may proceed.

Thanks. Hey, guys.

I want to follow up on the question about the shift in incentive comp. The guidance for this year implies we add about as many sites in 23 as you did in 22. Just wanted to see how you square that with where you're incentivizing your team to spend their time. Maybe we're reading too much into that comment, but it seems like that could mean fewer center ads this year.

Well, I think we left the guide consistent from 22 to 23 because we still have our training team in the area of business managers to be able to focus on adding new centers. And we're going to continue with that. We also previously talked about how our growth has really been driven predominantly by increased utilization, same store sales, versus the contribution from new centers. And I think what we're kind of highlighting is we're going to continue down that pathway. And we want to keep focusing on growing utilization because centers that are able to do more procedures, they get better outcomes. They're more proficient in the procedure, they're proficient on managing the patients, they're better at patient flow, they're better at submitting the proper codes to get proper reimbursement. So centers that have high utilization are just so much more efficient and have higher patient outcomes. So we're going to continue with that trend and continue Um, having territory managers, ideally managed left centers that are doing higher utilization. Okay. That makes sense.

And then 78,000 physician contacts driven by our DTC effort is very impressive. You treated about 16,000 patients last year. So one out of every five people who raised their hand are actually getting an implant. Where are the stumbling blocks today that are causing patients to fall out of that funnel? And can you talk a little bit more about the digital scheduling tool you mentioned and whether that's part of the solution for trying to improve that yield?

Right. When we talk about the physician context, there's another sentence in there that talks about patients getting direct referrals from their own healthcare providers. That's not part of that number. And so there's always a little bit of specificity on where exactly the patients come from. And is it truly one in five from the advisor care program? But how many patients see the ad, they'll go to the website, they'll be educated, but rather than going through the advisor care program, they will contact their own healthcare provider or their own sleep physician saying, what do you think about Inspire? Will this work for me? And they actually will become a direct physician referral and then not coming through from the advisor care program. So that's really an important part of the business as well. So we have to continue to educate sleep physicians. On the other side, we need to continue to improve the efficiency of the advisor care program. And we do have a pilot out there right now to be able to log directly in to the scheduling at physician's office. So when the advisor care program talks to a potential patient, determines that they are a good candidate, that they can directly schedule in. So we have a handful of sites up and active And we're really looking to further expand that program earlier in the year. Thanks.

Thanks, Chris. Thank you. Thank you. Our next question comes from Matthew Mishen with KeyBank. You may proceed.

Hey, Tim. Hey, Rick. Thanks for taking the questions. Absolutely. Yeah, so I think this might be a little bit early to ask, but I think investors are encouraged about the improvements with the Inspire 5 once that gets through approval. Do you think as it gets closer, like some positions will wait for it to be approved where it might actually delay some implants approval?

Great question. I don't think so. We see this in the past with the new remote with Bluetooth, with going to silicone leads, going to Inspire 4 from the Inspire 2. Now that's back in 2018, but we just don't see that slowdown. Once we have the patient flow and the patient gets scheduled, we'll just stay on the pathway. Inspire 4 going to 5, while it puts the sensing inside the can, It doesn't have a dramatic impact, such as like when we go to future generations with auto sleep detect or with auto titration. So we don't expect to see any kind of slowdown, and we know the demand continues to be strong.

Okay, excellent. And then a follow-up, just a predictor study with an initial readout in 2023. I think you mentioned that in an industry presentation earlier this year, there was some data published from another study. Can you comment on like what that showed and why that would be encouraging for the readout for predictor?

Yeah, absolutely. So we finished the first 300 in 2022. At the same time, Dr. Weiner is a physician in Arizona. Give him a shout out because his paper was published several weeks ago with the first 100 patients. And we're getting the data now from the first 300. Right now it's in the quality stage, meaning that we get physician over-read of the data for quality control, so we're right in that process. But we also noted there were patients with a higher BMI above 32. So we actually are entertaining the opportunity to continue that study and actually increased to maybe add another 300 patients, go to 600, being able to widen the number of patients that we can treat with that. So very active program. We're in the process of getting the quality control on the first 300, and we're looking to just continue enrolling patients because the data is we like what we see, and we think that we might be able to treat even a higher BMI population. So you'll expect us to say that we'll be going to 600 patients soon.

All right. Thank you very much.

Absolutely. Good to hear from you.

Thank you. And as a reminder, to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from Suraj Khalia with Oppenheimer. You may proceed.

Good afternoon, Tim. Can you hear me all right? Yes, Suraj. How are you? I echo the sentiments. Congrats on a nice finish to the year. Thank you. So Tim, forgive me, maybe I missed the new store, same store metrics provided. If I could ask specifically the 225 or so sites added last year, how many implants did they do for the whole year?

Yeah, we don't have that. I get what you're asking. We don't have that specific numbers in front of those, but remember how we do new sites. And a new site is anybody who has opened up during the year. So any site that we opened in the fourth quarter, obviously they were only able to do their first cases, correct? So they do one or two cases in November, December. Anybody who opened up January 1st of 2022, is still in the same bucket of a new center. And they have the opportunity to reorder and do additional patients through the year. So some of those can be productive accounts by the time they get to the end of 2022. So it's kind of the way that we establish case centers and we establish them per year. So yeah, I don't really have the exact number of what percent of the cases were from the class of 2022.

Tim, how do you define account turnover?

First, let's define account. An account is a purchasing unit, right? That would be a hospital that orders product from us. That's what we call a center. A center can have several different accounts per se. So there may be Kind of comes back down to who's on the website, right? We don't have one center on a website. We could have multiple centers on there, right? The sleep practices could be on the website along with the implanting surgeon's website. So turnover, we don't have a whole lot of center turnover. Those are purchasing units. But sometimes they'll go on hold if the surgeon moves. But go ahead.

I guess, Tim, what I was really getting at, just trying to get my arms around, you know, you'll have 905 sites exiting FY22. Great. But does 905 really imply that Onboarding was, I don't know, pick a number, 1,100. And then some bled out, you know, for the various reasons that you have mentioned on calls in the past. They didn't do implants. You'll kick them out of the list and all that. And then you'll exit it at 905. So, you know, just kind of trying to understand what the turnover is. You know, how many don't come back, so to speak.

Very low. Very, very low. And I don't think in the fourth quarter we really closed any sites. So what you see is additive and 905 is the active number of centers. And during COVID, we reported, I think once we closed 15 sites, another time we closed like 12. By the way, some of those sites have a surge and move back in and are back in process. So we have very, very low turnover of a site once they become active. Now we want to continue to work with that site to be able to increase utilization doesn't mean a site if they're not productive or if they have too much of a backlog of patients that they're scheduling out too late, we'll remove them from the website. But the website and an active center are two independent functions.

Gentlemen, thank you for taking my questions.

Raj, good to hear from you.

Thank you. This concludes the Q&A session for the conference. I'd now like to turn the call back to Tim for any closing remarks.

Thank you, Josh, and thanks for all 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 successful and consistent patient outcomes. The Inspire team's commitment to patient remains unmatched and is the most important element to 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 in Asia. 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 month ahead. Please stay safe and healthy.

Thank you. This concludes today's conference call. You may now disconnect. Thank you.

Star 1-1. Thank you. Thank you. Thank you. you Good afternoon. My name is Josh, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the INSPIRE Medical Systems fourth quarter and full year 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I'll now hand the call over to your first speaker, Ezgi Yazda, the Vice President of Investor Relations at INSPIRE. You may begin the conference.

Thank you, Josh, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buhl, Chief Financial Officer. Earlier today, we released financial results for the three and 12 months ended December 31st, 2022. 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 law. All forward-looking statements including without limitation those relating to our operations, financial results and financial conditions, investments in our business, continued effects of the COVID-19 pandemic, full year 2023 financial and operational outlook, and improvements in market access are based upon our current estimates and various assumptions. 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. Please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K to be filed with the SEC by February 14th 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 7th, 2023. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Ezgi. And thanks, everyone, for joining our business update call for the fourth quarter and full year 2022. We are excited to report our first profitable quarter and a solid finish to a very strong year with significant progress across all elements of our business. As always, we first and foremost reiterate our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire Therapy. During today's call, we will highlight many accomplishments from 2022 that demonstrate our ongoing focus on the patients, including improvements in access to therapy, technology advancements, and planned activities to broaden the population that can benefit from INSPIRE. We will also discuss our outlook for fall year 2023. We completed many important milestones in 2022. and there are now over 36,000 patients who have received INSPIRE therapy. During the year, we received FDA approval of full-body MRI compatibility and launched our silicone-based stimulation and sensing needs, along with the Bluetooth-enabled patient remote. Further, we made significant progress with our digital platform, including major updates to the INSPIRE SleepSync patient management system and the Inspire Sleep app. We also initiated a pilot of a digital scheduling tool, which we believe will significantly enhance patient access to care through our advisor care program. In addition, we submitted important indication expansions to the FDA, including for the pediatric population with Down syndrome and for patients with a high apnea hypopneic index. We raised over $240 million in cash, as noted previously, and in the fourth quarter, we achieved profitability for the first time, all of which gives us confidence as we enter 2023. With that, let's review our results. In the fourth quarter, we generated revenue of $137.9 million, representing a 76% increase compared to the fourth quarter of 2021. For the full year of 2022, revenue totaled $407.9 million, a 75% increase compared to full year 2021. Our growth continues to be driven by higher utilization at existing centers and supported by the activation of new centers. During the fourth quarter, we experienced challenges with our supply chain and as the demand for the silicone-based sensing and stimulation leads outpaced our ability to provide products due to issues with scaling the production lines. These challenges have been resolved and we are increasing our inventory levels. Despite these challenges, we were successful in providing product for all scheduled procedures in the fourth quarter. We have experienced seasonality in the first quarter due to the reset of high deductible health plans at the start of the year. While this remains the case, the first quarter of 2023 may see slightly less seasonality due to the supply chain issues in the fourth quarter. With that said, we expect full year revenue to be in the range of $560 to $570 million a 37 to 40% increase compared to 2022. In the fourth quarter, we continue to increase our capacity by adding 61 new implanting centers, ending the year with a total of 905 centers. At the end of the fourth quarter, ambulatory surgical centers made up 23% of US centers. And in 2023, we expect to continue to activate 52 to 56 centers per quarter. Regarding the US sales team, we created 16 new sales territories in the fourth quarter, bringing our total to 225 territories. We are increasing our guidance in 2023 and expect to add 12 to 14 sales territories per quarter compared to 10 to 12 per quarter in 2022. In 2023, we will continue to scale our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. As such, we modified our incentive compensation for the field organization to focus on higher utilization at existing centers. We will continue to enhance our ability to connect interested patients with a qualified healthcare provider. Our outreach programs are very effective in generating interest in Inspire Therapy, primarily through the InspireSleep.com website. For the full year of 2022, the number of visitors to our website surpassed 13 million, an increase of 86% year over year. And from these visits, we had over 78,000 physician contacts. Of note, these physician contacts represent the calls and emails to an advisor care program or directly to a physician's office and do not include referrals directly from a patient's healthcare provider. From a U.S. reimbursement perspective, the final rules for 2023 were published in November and came in generally as expected, providing a stable reimbursement outlook for healthcare providers. Moving on, our international business continues to make strides, growing 28% in the fourth quarter over the prior year despite ongoing headwinds from unfavorable exchange rates. During the quarter, international revenue was less than 3% of global revenue, highlighting the significant growth in the U.S. market. There were many positives in our international business during the fourth quarter, including the strong performance in Germany, the Netherlands, and Switzerland. Furthermore, following many years of working with the French authorities, we are in the final process to have INSPIRE listed on the French registry in early 2023 at reimbursement rates consistent with the rest of the world, and the team continues preparations for a commercial launch there. In Singapore, our flagship programs continue to perform at productivity levels consistent with U.S. centers. We also see momentum in Japan with multiple centers doing first procedures in the fourth quarter that have also completed or booked additional cases in the first quarter. In Hong Kong, we expect to complete our first procedures in February, and in Australia, we have resubmitted for reimbursement and should have a determination later this year. Turning to R&D. We recently submitted our SleepSync Physician Programmer for FDA review. This new programmer connects with our next generation SleepSync digital health platform, which is a key step toward providing remote patient programming. Longer term, we continue to work on the design of our fifth generation Inspire Neural Stimulator. The Inspire 5 device will eliminate the pressure sensing need and incorporate the sensor inside the neural stimulator using an accelerometer to measure respiration. We have finalized the design, and we are conducting operational and production qualification. We are still targeting FDA approval in late 2023, but depending upon the FDA review cycle, this could move into early 2024. We continue to conduct research and clinical trials to increase the number of patients who can benefit from Inspire therapy. In the fourth quarter, we finished enrolling the first 300 patients in our predictor study, which is the first step to replacing the requirement for drug-induced sleep-induced sleep procedure with an office-based measurement for patients with a BMI less than 32 and continue our plans for initial readout of the data in 2023. In summary, we are experiencing significant momentum in all aspects of our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy. In 2023 and beyond, we will continue to increase utilization at our existing centers while adding capacity by opening and training new centers. The ongoing expansion of our call center and investment in our DTC campaign support these initiatives, and we are seeing enhanced productivity from these efforts, which is driving our improved financial performance. Finally, the many R&D achievements in 2022 highlight our commitment to improving patient outcomes and enhancing both the patients' and healthcare providers' experience with Inspired Therapy. We remain extremely excited about our future prospects and our confidence that we have the appropriate strategy in place to drive long-term stakeholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Thank you, Tim, and good afternoon, everyone. Total revenue for the fourth quarter was $137.9 million, a 76% increase from the $78.4 million generated in the fourth quarter of 2021. U.S. revenue in the fourth quarter was $134.3 million, an increase of 78% from the $75.6 million in the prior year period. The growth in the U.S. reflects several factors, including higher utilization at existing centers, the addition of new implanting centers, expanded direct-to-consumer marketing, and a higher number of territory managers. Revenue outside the U.S. increased to $3.6 million, which is a 28% increase year over year on a reported basis, while units sold outside the U.S. grew 43% year over year. The U.S. average selling price in the fourth quarter was $24,900, compared to $23,900 in the prior year period. The increase reflects our price uplift that began in May of 2022. We expect US ASP to remain steady at the current level. The ASP outside the US was $20,400 during the quarter, compared to $22,700 in the fourth quarter of 2021, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the fourth quarter was 83.9% compared to 85.8% in the prior year period, primarily due to higher costs of certain component parts and additional costs associated with the transition to our new silicone-based leads, partially offset by the price increase that began in the second quarter. Total operating expenses for the fourth quarter were $116.1 million. an increase of 68% as compared to $69.1 million in the fourth quarter of 2021. This planned increase was due to 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 long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $3.4 million in the fourth quarter, compared to $15,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances. We had no interest expense in the fourth quarter, having paid off our outstanding debt in the third quarter of 2022. We are proud to announce our first profitable quarter in the history of Inspire. Net income for the fourth quarter was 3.2 million compared to a 2.4 million net loss in a prior year period. The diluted net income per share for the fourth quarter was 10 cents compared to the net loss per share of 9 cents in the fourth quarter of 2021. The wave average number of diluted shares outstanding for the fourth quarter was 28.9 million. We expect Q1 Weighted average shares outstanding to be approximately 29.1 million. During the fourth quarter, we generated 24 million in cash, and we ended the year with cash and investments totaling 451 million. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers while training and opening new implanting centers. For the full year 2022, revenue totaled $407.9 million, or a 75% increase over $233.4 million. U.S. revenue was $394.8 million, or 79% year-over-year growth, while revenue outside the U.S. totaled $13 million, a 5% year-over-year growth despite foreign currency headwinds. Net loss for the full year 2022 totaled $44.9 million, compared to $42 million in 2021, with the net loss per share of $1.60 for 2022 compared to $1.54 in the prior year. Moving on to 2023 guidance, we expect full year revenue to be in the range of $560 to $570 million, a 37 to 40% increase compared to 2022. Full year growth margin is expected to be in the range of 83 to 85%. As Tim previously noted, we expect to activate 52 to 56 new centers per quarter and establish 12 to 14 new sales territories per quarter in 2023. Given the prevalence of high deductible health plans, we have historically seen seasonality in our business. As Tim previously mentioned, we continue to expect revenue to step down sequentially in the first quarter of 2023 and will then increase throughout the year. In conclusion, our strong performance and business momentum provide us with confidence in our outlook as we enter 2023. With that, our prepared remarks are concluded. Josh, you may now open the line for questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. With dryer question, please press star 11 again. Please limit yourself to one question and one follow-up. Our first question comes from Travis Speed with Bank of America. You may proceed.

Hey, congrats on the profitability this quarter. And I think in the past, you said once you turn profitable, you wanted to stay profitable. So I don't know if this is the start of that because looking at the street has over $2 in loss for earnings next year. Should that be closer to flat to slightly positive?

Yeah, let me comment.

Hi, Travis.

Let me comment first on that Rick kind of jumped in. I think as we know, we wanted to get to profitability. We know how important it is from a business standpoint. I think moving forward, it will continue to be a desire of the organization. But we also know that in Q1, we do see seasonality there. So let me hand out to Rick there.

Yeah, so we did demonstrate some improved leverage in Q4. And we also expect in Q1 that we would lose some leverage just due to our normal revenue seasonality. But we do intend to show improving operating leverage as we progress throughout the year. We're not changing our tone on profitability. We're going to continue to run our playbook. But it is important to understand that we do have a very disciplined approach in determining our spending and our investments across our business.

Okay, that's a good color. And so for OPEX, so something maybe in the 30% range, is that a good starting point? And I'm curious if you would hold that if revenues come in higher than expected for the year, or if you would also kind of grow OPEX upside with revenue upside over the course of the year. And then the other follow-up was on the comment on Inspire 5. You mentioned, I think, move into early 2024. I don't know if there was a change or something that drove that comment or if it was just more of a caveat.

I'll start, Travis. So as we did demonstrate that the revenue did outpace operating expenses in the fourth quarter, we're not going to guide on bottom line, which means also operating expenses at this time. And so we're going to continue to make thoughtful, disciplined investments, but we're really focused on driving that top line.

As far as the Inspire 5, I think we continue with the program. The design is frozen. We are going through the operational testing. We're building up the qual units. And we're building redundancies. We have multiple manufacturers for that product, again, to protect for supply chain. So always a little bit of challenge to work the schedule to get all the testing done and get the submissions in. But we're still going to be pushing really hard to get the approval by the end of 23. But we can see it. slide into early 24 if the cycle is tight.

Okay. That's fair. Thanks for the questions. Thank you, Travis.

Thank you. Our next question comes from Robbie Marcus with JPMorgan. You may proceed.

Yeah. Thanks for taking the questions and congrats on a really nice quarter.

Hey, Robbie.

Hey. Maybe starting with the guide, you know, you're coming off a really good growth year. Your guidance in terms of growth is still a really healthy rate for 2023, but a pretty significant decline in growth rate versus 2022. And by my math, it kind of looks like center utilization might be flat to down in the implied guide for 23. So anything other than your usual conservatism here that we should be thinking about implied in the guidance as we start the year?

Yeah, we want to be very consistent on how we put our guidance out there, how we look at the business at the beginning of the year. We already mentioned in the note that we want to continue to drive utilization and actually improve utilization at existing centers, in fact, to the point of putting additional incentives in there for the sales team. So, again, yes, we want to be careful putting guidance out early on. We like to position companies in and really have been strong across the board with all of our milestones.

Got it. And then, while not a huge part of sales today, the international constant currency growth number in fourth quarter was really impressive and a big step up from third quarter, it looked like. How should we think about the cadence of international throughout 2023? And can this be a starting to become a material contributor. Thanks.

Thank you very much, Harvey. I think we're very excited about international, and we know it's just days away before getting confirmation from the French authorities that we will be listed on the registry as an accepted product, fully reimbursed in France, and we're recruiting a country manager there. So we think France is going to have a good year. We think Belgium will follow that, as well as the Netherlands, is set up to have a strong year in 2023. And Germany, and then on top of that, even the UK has started doing cases too. So we like what's happening in Europe. On the other side, Singapore, Hong Kong will be doing the first case in just a few weeks. And Japan has really started to uptick a little bit. So I think it's going to be a measured success with the growth in international, but the key thing is still hovering around the 3% mark as far as global revenue, and we're not going to take our foot off the pedal in the United States. We want to continue to grow utilization and really focus on the U.S. market as well. So while I think you'll see continued growth internationally, our emphasis continues to be on the U.S. market.

Really helpful. Thanks a lot. Thanks, Robbie.

Thank you. Our next question comes from Adam Mader with Piper Sandler. You may proceed.

Hi, Tim. Hi, Rick. Hope you can hear me okay, and congratulations on the nice finish to the year. Maybe just to start, wanted to ask about direct-to-consumer expense and realize there's no guidance on OPEX, but just remind us kind of where 2022 DTC spend came in and how investors should think about spend in 23 and then just longer term kind of direction where this could go.

Sure. Hey, Adam. It's Rick. So we continue to make investments in DTC because it's very important for our pipeline. We talked about over 13 million visits to our website and 78,000 physician contacts. And so it's a very important part of our business. In the fourth quarter, our DTC spend was about 21 million. That's relatively flat over the third quarter, but we're going to continue to increase that year over year. In 2022, we spent $74 million in 2022, and that was up about 55% over 2021, where we spent $48 million. We're going to continue to make those investments and grow our investments in DTC, but that growth will slow. It will be less than 55%, but we're not giving specific guidance around what might be right now.

Okay, understood. Thanks for the color there. And then just for the follow-up, you guys give helpful color and guidance on new account ads. I'm curious if you are able to share some color on implanting physicians per account, know are there metrics you can share there and how do you think about those trends going forward there's clearly a lot of demand for your product so wondering how you think about the importance of not just growing the account base but also uh the number of docs at existing centers thanks for taking the question absolutely adam uh great to hear from you thank you uh it continues to be a focus and it's the it's one of the fastest ways to be able to increase capacity at an existing center is to add a surgeon

And so we'll continue with the focus on that. We don't have specific metrics here, but it is one of the key methods to work with centers to either grab additional OR time for the existing surgeons, but to also just train their partners to be able to have additional OR time because we know the demand certainly is there. So we'll continue to look forward and try to provide some more specifics on that, but it is certainly a key factor for our field team to be able to grow capacity. Thank you.

Thank you, Adam.

Thank you. Our next question comes from Rich Newither with Truist. You may proceed.

Hi. Thanks for taking the questions, and congrats on another really great quarter, solid finish to the year. I wanted to... Maybe just start off on the 1Q seasonality comments in the context of the 4Q impact you called out on supply issues and maybe some deferral into the 1Q. Typically, you see, I think, in the last few years, about a 10% or low teens percentage decline 4Q to 1Q. It sounds like you're suggesting that might be a little bit less than normal. So, A, is that correct, that the 10%, you know, or less of a sequential decline or less than historical is a good way to think about it? Can you quantify what you think that supply pushout procedure, you know, demand pushout might have been?

Yeah, let's go back and talk a little bit about what we're talking about first. First, I think, we've always kind of talked about like a 12% seasonality as we moved into Q1. But what we're talking about with these stimulation leads, remember in the third quarter when we transitioned from the polyurethane production line to the silicone production line. We built up a safety stock polyurethane, and then we had to stop and purge the line and get them back up and running. And we did that, but we have to be able to get up to volume. And then the process of scaling is when we ran into some of the challenges. So we went to more of a just-in-time delivery to support cases and would be holding some power level orders or things like that. But We were able to fulfill and closely track with scheduled procedures to make sure that we had all those products ready to go. And for cases that get scheduled in January and part of the just-in-time system, some of those may ship in January. So probably not a big number, but certainly wanted to bring awareness to that and that the seasonality still exists, but with the supply chain challenges, it might offset that a little bit. just to make everybody aware of that. But the good news is the inventories are growing and the production lines are scaling up.

Okay, that's helpful. Got it. So it sounds pretty minor. Your normal seasonality is probably a good way to think about it. And then just on the account opportunity, I think you're right under 1,000 centers right now and planting centers. You've talked in the past about know i know it's very high level but i think something in the to the tune order magnitude of 4 000 accounts in the us that you could theoretically get and i think you've also said there's 4 000 ascs out there can you maybe just refresh our memory on on kind of how you see that a thousand install base you know progressing towards some account opportunity and what is the right account opportunity

Yeah, good question. So yeah, when we took that 4,000 and 4,000 got to a total of 8,000. And then we just assumed about a third of those centers would have a capability or would be doing Inspire. And that put our target market at 2,400. And I think over the last couple of quarters, we've been spending more time evaluating that. Because we've been recognizing in smaller communities, physicians are setting up centers that don't require patients to take long drives into more of the larger city centers. So I think we're going to continue to evaluate that. I think the number of centers that we can move to will far exceed the 2,400. And we've already demonstrated in some towns in Idaho, Montana, even in Jackson, Wyoming, that there are very productive accounts in these smaller communities. and we can really leverage the community doctors to be able to offer Inspire and have more community-based care. So I think that story continues to evolve, and we will continue to increase the number of centers capable of treating patients with Inspire.

Thank you very much.

Thanks, Rich.

Thank you. Our next question comes from Larry Beagleson with Wells Fargo. You may proceed.

Good afternoon. Thanks for taking the question, Tim and Rick, and ASCII. I wanted to ask on the guidance and the new indications and label changes. Tim, what are you assuming for the timing, you know, downs, AHI, BMI, and the impact that you're assuming in the guidance?

Got it. We're very optimistic with the pediatric population with Down syndrome. I think that we've been working closely with the FDA to answer questions that they have. They've come and done an audit on the clinical data, so we know that they're progressing in their review as well. And so we're optimistic that that should happen in the first half of the year, which I think is really exciting. As far as the high AHI and the warning for BMI, I think that also is progressing. We're working with the FDA again and a little bit earlier stage, so that'll take a little bit longer to be able to get that approval, but certainly confident that that's coming through and it does have the proper designation to help accelerate the review at the FDA. So we expect both of those in the near future and should have an impact on the business. We did try to kind of build that into the guide that we put forward. I think in both of those populations, it'll be a little bit of a slow uptick as we get awareness out there and to be able to incorporate that into the existing practices. The good news is a lot of the pediatric hospitals or the children's hospitals are affiliated with some of the larger institutions that already do INSPIRE today. So we already have an INSPIRE present. Hopefully that will streamline our ability to get those centers up and running on the pediatric front. So more to come on that. We're very excited about that population. It's near and dear to our heart. And we're working with the societies and the parent, the family groups to be able to build awareness of that.

Just one follow up on pediatric down. Why do you think the uptake will be low there? They're relatively well-organized community, if you will. I think the clinical need seems pretty high here. You've been working on this for a while. So why do you expect the uptake in that population to be slow? Thanks for taking the questions.

Thank you, Larry. I think we've been working on it for years, and you've seen the clinical studies and the enrollment of those studies, and it's still... a relatively small number of patients have received Inspire in that pediatric group. I think it's just a new therapy and a new option for the families and the doctors to be able to understand. So I think this is going to be an educational process like any new indication or like any new therapy or in introducing Inspire into any new country. There's just always just a little bit of a slow adoption curve as as people learn about the therapy and become comfortable with it and increase the prescription of the therapy.

All right, fair enough. Thanks a lot.

Thanks, Gary.

Thank you. Our next question comes from John Buck with Spiegel. You may proceed.

Thanks, guys. Good evening.

Rick, maybe first one for you. Do you have an EBITDA number for the quarter? I'm counting around $15 million. I just don't have the cash flow statement. So maybe just your thoughts on around $15 million. And if so, I believe you guys would be EBITDA positive for full year 22. Maybe just provide your thoughts on how that would look or trend for full year 23.

Yeah, so stock-based compensation was about $15 million. So in rough terms, John, We're about 18 million roughly in EBITDA positive for the fourth quarter. And so that stock-based compensation expense has increased. Again, that will increase. We're also going to continue to make investments along all facets of our business, R&D, sales and marketing, and so on. And so with that, We expect that, you know, we'll lose leverage in the first quarter with our seasonality, but then gain that back as we progress throughout the year. But, again, we're not providing any guidance on topics or bottom line at this time.

Yep, I got it. But I guess maybe just as a follow-up to that, you know, if you were positive for full year 22, which you just confirmed, and you expect leverage not for one Q, but over the course of 23, we can just sort of draw our own conclusions from there. Is that a fair statement? That's fair. Okay, perfect. And then, Tim, just talk to us, if you don't mind, on the ASCs a little bit. I think it came in again 23%. Is that representative as a percent of the overall procedures? And maybe more importantly, how do you see this playing out and evolving over time? I think initially you were excited about you know, those potentially being higher utilization settings, the reimbursements improve there, you've got a good number or percentage of commercial payers, to talk to us on how that can help, you know, act as an overall driver for utilization for Inspire longer term. Thanks.

I think we continue to be excited about it. I think this may be a little bit more of a post-COVID phenomenon where the hospitals are really active again. And so while we're still at 23%, we're still growing the number of ASCs, but we're growing the number of hospitals as well. And that's not too surprising. I do think the utilization impact that we're seeing is part of a factor of the ASCs. I think right now we're running maybe 20% of our procedures are done in ASCs, even though ASCs make up 23% of the centers, what that means is they're taking more of their fair share of the procedures. So that's really good to see the utilization growing in both centers, but particularly in ASCs. As we continue to progress, I think we'll continue to look for further sites of service. But as we know, the reimbursement in hospitals continues to be very, very strong and our ability to Garner OR time to take care of the patient continues to grow, and that is evidenced by the increased utilization across the board. So we're not taking our focus off ASCs, but we continue to leverage all the hospitals that want to participate with INSPIRE as well.

Got it. Thanks, guys. Thanks, John.

Thank you. Our next question comes from Mike Pollack with Wolf Research. You may proceed.

Mike Pollack Good evening. Thank you for taking the question.

First topic, the comment on modifying incentive compensation for your field force to focus on higher utilization at existing centers. I guess, can you level set? Is this a notable change? Is it a subtle change? What did the framework look like before? What does it look like now? And I guess, why make this change for 2023?

Absolutely. Well, first off, it's an important part of the compensation for the field, especially the territory managers, but the management team shares in the same compensation structure, so they're all very consistent. We have different groups of people. We have the area business managers, as you know, that focus on opening new centers, and the territory managers that are responsible for cultivating the existing centers to increase utilization. the past we used to compensate more everybody gets their base comp and of course they get the Commission's based on implants and revenue and units sold but we have added components in the past years it's been based on what we call patients expecting therapy or more around patients in the prior authorization process but as we continue to mature it's important that we shift that from individual patient count to more utilization at site. So we've kind of switched over the parameters starting this year to really focus more on the utilization site. So I think we just presented it at the national sales meeting just a week ago, and the team's very excited about the progress that they made last year as well as the prospects moving forward.

My second one, if I may, is a leverage-related question.

You report SG&A in a consolidated line. I don't see a breakout in filings or the like of S&M versus G&A. I'm just curious, as you assess kind of the leverage that you're seeing in the model, is there a variance worth calling out as to how your G&A spend is getting leveraged versus S&M? Just if you could frame up like, you know, where G&A is as a portion of total, and is that getting materially better versus S&M, or are they about trending the same? Any color there would be great. Thank you so much.

Hey, Mike, it's Rick. So we have demonstrated leverage across all those line items, R&D, G&A, and sales and marketing as over the fourth quarter and throughout the year in 2022. Again, we're going to lose that in Q1 with seasonality. But even R&D, we're continuing to make investments. R&D was 19% of revenue in the third quarter. That was 15%. in the fourth quarter. G&A is in that 10% to 12% range. And we expect to continue to be in that ballpark in that range going forward.

So we're getting leverage across all lines. Thanks, Mike.

Thank you. Our next question comes from Chris Pasquale with Nefron Research. You may proceed.

Thanks. Hey, guys.

I want to follow up on the question about the shift in incentive comp. The guidance for this year implies we add about as many sites in 23 as you did in 22. Just wanted to see how you square that with where you're incentivizing your team to spend their time. Maybe we're reading too much into that comment, but it seems like that could mean fewer center ads this year.

Well, I think we left the guide consistent from 22 to 23 because we still have our training team in the area of business managers to be able to focus on adding new centers. And we're going to continue with that. We also previously talked about how our growth has really been driven predominantly by increased utilization, same store sales, versus the contribution from new centers. And I think what we're kind of highlighting is we're going to continue down that pathway. And we want to keep focusing on growing utilization because centers that are able to do more procedures, they get better outcomes. They're more proficient in the procedure, they're proficient on managing the patients, they're better at patient flow, they're better at submitting the proper codes to get proper reimbursement. So centers that have high utilization are just so much more efficient and have higher patient outcomes. So we're going to continue with that trend and continue having territory managers ideally manage less centers that are doing higher utilization. Okay. That makes sense.

And then 78,000 physician contacts driven by your DTC effort is very impressive. You treated about 16,000 patients last year. So one out of every five people who raised their hand are actually getting an implant. Where are the stumbling blocks today that are causing patients to fall out of that funnel And can you talk a little bit more about the digital scheduling tool you mentioned and whether that's part of the solution for trying to improve that yield?

Right. When we talk about the physician context, there's another sentence in there that talks about patients getting direct referrals from their own healthcare providers. That's not part of that number. And so there's always a little bit of specificity on where exactly the patients come from. And is it truly one in five from the advisor care program? But how many patients see the ad, they'll go to the website, they'll be educated, but rather than going through the advisor care program, they will contact their own healthcare provider or their own sleep physician saying, what do you think about Inspire? Will this work for me? And they actually will become a direct physician referral and then not coming through from the advisor care program. So that's really an important part of the business as well. So we have to continue to educate sleep physicians. On the other side, we need to continue to improve the efficiency of the advisor care program. And we do have a pilot out there right now to be able to log directly in to the scheduling at physician's office. So when the advisor care program talks to a potential patient, determines that they are a good candidate, that they can directly schedule in. So we have a handful of sites up and active. And we're really looking to further expand that program earlier in the year. Thanks.

Thanks, Chris. Thank you.

Thank you.

Our next question comes from Matthew Mishen with KeyBank. You may proceed.

Hey, Tim. Hey, Rick. Thanks for taking the questions. Absolutely. Yeah, so I think this might be a little bit early to ask, but I think investors are encouraged about the improvements with the Inspire 5 once that gets through approval. Do you think as it gets closer, like some positions will wait for it to be approved where it might actually delay some implants?

Great question. I don't think so. We see this in the past with the new remote with Bluetooth, with going to silicone leads, going to Inspire 4 from the Inspire 2. Now that's back in 2018, but we just don't see that slow down. Once we have the patient flow and the patient gets scheduled, we'll just stay on the pathway. Inspire 4 going to 5, while it puts the sensing inside the can, It doesn't have a dramatic impact, such as like when we go to future generations with auto sleep detect or with auto titration. So we don't expect to see any kind of slowdown, and we know the demand continues to be strong.

Okay, excellent. And then a follow-up, just a predictor study with an initial readout in 2023. I think you mentioned that in an industry presentation earlier this year, there was some data published from another study. Can you comment on like what that showed and why that would be encouraging for the readout for predictor?

Yeah, absolutely. So we finished the first 300 in 2022. At the same time, Dr. Weiner is a physician in Arizona. Give him a shout out because his paper was published several weeks ago with the first 100 patients. And we're getting the data now from the first 300. Right now it's in the quality stage, meaning that we get physician over-read of the data for quality control, so we're right in that process. But we also noted there were patients with a higher BMI above 32. So we actually are entertaining the opportunity to continue that study and actually increase to maybe add another 300 patients go to 600 being able to widen the the number of patients that we can treat with that so very active program we're in the process of getting the quality control on the first 300 and we're looking to just continue enrolling patients because the data is uh we like what we see and we think that we might be able to treat even a higher bmi population so you'll expect uh to expect us to say uh that we'll be going to 600 patients soon

All right. Thank you very much.

Absolutely. Good to hear from you.

Thank you. And as a reminder, to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from Suraj Khalia with Oppenheimer. You may proceed.

Good afternoon, Tim. Rick, can you hear me all right? Yes, Suraj. How are you? I echo the sentiments. Congrats on a nice finish to the year. Thank you. So Tim, forgive me, maybe I missed the new store, same store metrics provided. If I could ask specifically the 225 or so sites added last year, how many implants did they do for the whole year? Yeah, we don't have that.

I get what you're asking. We don't have that specific numbers in front of those, but remember how we do new sites. And a new site is anybody who has opened up during the year. So any site that we opened in the fourth quarter, obviously they were only able to do their first cases, correct? So they do one or two cases in November, December. Anybody who opened up January 1st of 2022, is still in the same bucket of a new center. And they have the opportunity to reorder and do additional patients through the year. So some of those can be productive accounts by the time they get to the end of 2022. So it's kind of the way that we establish case centers and we establish them per year. So yeah, I don't really have the exact number of what percent of the cases were from the class of 2022.

Tim, how do you define account turnover?

First, let's define account. An account is a purchasing unit, right? That would be a hospital that orders product from us. That's what we call a center. A center can have several different accounts per se. So there may be Kind of comes back down to who's on the website, right? We don't have one center on a website. We could have multiple centers on there, right? The sleep practices could be on the website along with the implanting surgeon's website. So turnover, we don't have a whole lot of center turnover. Those are purchasing units. But sometimes they'll go on hold if the surgeon moves. But go ahead.

I guess, Tim, what I was really getting at, just trying to get my arms around, you know, you'll have 905 sites exiting FY22. Great. But does 905 really imply that Onboarding was, I don't know, pick a number, 1,100. And then some bled out, you know, for the various reasons that you have mentioned on calls in the past. They didn't do implants. You'll kick them out of the list and all that. And then you'll exit it at 905. So, you know, just kind of trying to understand what the turnover is. You know, how many don't come back, so to speak.

Very low. Very, very low. And I don't think in the fourth quarter we really closed any sites. So what you see is additive and 905 is the active number of centers. And during COVID, we reported, I think once we closed 15 sites, another time we closed like 12. By the way, some of those sites have a surge and move back in and are back in process. So we have very, very low turnover of a site once they become active. Now we want to continue to work with that site to be able to increase utilization doesn't mean a site if they're not productive or if they have too much of a backlog of patients that they're scheduling out too late, we'll remove them from the website. But the website and an active center are two independent functions.

Gentlemen, thank you for taking my questions.

Good to hear from you.

Thank you. This concludes the Q&A session for the conference. I'd now like to turn the call back to Tim for any closing remarks.

Thank you, Josh, and thanks for all 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 successful and consistent patient outcomes. The INSPIRE team's commitment to patient remains unmatched and is the most important element to 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 in Asia. 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 months ahead. Please stay safe and healthy.

Thank you. This concludes today's conference call. You may now disconnect.