Inspire Medical Systems, Inc.

Good afternoon. My name is Dilem and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Inspire Medical Systems fourth quarter and full year 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there'll be a question and answer session. I'll now hand the call over to your first speaker, to Eski Yaja, the Vice President of Investor Relations at Inspire. You may begin the conference.

Thank you, Dilem, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buholz, Chief Financial Officer. Earlier today, we released financial results for the three and 12 months and the December 31st, 2023. 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 security laws. All forward-looking statements, including without limitation, those relating to our operations, financial results and financial condition, investments in our business, full year 2024 financial and operational outlook, and changes 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. Please see our filings with the Securities and Exchange Commission, including our Form 10-K, which we plan to file with the SEC on February 9th, 2024, 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 6th, 2024. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Esky. And thanks to everyone for joining our Business Update call for the fourth quarter of 2023. We are excited to report our first quarter with operating income and a very strong finish to the year. We know our focus and discipline on patient outcomes and ensuring that each patient has the best possible experience with inspired therapy is the foundation of our business. And we remain committed to this as our top priority. During today's call, we will highlight many accomplishments from 2023 that demonstrate our ongoing focus on the patients including improvements in access to the therapy, technology advancements, and planned activities to broaden the population that can benefit from INSPIRE. We will also discuss our outlook for full year 2024. We would like to take a moment to recognize two very special individuals who recently announced the retirement from the INSPIRE board following many years of service. Last week, we announced that Dr. Jerry Griffin, who after 16 years on the INSPIRE board is planning to retire following the conclusion of our 2024 annual meeting of stockholders. Dr. Griffin is one of our original directors having joined the board back in 2008 and has been an inspirational leader throughout our development and commercialization. To maintain the important medical influence on our board, we recently announced that Dr. Miriam Curret, a medical doctor with extensive business and med tech industry experience, was appointed to our board of directors. Secondly, and just yesterday, we announced the retirement of Marilyn Carlson Nelson from our board of directors. Marilyn joined the board as chair in 2018 following the passing of her husband, Dr. Glenn Nelson, INSPIRE's original chair. Marilyn has had a profound impact on our business and team members during her time on the board and served as a great leader and mentor to me and many others across the organization. In conjunction with Marilyn's retirement, I am humbled and honored to be appointed chair of the INSPIRE board of directors and look forward to this added role in continuing to lead INSPIRE for many years of growth ahead. Finally, the board has appointed Gary Ellis to the role of lead director. Gary was appointed to the INSPIRE board in 2019 following an extensive career as chief financial officer of Medtronic and he currently serves as the chair of the nominating and corporate governance committee. While we will miss Jerry and Marilyn, they will remain in the INSPIRE family and will always be just a phone call away and we sincerely thank them for their contributions to INSPIRE. Back to our review of 2023. The year was filled with many important milestones and achievements. We are excited to announce that exiting the year, over 60,000 patients have been treated with INSPIRE therapy. We expanded indications and received FDA approval to provide INSPIRE to pediatric patients with Down syndrome, to increase the upper limit of the apnehypotamic index from 65 to 100 events per hour, and to increase the body mass index warning from 32 to 40. With that, let's review our results. In the fourth quarter, we generated revenue of $192.5 million, representing a 40 percent increase compared to the fourth quarter of 2022. Our growth continues to be driven by increased utilization at existing centers and is complemented by the activation of new centers. Fourth quarter U.S. revenue totaled $189.4 million, a 41 percent increase over the same period last year. International revenue declined 16 percent to $3.1 million. As we previewed on our third quarter earnings call, during the fourth quarter, we depleted our supply of polyurethane-based leads in Europe, as we are still awaiting European Union Medical Device Regulation, or EU MDR, approval. We are working diligently to obtain EU MDR approval, and as a contingency, have received derogation authorization in the Netherlands and Belgium, and more recently in Germany and Switzerland. This enables us to ship silicone-based leads in those countries while we continue to pursue EU MDR approval. Given the strength we are seeing in our business, we are reaffirming our 2024 revenue guidance of $775 to $785 million, which represents 24 to 26 percent -over-year growth over 2023 revenue of $624.8 million. We are thrilled to report our first quarter with operating income, which totaled $9.3 million. Our net income for the fourth quarter was $14.8 million, compared to $3.2 million in the prior year period, represented diluted net income per share of 49 cents, compared to 10 cents per share in the fourth quarter of 2022. We will continue to focus on operating leverage in 2024 and beyond, and plan to move towards steady profitability as we progress through the year. We will provide further guidance following our first quarter earnings. In the U.S., during the fourth quarter, we continue to increase our capacity to support the strong demand for Inspired Therapy by adding 78 new implanting centers, ending the quarter with a total of 1,180 centers. In 2024, we expect to activate 52 to 56 new centers per quarter. Regarding the U.S. sales team, we created 13 new sales territories in the fourth quarter, bringing our total to 287. In 2024, we expect to add 12 to 14 sales territories per quarter. One of our keys to success is our ability to drive awareness of Inspired Therapy through our direct kids to consumer programs. As such, we were excited to launch a new and improved InspireSleep.com website in December, which features increased education on Inspired Therapy, including new physician testimonials. After initiating a direct digital scheduling program through our advisor care program in 2022, we expanded the program in 2023 to over 100 centers, and we'll continue focusing on this in 2024. We also continue to expand our patient nurturing program through an email campaign to patients who have visited InspireSleep.com or called our ACP and expressed continued interest in Inspired Therapy. Switching over to market access, our positive fourth quarter results reflect the strong patient demand for Inspired Therapy and an increased number of prior authorization submissions, trends that we expect to continue in 2024. Further, we have onboarded a third-party vendor to assist our market access team with the prior authorization process, which increases our capacity to meet a strong and growing patient demand. The market access team has been actively engaging with payers on the clinical indication expansion approvals received this past year. The process involves our team providing payers with the necessary clinical information and requesting implementation into the payers' coverage policies. We have already been successful with the implementation into numerous policies and expect further progress in 2024. We continue to make investments in our clinical research as evidenced by the predictor study. We completed enrollment of the second subset of 300 patients early in the first quarter and expect to publish results once the full data set has been analyzed. Once results are available, we will work with payers to update their policies to provide flexibility in assessing which patients are ready for Inspire. The predictor study is designed to assess if and when an office-based assessment can effectively replace the long-standing drug-induced sleep endoscopy or dice. This office procedure will significantly improve the patient experience and should unlock physician capacity to perform additional Inspire procedures. On the product development side, our pipeline remains robust. The team is working diligently on our response to the FDA's questions on the Inspire 5 PMA supplement. Recall, the Inspire 5 system incorporates sensing capability into the neural stimulator using an accelerometer and removes the need for the pressure sensing lead. We are completing system level and production qualification testing to submit to the FDA. With normal review time, we continue to expect approval and a limited market release in 2024, and we are targeting full commercial launch in 2025. Looking ahead to 2024, we will launch our new connected physician programmer in the U.S. called the SleepSync Programmer. This will allow physicians to access our programming screens from their own computers and eliminate the need for Inspire-provided tablets as part of the physician programming system, paving the way for future remote patient programmers. We continue to increase the adoption of our SleepSync digital platform and work on enhancements to streamline the patient experience from initial contact through long-term longitudinal management. In summary, we remain focused on patient outcomes and physician education to continue the adoption of Inspire therapy. We will continue to increase utilization at our existing centers while adding capacity by opening new centers. We remain excited about future prospects and are confident that we have the appropriate strategy in place to drive the future of Inspire. We are also committed to providing the best possible and most effective way to provide long-term stakeholder value. With that, I'd like to turn the call over to Rick for his reviews of our financials.

Thank you, Tim, and good afternoon, everyone. Total revenue for the fourth quarter was 192.5 million, a 40% increase from the 137.9 million generated in the fourth quarter of 2022. U.S. revenue in the fourth quarter was 189.4 million, an increase of 41% from the 134.3 million in the prior year period. The primary growth driver in the U.S. was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers or continuing -to-consumer marketing and a higher number of territory managers. Revenue outside the U.S. was 3.1 million, which is a 16% decrease year over year. As Tim noted, this was due to the delay of the EU MDR approval that impeded our ability to ship silicone-based leads in Europe during the fourth quarter. The U.S. average selling price in the fourth quarter was $25,000, compared to $24,900 in the prior year period. We expect the U.S. ASP to remain steady at the current level. The ASP outside the U.S. was $19,900 during the quarter, compared to $20,400 in the fourth quarter of 2022. Gross margin in the fourth quarter was .4% compared to .9% in the prior year period. The year over year increase was driven by improved manufacturing yields and higher volumes. Total operating expenses for the fourth quarter were $155.2 million, an increase of 34% as compared to $116.1 million in the fourth quarter of 2022. This planned increase was due to the expansion of our sales organization, increased -to-consumer marketing programs, continued product development efforts, and general corporate costs. Interest and dividend income totaled $5.9 million in the fourth quarter, compared to $3.4 million in the prior year period. This higher income was driven by higher interest rates on our increased cash and investment balances compared to a year ago. Net income for the fourth quarter was $14.8 million, compared to $3.2 million in the prior year period, representing diluted net income per share of 49 cents, compared to 10 cents per share in the fourth quarter of 2022. The weighted average number of diluted shares outstanding for the fourth quarter was 30.2 million. We expect the first quarter weighted average shares outstanding to be approximately 29.6 million. Our total cash position increased by $18 million in 2023, and cash and investments were $470 million at year end. This 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. Looking ahead, we expect to generate positive cash flow for the full year 2024. For the full year 2023, revenue totaled $624.8 million, or a 53% increase over $407.9 million. U.S. revenue was $606.2 million, or 54% -over-year growth, while revenue outside the U.S. totaled $18.6 million, a 43% -over-year growth. Moving on to 2024 guidance. With the strong trends we are seeing in our business, we continue to expect full year revenue to be in the range of $775 million to $785 million, representing an increase of 24% to 26% compared to full year 2023 revenue. We expect full year gross margin to be in the range of 83% to 85%. As Tim noted, we expect to activate 52 to 56 new U.S. centers and establish 12 to 14 new U.S. sales territories per quarter in 2024. As a reminder, given the prevalence of high deductible health plans, we have historically seen seasonality in our business in the first quarter. Furthermore, the fourth quarter of 2023 was exceptionally strong based on the recovery from the third quarter. As such, we expect more pronounced seasonality in the first quarter of 2024 compared to historic levels. We expect our improved operating leverage will continue into 2024 and to be profitable for the second half of 2024. We will provide additional details during our first quarter earnings call. In conclusion, our strong performance and business momentum provide us with confidence in our outlook heading into 2024. With that, our prepared remarks are concluded. Dilem, you may now open up the line for questions.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. We ask that you please keep your questions to no more than one and one follow-up. And if time permits, we'll be more than happy to take more questions. Please stand by while we compile the Q&A roster. And I sure our first question comes from the line of Adam Mader from Piper Sandler. Please go ahead.

Hi, Tim and Rick. I hope you can hear me okay and congrats on a nice finish to the year and great to see the leverage in the quarter. Maybe just to start on the guidance for 2024, the -$785 million. Can you just maybe go into a little bit more detail there? How are you thinking about utilization or same-store sales growth? What's assumed in the guidance around label expansion? You know, the Gen 5 launch. Just walk us through some of those puts and takes and then I'll follow up. Thanks.

Sure. Hi, Adam. I think number one, I think we're seeing a trend that same-store sales or the increased utilization at existing centers is the primary driver of our growth in 2023. We expect that to continue into 2024. We certainly are going to complement that with opening new centers and we provided the guide on what we expect to open new centers as we get one to the first quarter. But again, we're going to continue to focus on building ENT capacity and increasing the number of procedures done at existing centers.

And any comment, Tim, around the label expansion or the Gen 5 impact in those figures?

Sure. I don't think the Gen 5 will have a big play because we'll be doing a limited launch as our plan in 2024 and we're planning for a full launch in 2025. So we'll have time to talk about that further on. I do think the indication expansions will start to show in 2024 primarily with the high AHI and the pediatric population with Down syndrome is getting some strong awareness right now. Remember the high BMI is really driven by mechanism of action and we use sleep endoscopy today to treat those patients that have tongue-based obstruction and a high BMI with patients who have lateral wall obstructions. That's where we're having trouble. In fact, that's where we're we're targeting some of those patients may benefit from a GOP-1.

That's good color. Thank you. And I feel like I have to ask about the leverage and supporter. You know, the positive operating income. You know, I know there's some seasonal variability to models, but Rick, any constructs or frameworks you can give to us as we think about 2024 and potential leverage this year. And I heard the commentary earlier. It sounds like that is a focus in 2024. And I think I heard the phrase move towards steady profitability over the course of the year, but I was hoping you could just flesh that out for us in a little bit more detail. Thanks again for asking the questions.

Okay, sure. Thanks, Adam. Yeah, our focus does remain on driving top line growth as we as we grow the therapy adoption. And we did demonstrate, you know, a strengthening of our operating leverage in the model. We definitely saw that in the fourth quarter. And we expect to see that. We do have seasonality, which we can touch on later, I guess, but we do have seasonality in the first quarter. But we expect that leverage to improve and that's why we stated that, you know, we expect that we plan to be profitable for the second half of 2024.

Thank you.

Thank you. And I show our next question comes from the line of Travis Steed from Bank of America Securities. Please go ahead.

Hi, this is Carolyn on for Travis. Thanks for taking my questions and congrats on the quarter. I had a follow-up on the revenue guidance for 24. If you could just talk about what's baked into that guidance for the battery replacements that you expect to start coming through this year. So follow up on the first question and then a second question here. I heard the reiteration of the limited market release in 24 and then full launch in 25 for Inspire 5. And I wanted to see if you could also give us an update on where you're at with the submission to the FDA. Thank you.

Thank you. Battery replacements are still going to be limited in 2024. We will start to see some of the early commercial patients coming through. We are still seeing patients who participated in the STAR trial still coming through today, but the first year of commercialization was 2014. And at 10 and a half years to 11 years battery life puts us at 24 to 20 to 25. So we'll start to see that coming through in this coming year, but really won't have a significant impact for a couple more years yet to get to larger volumes. But it's still very promising. As far as Inspire 5 submission, team's doing a great job. We're going through just the final testing and documentation to be able to provide that information to the FDA and we're targeting the approval for later in the year to provide opportunity to do the limited launch later in 2024. And the team is working hard to be ready to do a full commercial launch in 2025.

Thank you. Thank you.

Thank you. And I sure our next question comes from the line of Robbie Marcus from JP Morgan. Please go ahead.

Hi, this is actually Lillian for Robbie. Thanks for taking the question. On the international business, how should we be thinking about that growing this year in light of some of the supply challenges and is there a timeline that we should be keeping in mind for when you can return to normal levels of revenue and supply?

Yeah, very good question. Thank you very much. We had our challenges with getting derogation approval primarily in Germany in 2023. While that approval comes through, the derogation does require us to do some labeling changes to identify that product being shipped in advance of EU MBR. So we are shipping product today in Germany and that's coming back up, but it's probably going to take a couple quarters to get them back to steady state. But we are very promising movement both with derogation in those countries we identified but also making progress getting the full EU MBR. And hopefully we can get that done in the year to be able to provide silicone leads for the rest of Europe.

Thank you. One moment for our next question.

And our next question comes from the line of Michael Ciccone from Jeffries. Please go ahead.

Hey, good afternoon and thanks for taking my question. Just wanted to start. Maybe you can just give us an update if possible on how activity is trending so far through the first quarter and then maybe, you know, elaborate somewhat on how you're thinking about seasonality this year and quarterly sales, Kaden?

Absolutely. Well, I think the we felt very comfortable with the strength of the organization as we're exiting the fourth quarter, be able to set our guide or reconfirm the guide that we initially pre-announced at the JP Morgan Conference. But the progress continues to be steady. That's why we're comfortable with the guidance going forward. I'll let Rick touch a little bit about cadence of quarters specifically on seasonality here in the first quarter.

Right. Thanks for the question. So as I mentioned in the prepared remarks, you know, we do have a stronger commercial mix with the high deductible plans in the fourth quarter. So we generally see that seasonality in the first quarter, but also we did see a little recovery from the third quarter into the fourth quarter. So we had a very strong fourth quarter. And that's where we mentioned we might have some more pronounced seasonality. And so, you know, given the typical seasonality plus the stronger Q4, our seasonality into Q1, it could range from the mid to high teens sequentially. And then from there, we expect it to return and grow. And, you know, you've seen our our guidances to have between 24 and 26 percent growth, 780 million at the midpoint.

Got it. Thanks, Rick. And then just I guess one follow-up on profitability, again, just a clarification, really. The, you know, hitting profitability in the second half of 2024, is that on both an operating income and net profitability basis?

Yes, as we sit here today. Yep, that is the case. And that will be for the second half of the year.

Right. All right. Great. Thank you.

Thanks, Michael.

Thank you. And I show next question comes from the line of Danielle and Talfee from UBS. Please go ahead.

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a strong end to 2023 and looking forward to 2024. So I guess, Tim, one question I wanted to, I have two questions just first on sleep centers and I know, you know, getting patients through sleep centers, that's been a bottleneck. You've made some investments there. Just curious to see what, you know, how those investments have been panning out and do sleep centers still represent a bottleneck or is that starting to ease? And then we just loved ahead of surmount OSA coming, you know, at some point maybe -year-ish. You know, any more thoughts on how we should think about the impact of the funnel for Inspire in 2024 and 2025, assuming that they do get coverage for obstructive sleep apnea patients. Thanks so much.

Thank you very much, Danielle. Good to hear from you. As far as sleep centers go, it's taking that even a step higher. We're spending a lot of time even educating and involving sleep physicians to be more involved with the patients and specifically with the longitudinal management. So while the focus today remains on building the capacity, the ENT, we know that the next challenge will be building enough capacity with the sleep physicians and specifically around the sleep centers. A lot of payers require sleep studies to be performed at in a sleep lab for a polysomnography, but we do talk to them and show the value of home sleep testing and we've had opportunities to work with different parties to be able to provide home sleep testing or different areas to be able to help assess sleep and that's going to continue to be a focus going forward into 2024 and beyond and we're trying to make sure that that's not going to be a challenge going forward because we can get those patients properly diagnosed. And we do know most of the payers require a current sleep study within two years prior to moving on with Inspire. As far as the SMOTE OSA trial, yeah, hopefully that data will come out earlier in the year. We would like to hope it's successful and can show a 50% reduction in AHI. We know that's going to be a little bit of a challenge for the drug as long as the compliance and the weight loss is there to support that. But with the demographics of that study having a BMI of on average 40 and an AHI on average of 50, we really need to see a 50% reduction to have those patients move into the approved Inspire indication. And the majority of the patients in that study when we look at the demographics, they really won't qualify for Inspire today anyways because of the lateral wall collapse associated with a high BMI. So we look forward to seeing that data, but we do not believe it's going to have any impact on our patient flow this year and will tend to be positive as we kind of move forward after 2024.

Thank you so much.

Thank you.

Thank you. And I show our next question comes from the line of Richard Neuwitter from Churwitz Securities. Please go ahead.

Hi,

thanks for taking the questions.

Congrats on the quarter and the profitability as well. So maybe two questions for me. This first, just with Inspire 5 coming, you know, you have a preliminary launch hopefully and approval later this year. I guess what if anything is contemplating the outlook for people potentially delaying or wanting the next generation device if they know that it's coming, you know, doctors and patients alike. I'm just curious how you've contemplated that. Should we be expecting any impact there and if it is in the guide at all?

We don't believe there will be a delay. We know that patients are motivated to receive therapy. Those patients who are facing a significant challenge with quality of life and they are motivated to receive therapy. Remember we're talking about the device replacement and so the Inspire 4 system is a very strong system, provides very strong outcomes. And also you're talking later in the year when we're dealing with the high deductible insurance plans as well. So we haven't built in any patient therapy delay into the model. We believe that the patients will continue on with therapy and this is consistent with prior launches when we went from the Inspire 2 device to the Inspire 4 device and to a lesser extent with the new remote and going from polyurethane to silicone lead. So we are aware of that. We track that. We make sure we educate the patients appropriately but we don't expect to see any delay and have not built that into our guide.

Great and maybe just one more, Tim. You have a number of initiatives at hopefully looking to unlock some of the bottlenecks that exist and also some throughput areas. Inspire 5 will be one of them. We're moving the dice unnecessarily where possible with the protector trial. It feels like a lot of those though won't kick in or have their intended impact really more so into the 2025 onward time frame. I'm just curious what kind of threshold do you think there is or can you talk to us about to give us confidence that you won't potentially run into capacity issues before that 2025 time frame? Is there a utilization level where capacity could become a problem and how do we think about that within the context? of your initial guidance? Sure,

I think the real thing is to keep it simple and let's talk about the ENT surgeons today. As we've progressed over the last several years, it's just a very step-wise increase in utilization and the number one method to increase capacity is ENT confidence. It's the ENT having gained additional experience and having a strong team. So the ENT is able to do more cases to become more proficient. It takes less time to do the procedure. They gain confidence in the procedure, but it's essential that they have a strong partnership with sleep physicians to be able to manage the patients longitudinally. Therefore, the team all know their roles at the centers and the centers that are progressing the quickest with utilization are those centers that have a strong team. An ENT who performs the procedure, a sleep physician who can help diagnose but can also manage the longitudinal management of the patients, thereby keeping the ENTs available to do more implant procedures. We don't necessarily have challenges getting operating room time. We have challenges getting enough ENT time to be in the operating room to do the procedures, and we certainly don't have challenges with patient flow. We know our -to-consumer bring patients to the ENTs. So we're going to refine our programs a little bit, including the website, to make sure that patients have the best opportunity and can go to centers that have the ability to take care of them and have positive outcomes and really focus on utilization because we know the centers with the highest utilization get the best patient outcomes. They're more experienced. So it's the simple things that are going to drive us in 2024, not to mention what we mentioned slightly in the call about our technology development with our SleepSync system to help the patient's throughput and help the patients get appointments. So there's multiple avenues we're going to go down in 2024 to continue to grow utilization. And then, as I mentioned, a couple key items later on will be removal of dice with predictor and Inspire 5 with reduced OR time. But there is a lot of basic work we need to perform here in 2024 to continue success.

Okay, thank you very much.

Thank you, Rich.

Thank you. And I show our next question comes from the line of David Rescott from Baird. Please go ahead.

Hey guys, thanks for taking the question. Congrats on the strong finish to the year here. I wanted to start off by diving in a little bit into the clarifying the comments you made around international. It kind of played in the guide this year. I know you mentioned that it should take a couple quarters to get back to some of these normalized growth levels, but I'm just wondering if growth in 2024 international markets would be a creative total company growth. Just give them some of the commentary around where you are with derogation and then returning to growth levels.

Absolutely, that's a good question. I think Germany is really coming back strong now that we're able to start shipping product after the relabeling effort. And we know the Netherlands and Belgium are strong because they had derogation earlier in 23 in the fourth quarter to allow us to start shipping product there. We're excited. We believe that France is going to announce the new coding along with full countrywide reimbursement in 24 to be able to realize some growth in that country. So we're excited about the lodge coming up in France. We do have some polyurethane leads that we can now help deliver into the UK and Austria to continue doing implants in those countries. So we're going to be able to get back online in those countries as well. And then we're going to continue to work hard in Singapore and Japan. So we do see positive growth in the year. And Rick, any more comments on that? Yeah. Hey, David.

I just further comment on a quarterly basis given the dynamics of 2023. Our growth rates have been a little lumpy, if you will, in the international markets. But on an overall basis as we go forward, we still expect outside the US revenue to be right around 3% roughly of our overall worldwide revenue.

Okay, that's helpful. And then just maybe on the profit piece, I know I appreciate the kind of commentary around second half 2024 being this. Sustained profit level. When you think about where you are from a penetration standpoint, and then, you know, some of the investments over the next several years, you know, DTC getting more targeted. Is there any reason to think that this sustained level of profit in the second half of 2024 shouldn't be kind of a jumping off point as you go into 2025 and beyond?

Yeah, I mean, we provide guidance on an annual basis, but we're excited about the leverage that we demonstrated in the fourth quarter. And the confidence we have in our revenue number for 2024. We have demonstrated leverage. We're going to lose some of that leverage with our more pronounced seasonality in Q1, but then we'll return that. our comment was that we'll be profitable for the second half of 2024. But we're not giving any long-term guidance, but, you know, we're We're continuing to build leverage on an annual basis, as you've seen.

All right, I had to ask. Thanks for taking the questions.

Thank you.

Thank you. And I show our next question comes from the line of Anthony Petroni from Mizuho Group. Please go ahead.

Thanks, Tam and Rick. Congrats to the strong start, strong end to the year and solid guidance that you put out earlier at JPMorgan. Maybe one just on utilization, tackling it a different way. Our math shows that you got to just north of two implants per center, per quarter here exiting December. So just wondering is two a right number now to jump off for the rest of the year or will that just remain a little bit lumpy? Depending how patient flow comes in and then I'll have one quick follow-up on United Health Care.

Sure. Thanks for the question. So that just over two, just to clarify that that's two two procedures per center per month.

That's correct. Yes. Sorry

about that. So yeah, we just had just over two and just under two a year ago in the fourth quarter. Again, as we continue to add more centers, we're up to 1180 centers. It gets more difficult to move the needle on utilization, but we've continued to do that on a year over year basis. If you look at each quarter, that's one of that's our goal for for 2024 and beyond. We think there's a lot of room to improve that utilization, but it does, it's more difficult to move the needle on that. You know, we on an annual basis, if you look at growth, 70 percent of our growth came from existing centers and 30 percent of our growth came from new centers. So that kind of signifies a healthy business and that's consistent with 2022. So if we can maintain that, continue to add new implanting centers, move that utilization. If you look at our top quartile, you know, they're doing well north of two procedures per month. And so we want to move all those buckets up, if you will. So that's a real focus for us.

And the FOB was on United, you know, positive announcement earlier in the year, Jan one, they basically in line with FDA on AHA and BMI thresholds, but they put the mandibular turnstile in there, if you will, maybe to slow it down a bit. But net net, it looks like a huge positive. So maybe, you know, what do we expect from United Health Care patient flow? And is there anything from other payers that you're hearing out there? Thanks.

Yeah, thank you very much. We don't think it's going to really affect United Health Care. They have some regional policies that actually deal with mandibular devices or oral appliances in the past. We're very careful to educate the centers or when the physicians preparing their notes and the sites prepare their prior authorization documentation that they include information in there in regards to the patient's qualifications and if they have the right anatomy or severity to be able to qualify for oral appliance. So we have a little bit of practice dealing with United Health Care on the subject. All the patients are prior authorized. We make sure that we put the necessary information provided from the centers into the submission. Such that when we get the prior authorization approvals, we can just kind of move forward. So we don't see that from any other payers. That's kind of a unique United Health Care. But to your point, it is a significant win for the patients in that the expansion to a high AHI to 100 and the BMI warning to 40. And let's make sure we highlight the pediatric population with Down syndrome. So it's in there. We continue to work with United Health Care and we'll continue to push back on them on that. But we don't see it being really disruptive in the year.

Thank you.

Thank you.

Thank you. And I show the next question comes from the line of Brett Fishman from Key Bank. Please go ahead. Hey Tim and Rick. Thank you so much for taking the questions.

Just wanted to start off. Over the past month, we had a competitor announce their objective to launch a competitive hypoglossal nerve stem device later in 2024. So we're just hoping for a bit of an update from you guys about how you're thinking about potential future competition in the U.S. market. And then if you think you might have to do anything outside of the normal practices just to protect that market share in the event that this does actually happen on time.

We watch everybody. We know that the market that we have created and the market that we are developing both in the U.S. and international is quite attractive. We know it's one of the largest markets available in the medical technology industry. And of course we're going to get people pursuing different approaches. And while you mentioned one company coming up, there are several others who are in very early stages of development. We're not resting on what we currently have as technology. And we've already mentioned a little bit about Inspire 5 here on this call. But in past we've talked about Inspire 6 and 7 and continuing to grow the indications and be able to treat other groups with obstructive sleep apnea. Not to mention our ability to manage these patients longitudinally through our SleepSync digital health system. So yeah, we're very well aware of all the competition out there. We know the challenges with some of the technology out there today. We know some may be putting out some data. And we don't rest on our clinical evidence. In fact, the clinical evidence of our product today is superior to the evidence that we were approved on the STAR trial. So we'll continue to take care of our patients and continue to do everything to grow the adoption of Inspire.

All right, great. Thanks for the call there. And then just for my follow-up, you talked about grants a little bit on the call today. And I know part of the 2024 plan is potentially securing reimbursement in that territory. I'm just curious if you could provide a little bit more detail on how you view the market opportunity and how reimbursement potentially accelerates commercialization into that region. And thanks so much again for taking the questions.

All right. Thank you very much, Brett. I think that in France last year, they announced countrywide reimbursement has been approved in France. And it went to the next step, which was developing the coding criteria for physicians to implement the reimbursement. And that is progressing through the system. It has not yet been formally announced yet. We expect that to happen in the very near future. We do have a country manager that we have hired. We do have a team in France that is preparing for the launch. And we hope to be able to report some positive progress with that yet in 2024. So pretty excited about France as a very significant opportunity for Sleep Apnea and for the Inspire technology. And with what we've been able to demonstrate in our growth in Germany, we believe that we're going to have a significant ramp in France. And then the other key area to look at ramping again is going to be in Japan. So very excited about France. And we're going to keep working with the authorities to get the announcement made and for our team to be able to launch them.

Thank you. One moment for our next

question. And I'm sure our next question comes on the line of Mike Cracky from Learing Partners. Please go ahead.

Hi, everyone. Thanks for taking our question. Regarding the recent policies changes by United, specifically on the new requirement of oral appliance therapy, do you have a sense of what portion of patients getting Inspire therapy today have not already tried and failed oral appliance therapy? And then I have a follow-up.

I think the majority of them. I think that most patients, well, most patients, if not all of them, have been introduced to or attempted CPAP. But oral appliances haven't been well documented for successful use with severe obstructive sleep apnea. In fact, it is most beneficial with snoring or mild, maybe slightly moderate. So I don't think the majority of our patients have not been introduced to oral appliance and probably based on their anatomy wouldn't qualify for it anyways or have a desire to start that because of the severity of their obstructive sleep apnea.

Got it. Understood. And then just as a quick follow-up, are most patients able to get oral appliance therapy without going to the dentist to get custom fitted or is that a necessary part of the process?

That's part of the experience is going to your, to the dentist because you need to be properly fitted to be able to make sure that if you're going to get an oral appliance, it will have enough forward movement of the lower jaw to be able to create sufficient volume behind the base of the tongue to be able to effectively address obstructive sleep apnea. In some cases with moderate to severe sleep apnea, you may have to move that lower jaw forward as much as 10 millimeters and you can imagine that's a pretty uncomfortable forward movement. Therefore, it's pretty limited when you get to the more severe cases.

Got it. Okay. Thanks for taking your questions. Thanks Mike.

Thank you. And I show the next question comes from the line of Larry Beegleson from Wells Fargo. Please go ahead.

Hi, it's late calling in for Larry. Thanks for taking my question. First, just a clarification on Q4 please. You mentioned there was some catch up in Q4, the strength because of the ways in Q3 procedures. Are you able to quantify how much that catch up was, you know, maybe five, 10, knowing kind of good number. Related to that, you also talked about headwind outside of US, you know, the irrigation in Germany came in perhaps a little bit later. So obviously that had some impact in Q4. Are you able to quantify that number? And I have a follow up.

Sure. Hi, the strength in Q4. We've mentioned before, you know, some of the procedures did not get scheduled or completed in Q3, but we haven't quantified it. There's some procedures done in the fourth quarter and some will carry into first and second quarter of 2024. Regarding the outside the US, we'd mentioned before that we could see a $4 million headwind in the fourth quarter. That's will we see that come through in the first quarter? Probably not. That will be, that will take a few quarters to clear that so there won't be a bolus in the first or second quarter. But we'll work through that. As Tim mentioned, most recently we did get Germany derogation. We had to work through some logistics and on the labeling for that. And so that really started in late January. And but we are now shipping there. But again, we won't see that come through in a bolus amount.

Okay, that's super helpful. Thank you. And my follow up question relates to Inspire 5. Can you clarify, are you still planning to file in early 24? So perhaps in Q1? Is that how you think about early 24? And talk about your confidence and the confidence level in getting it approved in 2024? Are we still talking Q2, Q3? I think I heard the comment about later 24. Thank you.

Yeah, thanks. I think that we have confidence in our development of the technology and the team's working on the final submissions. We're not putting out the specific data on when that submission is going in as we work with the FDA. But the submission will include both the Inspire 5 Neural Stimulator, the patient programmer software changes, the physician programmer software changes. It's a full system level submission. And we do not only want to have approval in 2024, but we want to do a limited launch in 2024 as well. So we're pretty consistent with the targets that we laid out previously.

Okay, thank you. So no additional caller on the Q3 versus, sorry, Q2 versus Q3 timing on the approval, you know, whether how the clock is reset.

Yeah, we're going to continue to work with the FDA to drive the review process. And FDA has their time to review. So yeah, we'll be careful about putting any more color into that.

Fair enough. Thank you.

Thank you.

Thank you. And I show our next question comes from the line of John Block from CIFL. Please go ahead.

Thanks, guys. In solid quarter, Rick and Tim, maybe just two for me. Rick, for 1Q24 US revs to be down mid to high teams, Q over Q, I need to get 1Q24 year over year utilization down 2 to 3% year over year. And that would be the first down year over year utilization since arguably the throws of COVID. And now you've got broader labels. You've got the pediatric opportunity in some of those facilities. I think you said you could even see some 3Q23 ongoing flop into 1Q24. So can you just explain why we would see sort of that level fall off in utilization, the down low single digits again, to sort of foot back to your sequential decline of down mid to high teams?

Yeah, I mean, you have to look back. Thanks for the question, John. You have to look back in the first quarter of 2023. Remember, we had a 400 basis point benefit in our growth last year from the delayed orders that when we introduced the silicone leads in the US last year. So there's some of that at play. But we are excited for 2024 with the guidance that we set forth. And we're going to strive to increase utilization. And we talked about a lot of the different areas that we're going to focus on. So that's our plan is to achieve that.

OK, that's helpful. Thank you. And then to shift gears, Tim, just for Samana was saying, I think I heard you correctly before where it seems to be like a 50% AHI reduction you think could be beneficial for the business. And I believe you laid out the reasons why. Just to push you there, like what's not beneficial? In other words, is it a 60% reduction? Is it 65? It's 60%. Rough numbers, your AHI goes from 50 down to 20. United's cutoff is 20, not 15. Just to take a step back, are there any levels of AHI reduction where you sort of step away and say, this might not be a 10x spanner at the end of the day? Thanks for your time.

In the end, John, we don't care about AHI. What we care about is mechanism of action. And what we believe the mechanism that the GOPs act upon is reducing the lateral wall collapse. And we know that we stimulate the hypoglossal nerve that moves the base of the tongue forward. That's very difficult for our patients to be able to get that level of reduction in an AHI. But we want the patient to lose weight, have relaxation of the lateral wall, so that is not a contributing factor to AHI. And a patient with a higher AHI can obviously get a higher percent reduction because they can lose weight, lose neck circumference, and have a relaxation of the wall collapse, thereby presenting as tongue-based collapse, which is the majority of the lower BMI patients. If you're a low BMI, it's very difficult to have a significant AHI reduction. So I think you're going to see a variable reduction in AHI as you go from low BMI to high BMI. Again, we're more focused on the GOP1s helping the patients lose weight, reduce their neck circumference, and relieve the lateral wall collapse, thereby presenting as a tongue-based collapse for which INSPIRE can treat them.

Thanks for the time,

guys. Thanks, John.

Thank you. And I show our last question comes from the line of Suraj Kalia from Oppenheimer and Co. Please go ahead.

Gentlemen, can you hear me all right?

Yes,

Suraj. How are you?

Tim, congrats on a nice quarter. So Tim, I guess the first question for Rick. Rick, you mentioned 70-30 split between same store, new store sales. If you could just refine it a little further, maybe in terms of implants per quarter book site, should I think about FY23 exiting, let's say, round numbers, 620 million, give or take. There was a 200 million -over-year pop. 70% of it comes from same site. Is that the right way to think about it or is some other math that you're applying to 70-30 split?

Yeah, Suraj. Thanks for the question. What I'm talking about is the percentage of our growth, not of the composition of our revenue, but more of the growth came from 70% from our existing centers and the remaining 30% from new centers.

Fair enough. And Tim, just more on a pedantic level, the average number of days of CPAP usage that is documented by a potential patient, let's say Suraj comes in, he's either intolerant of CPAP. When you file the documentation, what are the average number of days of failure or intolerance shown for getting a GNSS authorization? Thank you for taking my questions.

Thanks, Suraj. I think that that's all over the place, that last number. For the most part, the patients who come in to receive inspired therapy are not tolerant to inspire, I'm sorry, are not tolerant to CPAP. Therefore, they have zero utilization. And very few come in if they are using CPAP into the numbers of what is it, four nights, four hours a night for five of seven nights. And if they're compliant to that, it's kind of difficult to get insurance approval because they're not using CPAP. So the majority of our patients, they've been introduced to CPAP, they've tried CPAP, maybe they've had some benefit with it, but they are not using CPAP, they're not tolerant to it. And so it's really not a big barrier for the physicians to document that those patients are unable to benefit from CPAP and are able to move forward with therapy. So thank you very much, Suraj. Hey, just want to make one last note to everybody. I want to thank everybody for joining the call today. As always, I'm grateful to the growing team of dedicated inspiring employees for their enthusiasm, hard work, and continued motivation to achieve successful and consistent patient outcomes. The team's commitment to patients 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 United States, in 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.

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