Inspire Medical Systems - Q2 2023

Transcript

Operator (participant)

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 second quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. I'll then now hand the call over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Ezgi Yagci (VP of Investor Relations)

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 Buchholz, Chief Financial Officer. Earlier today, we released financial results for the three and six months ended June 30th, 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 securities laws. All forward-looking statements, including, without limitation, those relating to our operations, financial results and financial condition, investments in our business, full year 2023 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-Q, which was filed with the SEC earlier this afternoon, for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, August 1, 2023. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Tim Herbert (President and CEO)

Thank you, Ezgi, and thanks everyone for joining our business update call for the second quarter of 2023. As always, we start with our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire therapy. As of the end of the second quarter, over 46,000 patients have been treated with Inspire therapy. Over the past week, we shared some exciting announcements with the additions of Carlton Weatherby as our Chief Strategy Officer and Dr. Charisse Sparks as our Chief Medical Officer. As we continue to expand our business, we need strong leadership to guide the team with our focus on increasing the adoption of Inspire therapy in the obstructive sleep apnea market. OSA is a large and penetrated market, and we see many years of sustained, healthy, organic growth ahead of us.

Carlton joins us from Medtronic, where he was General Manager of the Spinal Division. He brings a wealth of talent and experience that will be invaluable as we continue to scale our business. Dr. Sparks is a board-certified physician with extensive business and leadership experience, including direct experience with Inspire as a board director. She will lead Inspire's clinical program, provide executive oversight to ensure high-quality patient outcomes, and serve as a liaison for the ENT and sleep physician communities. In connection with her appointment, Dr. Sparks will transition from her current role on the Inspire board of directors. We look forward to Carlton and Charisse's contributions toward our mission of serving the many patients with untreated OSA. With that, let's review our results.

In the second quarter, we generated revenue of $151.1 million, representing a 65% increase compared to the second quarter of 2022. Our growth continues to be driven by higher utilization at existing centers and is complemented by the activation of new centers. Given the strong momentum we are seeing in our business, we now expect full revenue to be in the range of $600 million-$610 million, a 47%-50% increase compared to 2022. In the second quarter, we continued to increase our capacity to support the strong demand for Inspire therapy by adding 72 new implanting centers in the U.S., ending the quarter with a total of 1,045 centers. For the remainder of 2023, we continue to expect to activate 52-56 centers per quarter.

Regarding the U.S. sales team, we created 19 new sales territories in the second quarter, bringing our total to 261. We continue to expect to add 12 to 14 U.S. sales territories per quarter for the remainder of 2023. In the second quarter, the number of visitors to our website surpassed 2.9 million. From these visits, we had over 12,000 physician contacts, even with the typical summer slowdown in contacts, we steadfastly improved our conversion of patients receiving therapy. We continued to make numerous changes to our website to enhance how patients engage with our Advisor Care Program, and we have a new website design in the works for later this year. Further, we are continuing to increase the use of digital scheduling for consultations through our ACP.

We previously mentioned one of the limiting factors to the adoption of Inspire therapy is the capacity of ENT surgeons performing the procedure. To this end, we are focusing on providing robust training programs to new physicians and reducing the time required to qualify and support patients through the entire Inspire journey. We believe that both of these focus areas will provide implanted surgeons with additional time to perform Inspire procedures. One example to improve the patient experience and reduce the time burden of the surgeons is our ongoing PREDICTOR Study, which is designed to replace a drug-induced sleep endoscopy, or DISE, with an office-based airway exam. We have completed the data quality checks from the first 300 patients and are actively enrolling the second group of 300 patients with a higher BMI.

We will be moving towards preparing a publication from the first data set and expect that these results will be presented in the fall. Another example relates to the growing adoption of the SleepSync patient management system. SleepSync is designed to streamline the patient journey from initial contact through diagnosis, system implant, and post-procedural longitudinal patient management. The utility of this platform continues to improve, as is highlighted by the recent launch of the Inspire Bluetooth-enabled patient remote, which is the link between the patient's device and SleepSync. The next step is our new physician programmer, called the SleepSync Programmer, which was approved by FDA in the second quarter and will formally launch in the U.S. in early 2024. The SleepSync Programmer allows physicians and their staff to log in from their own computer to access the programming screens and view all patient activities stored in the SleepSync system.

Once launched, this technology will remove the necessity for Inspire to provide tablets as part of the physician programming system and will pave the way for future remote patient programming. Staying with product development, the Inspire V team is excited to announce the submission of our PMA supplement to the FDA. Subject to the FDA's review process, we expect approval in early 2024. Recall, Inspire V incorporates the sensor inside the neurostimulator, using an accelerometer to measure respiration and will eliminate the need for the pressure sensing lead. Further, Inspire V is a platform device, which will enable firmware upgrades, transitioning to Inspire VI and beyond, whereby further product enhancements, such as auto-activation, will be introduced.

From a research clinical, and regulatory viewpoint, in the second quarter, we received FDA approval to expand our indication to include patients with an AHI up to 100 events per hour, up from 65, and raised the BMI warning in the labeling from 32 to 40. Furthermore, we are happy to announce that the ADHERE Registry has met its target of 5,000 patients. Moving forward, patients will be enrolled into the ADHERE 2.0 Registry, which will be integrated into the SleepSync system and included as part of a broader software release later this year.

A quick comment on reimbursement, as the new proposed OPPS rules were recently published and showed an increase to the national Medicare payment to hospitals of about $1,000 to $30,355, and an increase for ASCs of about $300 to $25,470. We also highlight the significant increase in the reimbursement of the DISE procedure, which increased from $180 to $1,639 for the Medicare facility payment. We do see a slight reduction in the physician payment proposed, but this is tied to the overall RVU rate, which typically rebounds by the final November rules. Today, ASCs continue to make up about 23% of our total number of centers.

Longer term, we continue to see the Inspire therapy migrate more to the ASC setting, but this is challenged by the varying Medicare reimbursement rates in different states. We also have seen a stronger rebound in Medicare cases over the last two quarters, with the Medicare reimbursement rates lower, especially in the South, this is limiting Medicare cases to the hospital outpatient setting. While we are able to obtain sufficient OR time in hospitals, our long-term programs will focus on ASC reimbursement and education for ASCs, as we see this as an efficient site of service for the Inspire procedure. Finally, while we are very happy with the strong Medicare rebound, we expect that the balance will shift more heavily towards commercial cases as we progress through the year.

Switching over to our international business, the European team achieved a very successful second quarter, growing 81% over the prior year. This robust growth was driven by a strong performance in Germany and supported by the Netherlands and Switzerland. We are very excited about the strength we are seeing in Belgium, which finalized countrywide reimbursement earlier this year, and look forward to building momentum in the quarters ahead. We are also excited about our new country manager in France. We continue to prepare for a full market launch there, pending the final reimbursement announcement expected later this year. Finally, we have made progress with reimbursement in the United Kingdom and expect additional patients receiving Inspire therapy in this region. In Asia, we are seeing great momentum in Singapore, with procedures showing significant growth, both sequentially and year-over-year.

In Japan, we continue to advance our efforts of going direct by hiring and training additional team members, have completed the Japanese website, and are seeing increased activity with physicians and active centers. Regarding operations, we continue to make progress with the production ramp of the silicone-based stimulation and sensing leads. We remain in a challenged position with the sensor manufacturing yields. However, we have incorporated a recent manufacturing change and expect to grow inventory as we move through the quarter. We remain in a positive inventory position, with short-term plans in place to grow to our goal of 1 quarter of safety stock by year-end. We feel good about our inventory position in our other products. In summary, we continue to see significant momentum in our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy.

We will continue to increase utilization at our existing centers while adding capacity by opening new centers. 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.

Rick Buchholz (CFO)

Thank you, Tim. Good afternoon, everyone. Total revenue for the second quarter was $151.1 million, a 65% increase from the $91.4 million generated in the second quarter of 2022. U.S. revenue in the second quarter was $144.7 million, an increase of 65% from the $87.9 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, our continuing direct-to-consumer marketing, and a higher number of territory managers. We are pleased to announce revenue outside the U.S. increased to $6.3 million, which is an 81% increase year-over-year on a reported basis, while units sold outside the U.S. grew 72%.

The U.S. average selling price in the second quarter was $25,000, compared to $24,100 in the prior year period. The increase reflects our 5% price uplift that began in May of 2022. We expect the U.S. ASP to remain steady at the current level. The ASP outside the U.S. was $22,100 during the quarter, compared to $21,000 in the second quarter of 2022. Gross margin in the second quarter was 83.9%, compared to 84.5% in the prior year period, primarily due to additional manufacturing costs of sensors and lower yields prior to process enhancements, as well as higher costs of certain component parts, partially offset by the price increase, which is now fully in effect.

Total operating expenses for the second quarter were $143.4 million, an increase of 57% as compared to $91.2 million in the second quarter of 2022. This planned increase was due to the expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts, and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $4.9 million in the second quarter, compared to $297,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances compared to a year ago.

Net loss for the second quarter was $12 million, compared to $14.5 million net loss in the prior year period. The net loss per share was $0.41, compared to $0.53 in the second quarter of 2022. The net loss for the second quarter includes $3 million of R&D expenses associated with pre-launch inventory related to Inspire V, that is expensed for accounting purposes. The weighted average number of shares outstanding for the second quarter was 29.2 million. We expect the third quarter weighted average shares outstanding to be approximately 29.4 million. Given our continued operating leverage improvement, our cash and investments increased to $467 million at June 30, from $452 million at March 31.

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. Moving on to updated 2023 guidance. Given the strong momentum we are seeing in our business, we now expect full year revenue to be in the range of $600 million-$610 million, an increase from our previous guidance of $580 million-$590 million. This updated revenue guidance represents 47%-50% growth compared to full year 2022 revenue. Similar to prior years, as we progress through the second half of the year, we generally see increased seasonality in the fourth quarter as patients and physicians attempt to schedule Inspire procedures before high-deductible health plans reset at the beginning of the year.

We continue to expect full year growth margin to be in the range of 83%-85%. As Tim noted, we expect to activate 52-56 new U.S. centers per quarter and establish 12-14 new U.S. sales territories per quarter for the remainder of 2023. In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2023. With that, our prepared remarks are concluded. Dilem, you may now open the line for questions.

Operator (participant)

Thank you, sir. As a reminder, to ask a question, you will need to press * 1 1 on your telephone. To withdraw your question, please press * 1 1 again. We ask that you keep your questions to no more than one question 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. Your line is open, John.

John (Analyst)

Hey, guys, it's John from Stifel. I didn't hear the beginning, but maybe I'll go. Good afternoon, guys-

Rick Buchholz (CFO)

I didn't hear the beginning either, John, but great to have you. How are you?

John (Analyst)

I figured, Tim, I just jump in. What the heck? I'm gonna ask both up front. GLP-1, there's certainly a lot of chatter or concern. Tim, maybe sort of big picture, how do you view this playing out for the company's TAM? Is the funnel, you know, altered materially to the upside or the downside, arguably, from your view? Then the second question, maybe more specific to the quarter P&L. You know, I've been following you guys for a while, and internationally usually doesn't get a lot of play, but that's a big growth number. I know you've been working on the opportunity for some time. Was there anything specific to the second quarter, or is this arguably an inflection point for the OUS business that you see going forward? Thanks.

Rick Buchholz (CFO)

You bet. Thank you. GLP-1 concerns. We're happy with GLP-1. We think it's complementary to Inspire. Again, it's very specifically discussed that the Inspire mechanism of action is to move the tongue base forward. We don't address lateral wall collapse that is associated with higher BMI patients. Let that sink in. We've talked about this before. When patients go on a GLP-1 drug and they lose weight, they tend to lose the weight in the neck circumference, which is addressed by lateral wall collapse, which is outside of our mechanism of action. Therefore, if we can get higher BMI patients to lose weight, it will relax the lateral walls, and there will be predominantly tongue-based obstructions, which is highly effectively treated with Inspire by stimulation of the hypoglossal nerve.

Again, two different mechanisms of actions being treated by GLP-1 and Inspire, and very complementary to each of them. We do have our own research project to address lateral wall collapse, but that's a longer-term solution. In the meantime, if we can see progress with the GLP-1 drugs, helping patients lose weight and moving them towards the Inspire indication, it's gonna be highly beneficial. At this point, it's a little early, so we haven't seen a lot of movement out in the field. We don't hear a lot of feedback from our physicians, but we welcome the opportunity to take care of the patients as they start to lose weight.

Tim Herbert (President and CEO)

international is exciting, and I think we've seen some great progress international as we've-- John, you've been following Inspire for quite some time, and, and what we've always said is we don't make strong investments in a country until we've established a reimbursement pathway in that country. In the case of Germany, we've had great success there. As we're coming, you know, well after COVID now, we're seeing a strong rebound. Germany had a very good quarter. The Netherlands overcame some reimbursement challenges and are opening up new centers, which provides growth there. The exciting news is in Belgium; they completed the countrywide reimbursement. They will have a strong second half as they start to schedule their cases.

We've already have the announcement on countrywide reimbursement in France, and we expect the new coding to come out relatively soon, so we can do a full launch there. A lot going on in the international markets. We really like what's happening. The team is well organized. In the Asian market, Singapore, as you said, is doing well, and going direct in Japan is really starting to have show good progress, and we look forward to reporting more activity there in the future. Thank you very much.

Rick Buchholz (CFO)

Thanks, Tim. Great call.

Operator (participant)

Thank you. I show our next question comes from the line of Robbie Marcus from JPMorgan. Please go ahead.

Robbie Marcus (Analyst)

Oh, great. Congrats on a, a really nice quarter here. Maybe to start, you, you've recently had the label updated. You can treat, more episodes per night, more severe, sleep apnea, and the, the BMI raised to 40. Can you, you talk about what you're seeing as an impact in the field and how much this can really increase your, your addressable market? I guess it, you know, you, you touched on in the last with GLP-1s, but, you know, I, I imagine it, it probably helps a whole lot with the combination of the two going forward.

Tim Herbert (President and CEO)

Yeah, absolutely. Thanks, Robbie. As far as the label updates go, well, also, remember, we recently received a pediatric approval for Down syndrome, and that is going along well, and we're opening up more children's facilities. Most of those facilities are already tied in with existing Inspire centers, so we can take care of those kids. The label update for AHI is a pretty immediate introduction because there's just not a lot of options for those patients that have a higher apnea-hypopnea index above 65, going up to 100. That really helps us get the approval with the insurance company. That's a pretty immediate return. We're gonna see a little bit increase in procedures right there.

BMI, we got to be a little bit careful about because just bringing in a BMI patient who up to a BMI of 40 is a little dangerous because the probability of them having lateral wall collapse, which again, that presents as a complete concentric collapse when you do a DISE procedure. Remember, we treat tongue-based obstructions with the anterior-posterior, with the tongue moving forward. With a higher BMI, we're being very careful to not fill the appointment books of the ENT surgeons with high BMI patients who won't qualify for Inspire anyways. Those are the patients that will be good patients to get on the GLP-1 drugs, if you will, to help them lose some weight, relax the lateral walls, and allow us to assess if they are tongue-based collapse that can be properly treated with Inspire.

To summarize, the AHI is gonna be an indication expansion. I think in the past we've talked about it, being about a 10% increase over our published TAM. BMI, we're gonna be careful about because our current system doesn't treat lateral wall, but we now have the advantage of the GLP-1 to be able to address that market as well, albeit they need to lose the weight first, and we know that takes a little bit of time with the drugs.

Robbie Marcus (Analyst)

Great. Maybe one on spending. There was clearly, you, you called out, I think it was $3 million or so in Inspire V build up and inventory and R&D accounts for a lot of the step up. Maybe just give us an update on how you're thinking about balancing the great top line growth versus margin leverage and, and views on profitability going forward. Thanks a lot.

Rick Buchholz (CFO)

Yeah. Hey, Robbie, it's Rick. Yeah, we understand profitability is important and we continue to create leverage in our P&L, but our, our real focus is top line growth and growing the, the adoption. We do invest in a disciplined manner. We've continued to do that. We've made investments in DTC, R&D, and all areas of our business, but we have been improving our, our leverage with our operating expenses. R&D is 20% of revenue. It was 20% of revenue in the first quarter. We've talked about we expect that to be in the high teens or so, but we're making tremendous investments, as Tim talked about in the prepared remarks.

But we actually, in, in the second quarter, you know, given the, the current macro supply chain environment and, and our confidence in Inspire V approval in, in 2024, we are purchasing some Inspire V components now.

Tim Herbert (President and CEO)

... but for accounting purposes, it must be recorded as a R&D expense. I don't mean to get into the fine details of that, but that, that accounted for 200 basis points of our R&D as a percentage of revenue. That being said, stock-based compensation is a big number. In the quarter, it was nearly $22 million. Taking that out, you know, we, we've generated cash. We're cash positive, by $15 million. Profitability will come. We haven't changed our tone on that, but we're really focused on the long-term top line growth.

Matthew Mishan (Analyst)

Great. Thanks for taking the questions.

Tim Herbert (President and CEO)

Thanks, Robbie.

Operator (participant)

Thank you. Our next question comes from the line of Danielle Antalffy from UBS. Please go ahead.

Danielle Antalffy (Managing Director and Senior Equity Analyst)

Hey, good afternoon, everyone. Thanks so much for taking the question. Congrats on a really strong quarter. It's great to see. I, I just wanted to ask a follow-up question on the, the Medicare, you know, the shift in patients a little bit away from Medicare patients, given the proposed to payment, payment, physician payment. The first question I have is, what percentage of your patients today are, are Medicare, and then what percentage of overall OSA patients are Medicare? Also, how we should think about this going forward. Is this really meaningful, or is this just you guys being cautious?

Tim Herbert (President and CEO)

Sure. Hi, Danielle. I think the Medicare, historically, our blend has always been about 65%-70% commercial, 25%-30% Medicare, and about 5% VA or military, and that probably purposely doesn't add up to 100. As we've seen in the last couple of quarters, we saw a good Medicare rebound. Usually in Q1, we see heavy Medicare because we have the high commercial in Q4, again, going back to the high-deductible insurance plans. In Q1, Q2, we just saw a higher percent, not quite 50%, but approaching it for Medicare. While that's really exciting for that population, it does put some challenges to the reimbursement in ASCs, and that's kind of where we're highlighting.

We're able to handle and cover those cases all in hospital setting or in ASCs in the north. That does present a longer-term challenge. As we progress into Q3, and certainly into Q4, as Rick highlighted, it becomes more weighted towards commercial cases because, again, the high deductibles really kind of drive the fourth quarter. I would expect our percentages to move back to a more traditional ratio. Overall, obstructive sleep apnea is a young person's disease. In the clinical studies, we saw the average age of our studies were down at 54. During the early commercial years, of course, reimbursement is easier with Medicare, so it kind of rises up a little bit. We think that it should be back in the average age in the fifties.

Now we have the pediatric approval. The youngest person is really just single digits years of age. It, we're across the board on, on treating patients. For the most part, I think that we want to keep our ratios focused on the commercial side, certainly complementary with the Medicare and always, provide service to the VA and military.

Danielle Antalffy (Managing Director and Senior Equity Analyst)

Okay, got it. Inspire V, congrats on that. Once that is approved, should we think about that as a gradual rollout, or how should we think about building capacity of Inspire V ahead of a launch and potential impact to margins there? Thanks so much, guys.

Tim Herbert (President and CEO)

Thanks, Dan- Danielle. I think people are excited about Inspire V. Obviously, the removal of the pressure sensing lead is both improvement for the patient. It's, it, is makes the procedure more comfortable for our ear, nose, and throat surgeon to perform. It gives us and the patient an improved reliability as, as even though we have a small number of revision surgeries, the, the culprit for most of those is that pressure sensing lead. We want to be able to get this out broadly in the market as soon as we can. Once approved, I'm sure we'll do a small pilot study just to make sure it works well with all the SleepSync system, the new remotes, and the adoption into the market.

By mid-year, we expect to go full launch on this, and we believe once launched, it will be a very quick transition across the board.

Danielle Antalffy (Managing Director and Senior Equity Analyst)

Thank you all.

Tim Herbert (President and CEO)

Thank you.

Operator (participant)

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

Travis Steed (Analyst)

Hey, thanks a lot. Congrats on a good quarter. Maybe the hospital outpatient reimbursement that came out recently, there was a big uptick in DISE procedures, and a few things with the reimbursement going up on the replacement if the needs need to be replaced. Just curious how you're seeing that, if that was expected and, and how that should play out in the, in the business.

Tim Herbert (President and CEO)

Hi, Travis. Thank you. I think the sleep endoscopy increase in reimbursement was a nice surprise. We know that they have been working on that one. It initially came out at just $180, or what it was, was very disappointingly low for a 15-minute procedure, and it wasn't worth hospitals or ASCs to be able to do that procedure.

Moving that up, I think it actually brought the economics from the actuals over the last couple of years, kind of drove that calculation, and getting it to $1,600 really is gonna be beneficial for the centers providing that DISE procedure. Again, on the other hand, as we got done talking with our PREDICTOR Study, we want to reduce the reliance on DISE anyways, to be able to go to an office exam. We'd rather have the ENTs and the OR suites spend that time doing implant procedures rather than DISE. Very happy about the reimbursement there, and I'm sure all the centers and ASCs will be equally excited when that takes effect in November.

As far as the increase to the hospital ASC payment for the Inspire procedure, that's tied to the overall APC, Ambulatory Procedure Code. Again, very happy with the continued increase, that's been pretty steady of an increase year over year for the last several years. Again, it just continues to move north, and that's really good for the hospitals and ASCs. We just have to address the Medicare ASC payments in the south.

Travis Steed (Analyst)

Great. Thanks, thanks for that. Maybe you could talk about summer seasonality, kind of cadence of the year, Q3, Q4, just any color on, on both the revenue and, and the margins and spending, that'd be helpful. Thank you.

Rick Buchholz (CFO)

Hey, Travis, it's Rick. As we talked about, we're really proud of the achievement of the team in the first half of the year, and we talked about all the opportunities with some of the label changes and the change in the BMI warning and other catalysts. We have increased our guidance up to $600-$610. We talk about the step that, and I mentioned this in the prepared remarks, that we generally see a strengthening in our year in the fourth quarter, given the commercial mix with physicians and patients attempting to schedule those procedures before those high-deductible plans reset at the beginning of the year.

We will continue to increase our spending. We have shown leverage. We expect to improve that as we progress throughout the year. We're excited about the second half of the year, but there, there will be a strengthening in the fourth quarter.

Travis Steed (Analyst)

Great. Thanks a lot, and congrats again.

Rick Buchholz (CFO)

Thanks, Travis.

Operator (participant)

Thank you. I show our next question comes from the line of Adam Maeder from Piper Sandler. Please go ahead.

Adam Maeder (Analyst)

Hi, Tim, Rick, and Ezgi. Congrats on the next quarter and thank you for taking the questions. I wanted to ask about the OUS business, and apologies if this was asked earlier in the Q&A.

Tim Herbert (President and CEO)

Okay.

Adam Maeder (Analyst)

Obviously, a big increase sequentially, you know, to $6 million. The question is, you know, is this kind of the new watermark? What drove the performance? Anything to call out from a competitive standpoint in Europe. Then I had a follow-up. Thanks.

Tim Herbert (President and CEO)

Sure. I think it really is down to the performance of the Inspire team. The focus in Germany was really strong and drove most of that growth. I also want to compliment the team in the Netherlands with opening new centers in the Netherlands. That's something we haven't been able to do for several years. Also, Switzerland and the rest of DACH market really did very, very strong. We haven't really seen the performance from Belgium yet. That's still forthcoming. You're gonna see with the implementation of the national insurance coverage in Belgium, they're gonna have a strong second half, it's gonna continue to move north. I think the U.K. has done implants, now we're able to open up additional centers in the U.K., which is really promising.

We previously announced that we were awarded countrywide reimbursement in France, but France is working through the coding set, the CPT coding e-equivalent in France, to make sure that when they lay this out publicly and put this on their registry, that it will have the CPT codes in place. We expect that to happen post-vacation time in Europe, and so that will do a full launch in the latter half of the year, which is really exciting for France, which is obviously one of the largest markets in Europe. While we have good progress in Europe, I think the upside is still yet to come, and it's really driven by the introduction of reimbursement in those countries, and that's what's really gonna continue to drive the business. I no comment on competition.

I'm not sure that has any kinda impact on us over there. But the team is really moving very, very strong. Later in the year, I think you're gonna start to see some progress over from Asia. As we made mention, Singapore is doing really well. Japan, we're just coming through the transition to direct representation in that country, and you're gonna start seeing, seeing activity in Japan, which is really our focus in, in the Asia markets.

Adam Maeder (Analyst)

That's great color, Tim. Thank you for the fulsome response. For the follow-up, I guess I'll, I'll ask about the digital scheduling tool. I'm curious if you gave an update in terms of the number of U.S. centers that are now on, you know, that, that tool right now, and just remind us of the difference in utilization between centers that have that and don't. Then a second part would be just on the ASC mix, this quarter. Can you provide an update there? Thank you.

Tim Herbert (President and CEO)

Absolutely. We're still in the pilot center of the digital scheduling, but probably about 60 plus centers are using the tool right now, and that, that's really exciting, because it's good for the patients. They don't go through the poor experience of getting voicemail at a center when we're trying to make those appointments. We're gonna continue to push that. We're entering the second phase of that, where we can add additional centers, partnering with our software company, to interface into their digital scheduling. Really like what's happening there. I think some of the top centers, we're gonna be pushing that obviously quicker with those centers with the higher utilization, because that really just, again, streamlines that process, going forward. The second question?

Adam Maeder (Analyst)

ASC mix.

Tim Herbert (President and CEO)

ASC mix. I think that comes down to just a little bit higher Medicare mix in the second quarter, and Medicare tends to be dominated in the hospital setting, especially down South, where they have the reduced Medicare rates. As we progress back to higher commercial rates, as we progress through the quarter, I think that you'll see more and more progress with ASCs. It really is our long-term vision that ASCs will be a key catalyst for driving the business, and we need to continue to provide education to ASCs when they negotiate their contracts with commercial payers to make sure that they have the cargo for Inspire, and we need to work on the reimbursement levels from a Medicare standpoint and the proper mix between commercial and Medicare at ASCs.

Adam Maeder (Analyst)

Thanks again. Congrats.

Tim Herbert (President and CEO)

Thanks, Aaron.

Operator (participant)

Thank you. I show our next question comes from the line of Richard Newitter from Truist Securities. Please go ahead.

Richard Newitter (Analyst)

Hi, thanks for taking the questions, guys. Nice job on another good quarter. Maybe, my first question, you know, I know in the past you've talked about all these initiatives that you have to increase throughput, efficiency. One of them is getting more physicians per implanting center. Do you have an update on the kind of the percent of your centers or installed base that have more than one physician? Then where do you think, you know, how should we think about that over the next few quarters?

Tim Herbert (President and CEO)

Yeah, absolutely. Don't have a specific number for you. We know that continues to grow, and that's a, a primary factor when reps go in to make sure we, number one, have a backup. Who's your backup? If the surgeon goes away or is unable to perform procedures, as, as just a routine measure, we wanna always have a backup. The other thing is we always look at a lot of our surgeons have multiple sites of service, so they can do procedures at a hospital, but they also have a backup, at an ASC per se. A lot of surgeons have multiple hospitals and an ASC. So, for the most part, we're getting to the point where we have multiple surgeons in most facilities, but most surgeons also have multiple sites of service. So, it kinda counteracts itself from, from that standpoint.

What we're really excited about, both from ENT and Sleep, is we have a very active fellows program. We wanna capture the surgeons as they graduate and go forth into their first job to make sure that they're bringing their Inspire experience with them. What we're doing is very actively training them before they start their jobs to really focus on making sure Inspire is part of their practice as they get going. We're doing that again, both with ENT and Sleep. We just finished our annual fellows course, and we had quite a few ENTs. I'm not sure the exact numbers on those, of the ENTs that graduated this year, but we're looking about a 50% conversion of those surgeons being able to do Inspire procedures in their first year.

That same thing goes forward with sleep physicians. We're gonna continue to expand that program going forward and, and get Inspire taught more in the, at the medical school level.

Richard Newitter (Analyst)

Great. Then, you know, kind of a generic question that, with respect to the, you know, utilization backdrop for a number of elective procedures out there, it's been strong in the first half, above trend. I know you guys are in a different situation, so underpenetrated into this huge TAM. I'm curious the extent to which, you know, you're seeing any kind of backlog or pent-up demand that's continuing to come in and support strong results. If you are, what the outlook is from a contribution standpoint as we move into the back half.

Tim Herbert (President and CEO)

Yeah, we are. I think we're seeing continued growth across all of our centers. Obviously, same store sales drove the growth in Q2 as it did in Q1. I think we'll continue to do so as we move forward. I think that we're excited again about the pop that we saw with Medicare in the second quarter, and I think that kinda overwhelmed a little bit more of the commercial cases, which will come on strong in the second half. The demand continues to be there. As you mentioned, Rich, we continue to be underpenetrated in the TAM, and we still have limitations on the number of surgeons performing the procedures, so we still need to continue to address that and work the backlog of patients.

Absolutely, people wanna have, step in and, and have their, obstructive sleep apnea taken care of. Our demand from our direct-to-consumer continues to be very effective. Our contacts are high, our efficiency and conversions of patients through IMPACT continues to be strong. We just got to continue to open up more OR time by training and getting ENTs to commit more of their time to these patients.

Richard Newitter (Analyst)

Thank you.

Tim Herbert (President and CEO)

Thanks, Rich.

Operator (participant)

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

Leigh (Analyst)

Hi, it's Leigh calling in for Larry. Thanks for taking my question. Congratulations on the quarter. Just on the guidance, you raised the revenue, the full year revenue guidance by a little more than the beat. That seems implied in the second half. Your top line growth is closer to 30%, whereas you grew over 70% in the first half. If you can just talk about, you know, why the deceleration, is there something other than conservatism and just general confidence in the second half outlook? I have a follow-up.

Rick Buchholz (CFO)

Yeah. Hi, Leigh, it's Rick. We haven't changed our guidance strategy, and so we put forth guidance that we believe in and we can stand behind. We did talk about, you know, that the mix of Medicare and commercial. With that said, you know, we expect a real strengthening of the commercial procedures as we enter into the fourth quarter. Despite that, you know, we're very proud of the Inspire's team the first half of the year, and we have increased increased guidance. Really similar to previous years on how our revenue will kind of roll out for the year.

Leigh (Analyst)

Got it. Okay. Just my second question. Tim, you talked about the new Head of Strategy that you just hired. What will be his focus? The company has, you know, close to $500 million cash. Should we read that as perhaps an increased interest in expanding your portfolio, either inside sleep apnea or, you know, even outside of sleep apnea? Thanks again.

Tim Herbert (President and CEO)

Sure. Great question. Carlton's a great talent, as we continue to grow, we need that leadership to be able to scale our business. I definitely see where you're coming from that. Our investments in the past are focused on technical tools that can help us grow the adoption of Inspire. That's not changing. I think we're gonna focus on our building the Inspire business to treat obstructive sleep apnea. Nothing has changed there. Yes, we've been successful at making sure we have a strong balance sheet, but our focus today remains with obstructive sleep apnea and leveraging tools, as we have with Ognomy and EnsoData, to be able to help patients make appointments with physicians, to integrate in with a SleepSync system.

Again, we're keeping, we're keeping our focus, we're growing the adoption of Inspire, and Carlton's gonna be just instrumental in helping us with our overall strategy plan and understanding what this organization looks like when we go to $1 billion, $2 billion in annual revenue, and what does the organization need to look like, not only from our external team, but from our operational side, our clinical evaluation, our quality, and our overall company as a whole.

Operator (participant)

Thank you. Thank you. I show our next question comes from the line of Anthony Petrone from Mizuho Americas. Please, please go ahead.

Anthony Petrone (Managing Director, Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst)

Thanks, and congrats on another strong quarter here. Maybe a quick one on Inspire V, to clarify the pricing strategy for the latest gen system as we look toward a rollout, how will it stack up against the existing systems out there? The quick follow-up would be, when we look at the two themes of GLP-1s, potentially lowering BMI for even patients now contraindicated above 40 BMI, but with that label expansion up to 40 BMI, when you think of those two out there now concurrently, how many patients can that actually bring into the category where they would be eligible for hypoglossal nerve stimulation? Thanks.

Tim Herbert (President and CEO)

Got it. Thanks very much. As far as Inspire V comes out, we're still evaluating that on what our pricing strategy will be when we launch that. It will be a change, because again, we won't be moving, selling this, the pressure sensing lead either. A little bit of time yet to come on that. We're still doing ongoing evaluation. I always said in the past that we tend to do price increases with technology improvements, and this is certainly a strong technology improvement, not only with Inspire V, but it opens up the platform, allowing us to go to six and seven and beyond. A lot more to come on that, and we'll report back in the future.

As far as GLP-1, you put out a note yesterday, you did a call with a doctor that was very intriguing in regard to their take on what GLP-1 is gonna do with addressing Inspire and how it's gonna do with overall weight loss. It was a very interesting discussion. I think what we're seeing is, we know that when you get a BMI above about 35, we can screen out well over 30, per third, a third of the patients due to complete concentric collapse or lateral wall collapse that's associated with a larger neck circumference. As we go to a BMI of 37, even up to a 40, that's when you're gonna screen out 50% or higher. So, if you can just look at the number of patients up there, when we're able-...

to help them with the GLP-1 to be able to lose weight and re-relax the lateral wall component of their obstructive sleep apnea, that's gonna have a significant impact on the Inspire business. The key is gonna be, it will take time. I think in your report highlighted that there's not a lot of activity that you've seen to date yet. We haven't heard a lot subjectively from the field on progress made with GLP-1, but we do know that's coming in the future.

Leigh (Analyst)

Thank you very much.

Operator (participant)

Thank you.

Tim Herbert (President and CEO)

Thank you.

Operator (participant)

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

David Rescott (Senior Research Analyst)

Oh, great. Hi, thanks for taking the questions, and congrats on the strong quarter here. Just first on utilization in the U.S., I'm wondering, maybe not what's driving that, but when we think about kind of the bell curve of physicians that maybe are centers or maybe toward the upper end, middle end, and lower end of this range, is increased utilization kind of coming from any one of those specific segments, or is it more, more or less broad across, across the kind of spectrum of, of centers? And then when we think about maybe those toward the higher end of that range, are, are there still improvements in utilization coming from those centers, or are they approaching maybe some of a, somewhat of a capping out kind of level?

Tim Herbert (President and CEO)

Yeah, I don't. Hi, thanks for the question. I think we still have quite a ways to go as far as utilization. We can talk about the characteristics of the higher-end sites, and, and the key characteristic is team. What that means is the surgeons can focus on those aspects of their practice, and they can rely on sleep physicians who will do a lot of the longitudinal management of the patients, a lot of the programming of the device. So, the highest utilizing centers have multiple surgeons, and they have a well-defined team to know who does what with the patients, and it's, it's easy for the patients to see their process through from the initial screening, through the implant, through the longitudinal patient management.

I think that's kind of the key that we try to educate the Tier 2 and the Tier 3 sites with, is you got to be able to have a team. We have great respect for our friends who are those ENT surgeons who are dual board certified in sleep medicine, because those are the early adopters. They've been with us since the very beginning, but they need to transition a little bit to have partnership with sleep physicians and others, other surgeons to really help them build their capacity. What's important here is we know centers with the highest capacities also have the highest patient outcomes. Well, that's natural because everybody at that facility knows their job, everybody at that facility is experienced, and they know what a good patient outcome is.

We keep pushing utilization, and, I think you highlighted that in your initiation report on that as well. I think that's really kind of a key, is we're gonna keep pushing utilization as we move forward.

David Rescott (Senior Research Analyst)

Okay, great. Thanks. just second one from, from us on the expanded AHI, BMI labels. I know you guys provided some, some comments around the impact, there. just thinking or, or wondering, I guess, more toward the top of the funnel, I guess, to the extent of which you're able to see, you know, if maybe you've heard anything anecdotal, just around physicians, you know, more or less at the margin, maybe considering offering the therapy to a broader number of patients, given that those labels have been bumped up, up, up a little bit. Thank you?

Tim Herbert (President and CEO)

Absolutely. Thank you. High AHI, absolutely. We made sure all the physicians knew about the high AHI approval right away. We're working with the commercial payers on an update to their policies on that, amongst other things, including the pediatric population as well. The key is gonna be that's, that's an important because those patients just don't have many other options. As far as the high BMI, as we've been talking about with the GLP-1, we're being very careful about jumping too fast into the high BMI ring because those patients will have a higher probability of being screened out with the DISE procedure because a complete concentric collapse or the lateral wall collapse, and those are the concerns. Those are the patients we think can benefit from the GLP-1 drug.

We're being very careful about BMI, pushing really hard on high AHI, pushing very hard on pediatrics with Down syndrome, and then we'll talk more in the near future about transition of DISE to that, that whole predictor. That'll also be a key component with payers.

David Rescott (Senior Research Analyst)

Great. Thank you.

Tim Herbert (President and CEO)

Thank you.

Operator (participant)

Thank you. I show our next question comes from the line of Matthew Mishan from KeyBanc. Please go ahead.

Matthew Mishan (Analyst)

Hey, great. Thank you for taking the questions. I wanted to talk a little bit about SleepSync, and kind of how many of these new centers that you're adding are, are also kind of adopting SleepSync, and then kind of where are they in, like, the pathway, and what are some of the larger centers in the pathway, towards reimbursement for remote patient monitoring?

Tim Herbert (President and CEO)

Great question. Thank you very much. The Bluetooth remote that was launched last year really is the big change to SleepSync. It provided the utility of the system to directly interface the patient's device with SleepSync, so the the physicians and the healthcare providers can now have a real-time view of how those patients are doing. When we open new centers, as we have for the last several quarters, new centers being trained are automatically put on SleepSync. Our process is going back to the older centers that have been around for a while and starting to train them to add SleepSync to their process. As far as new centers goes, it's it's standard requirement right up front. We train all of them to make sure they're a part of it. It's necessary to have this direct communication.

As we mentioned, we already have the new physician programmer approved, and we're gonna launch that in the beginning of next year. All the actions taken with the physician programmer are automatically stored in SleepSync, and all the information from the patient remote from the implanted product is transitioned via the patient's smartphone to SleepSync. We're gonna be introducing tools, such as the sensor that goes under patients' mattresses, to be able to record and monitor a patient's quality of sleep. That'll be part of SleepSync. We are interfacing with our minority investments, Ognomy and EnsoData, so their data automatically uploads to SleepSync. What SleepSync is gonna be, is gonna be all-encompassing patient management tool that's gonna have not only the objective evidence for the quality of sleep, but they'll also be able to input the subjective data from the patient.

How do they feel when they do a telemedicine, right? What kind of complaints do they have? Is everything working fine with them? Then the next step after this with SleepSync, is we're gonna be able to start taking action from a physician's office to a patient's home with remote patient programming. That's gonna be tremendous. We're already working on that in-house. We're already in communication with FDA as well on that. That's gonna be a key step going forward.

Matthew Mishan (Analyst)

Okay, great. I'll just ask one last on all these new centers that you're, you're adding. Is this really a, a push from your sales force, or is it a pull from these centers basically asking, saying, "We, we need to add this to our practice?

Tim Herbert (President and CEO)

Where we are today, we're still a pull. When we are do our direct-to-consumer, yes, we are creating a brand, and a lot of patients see that. They come to our website. Well, physicians see this as well. We haven't mentioned this at all today, but we get general practitioners, family practice doctors, they see those outreach programs as well. They come to our website saying: Look, my patient's gonna ask me about this. I need to know how to communicate with my patients. We have a large educational process with general practitioners or family practice doctors on how to talk to their patients and how to refer their patients to the ENTs. Today, we're still responding to outside demand that we need to have this in our, in our practice.

The first thing we do when we get an inbound call from a center, is we kind of make them fill out an application. I know that sounds arrogant, but it's not. What it is, it's an organizational form that helps them identify who's who in the zoo. Who's the ENT? Who's the sleep physician? Do you have support from the C-suite? Do we have a proper navigator? Do we have the OR team? Who's gonna do sleep endoscopy? How are you tied into your sleep practices? We really kind of coordinate all the key functions that are necessary for centers to come on board and B, come on board with a high utilization. We're still in that early stage where we're bringing on patients and, and we just don't have capacity in centers yet. We need the...

or a capacity in, in cities yet. We need to continue to grow the number of centers that we're training.

Matthew Mishan (Analyst)

Thank you, Tim.

Tim Herbert (President and CEO)

Thank you.

Operator (participant)

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

Suraj Kalia (Analyst)

Hi, Tim. Can you hear me all right?

Tim Herbert (President and CEO)

Yes, Suraj, how are you?

Suraj Kalia (Analyst)

Good. Congrats on the quarter. Tim-

Tim Herbert (President and CEO)

Thank you.

Suraj Kalia (Analyst)

I'll just throw in all my questions quickly, all of them directed to you.

Tim Herbert (President and CEO)

Okay.

Suraj Kalia (Analyst)

Tim, on your comments on GLP-1s, appreciate the color. Maybe you can walk us through. I look upon this as a two-tailed curve, right? You were talking about high BMI getting pulled in, and your comments about lateral collapse, I appreciate that. How do you look upon the net change? Because patients that are 30 to 35, 37, they're gonna drop also. I'm curious, how do you all stratify what is the influx minus the outflux? That's one question.

Tim Herbert (President and CEO)

Mm-hmm.

Suraj Kalia (Analyst)

The second question, Tim. Please stop me if I ask me again. Second question would be, what % of your patients currently are getting hypoglossal nerve stim, but haven't even tried a CPAP?

Tim Herbert (President and CEO)

Hmm.

Suraj Kalia (Analyst)

Tim, the remote programming component, can you give us a specific example where remote programming has been done, whether it's Neuromodulation, anything? The reason I ask is general otolaryngologists, at least our field, you and I have talked about this in the past, also offline-

Tim Herbert (President and CEO)

Mm-hmm.

Suraj Kalia (Analyst)

you know, they are sort of disconnected with the, with the programming component of it. They hand it off. I'm curious if you could, you know, in the remaining time, just walk me through. Sorry, I threw all of this in. Any quest- answers to any questions would be great. Thank you, gentlemen.

Tim Herbert (President and CEO)

No, those are all really, really good. Let me walk through... I kind of want to go in reverse, but I'm not going to. Okay, BMI influx, outflux. You have knowledge on this, and that's why it's, it's so key to talk about this. It's a % of patients with a high BMI that actually have a lateral wall collapse. As you highlight, not everybody does. A lot of patients with a BMI of 37 only have tongue-based collapse, so they will pass a sleep endoscopy and go right on to Inspire. The challenge that you're highlighting is how many patients do you have to see that will actually pass a DISE to be able to move on to Inspire? How much capacity did you eat up in that ENT's practice with patients that aren't able to get Inspire? It's a very good question.

That's why we're being very careful with the high BMI. The good news is, with PREDICTOR, that airway exam, we can do a soft review in an office setting to see if a patient's likely to have a lateral wall collapse, and we're already in the, the next 300. A lot more to come on that to really start stratifying those groups. I think the, the, the GLP-1s are going to take those patients with a lateral wall collapse or the complete concentric collapse. Ideally, now we need to, to see how this works on practice, ideally, lower their BMI and have them present, really, ideally, as only a tongue-based collapse. We need to track that going forward. Your second question was with what percent of our hypoglossal nerve stimulation patients have actually tried CPAP?

The reference to this is, with the Philips recall, did we get a significant amount of patients that were able to bypass CPAP and go right to Inspire? I think the real answer to that is probably not. I think the great majority of our patients have all tried CPAP, and I think that's is a gate that the insurance companies always ask. I am sure there's a small percent that have been able to go through because they're unable to get a CPAP machine because there wasn't inventory there from ResMed, or there wasn't an inventory, obviously, from Philips because of the recall. I think, historically, I think very few of our patients actually get through bypassing CPAP, so I think probably it really has no impact on the inventory side. Neuromodulation.

I think Abbott has approval for some of their diabetes products. So if you look at the way SleepSync is set up, and we look at the screens of SleepSync, they really are modeled after our good friends at ResMed. ResMed did a really good job with the Brightree system, having a patient management system that the sleep physicians know how to manage their patients. If we could model our screens after those, the sleep physicians would be comfortable using SleepSync, and that's kind of the tool we're using. Those are the sleep physicians, those are the ones that manage the patients longitudinally, and those are the ones that the remote program is designed for.

You may have ENTs that are dual board-certified in sleep, and they do the longitudinal management, but we're really kind of building SleepSync for the longitudinal management and the remote programming. FDA has approved that for implanted products in the past, so we do have precedence for which to move forward with. Thank you very, very much on that, Suraj. I know we're over time, but I just want to make one last note. I want to thank you 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 patients remain 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 the 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 in and support of Inspire and look forward to providing you with further updates in the months ahead. Please stay safe and healthy. Thank you very much.

Operator (participant)

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