Inspire Medical Systems - Q3 2023

Transcript

Operator (participant)

Good afternoon. My name is Delam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Inspire Medical Systems Third 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 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, Delam, 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 nine months ended September 30, 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, November 7th, 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 third quarter of 2023. As always, we start with our commitment to patient outcomes and ensure that each patient has the best possible experience with Inspire therapy. We are excited to announce that during the third quarter, we surpassed the significant milestone of 50,000 patients treated with Inspire therapy, and the team is very proud to be able to make a difference in the lives of so many patients. With that, let's review our results. In the third quarter, we generated revenue of $153.3 million, representing a 40% increase compared to the third quarter of 2022. Our growth continues to be driven by increased utilization at existing centers and is complemented by the activation of new centers.

Internationally, we grew 99%, with the European team delivering very good results. We had several wins, including growth in Germany and the first full quarter of leveraging countrywide reimbursement in Belgium. Looking forward to the fourth quarter in Europe, we are running up against inventory supply issues of polyurethane-based leads. We do not yet have our European Union Medical Device Regulation approval, commonly known as EU MDR, which allows us to start shipping the new silicone-based leads, which were approved in the U.S. back in the third quarter of 2022. As background, we applied for EU MDR approval in December of 2021, but there is a significant industry-wide backlog in the European system, which has delayed approval beyond our expectations. As such, we have limited supply of the polyurethane leads.

Although it is difficult to predict, we have made significant progress with our notified body and are targeting EU MDR approval of the silicone-based leads in early 2024. In order to maintain product deliveries, we are pursuing a temporary pathway called product derogation, which is a country-specific approval that allows for the early shipping of the silicone-based leads while the EU MDR review is being completed. We have already received derogation approval in the Netherlands and have begun the delivery of silicone-based leads in that country. We have also initiated the derogation process in several other countries, including Germany, Belgium, and Switzerland.

Therefore, during the fourth quarter of 2023, and possibly extending into 2024, we expect that the delay of the EU MDR approval and the shortage of polyurethane-based leads will cause delays to implant procedures, resulting in a reduction in our European revenue of up to $4 million in the quarter. In the U.S., during the third quarter, we continued to increase our capacity to support the strong demand for Inspire therapy by adding 62 new implanting centers, ending the quarter with a total of 1,107 centers. During the fourth quarter, we continue to expect to activate 52-56 centers. Regarding the U.S. sales team, we created 13 new sales territories in the third quarter, bringing our total to 274. We continue to expect to add 12-14 sales territories in the fourth quarter.

To highlight the strong patient demand, in the third quarter, the number of visitors to our website surpassed 3.8 million. From these visitors, we had over 15,000 physician contacts. These are significant increases from the second quarter and are due in part to a change in the media mix, which we implemented in the third quarter. Further, we continued to improve our conversion of patients receiving Inspire therapy. Looking ahead to 2024, we will be more targeted in our approach to DTC. One example is increased attention to digital advertising directed towards qualified patients. As a result of this change in our strategy, these metrics will no longer be relevant and will not be reported into 2024. Summarizing the commercial activity in the United States.

We tracked a decrease in the number of submissions by our customers seeking prior authorization to the Inspire procedure, resulting in a short-term impact on the number of implant procedures during the early part of the third quarter. As background, in early 2023, we initiated a pilot program with certain customers to minimize their involvement with their prior authorization process. Despite a careful and well-planned approach to the pilot program, a significant number of our customers experienced challenges with their prior authorization submission process. After recognizing this trend early in the third quarter, we reinvigorated our efforts to facilitate patient access to Inspire therapy by more closely engaging with our customers with the prior authorization submission process, involving both our field and corporate prior authorization teams to assure timely, consistent, and accurate submissions.

As a result of these efforts throughout the quarter, the number of prior authorizations for patients seeking Inspire therapy began to normalize, which reinforces our confidence in the fourth quarter and beyond. Even with these improvements, we were limited in our ability to add implant procedures as a result of the ongoing challenge of ENT surgeon capacity. Having identified and addressed this prior authorization issue, and with the ever-present patient demand, we are seeing significant momentum in the U.S. entering the fourth quarter, and therefore, we are increasing our full year revenue to be in the range of $608 million-$612 million, up from $600 million-$610 million, representing a 49%-50% increase compared to 2022. This increase to our revenue takes into account the regulatory challenges in Europe. Switching over to reimbursement.

We are actively working to include the FDA indication expansion into payer policies. Just recently, two large US payers, Aetna and Humana, updated their policies to cover patients with an AHI up to 100 events per hour and a BMI up to 40, as well as for the pediatric population with Down syndrome. We will continue to work with other payers to include these expanded indications. Furthermore, the final OPPS rules for 2024 were published last week, consistent with the proposed rules in July, with minimal changes to the site of care reimbursement levels. We also highlight the significant increase in the reimbursement of the drug-induced sleep endoscopy, or DISE procedure, which increased from $180 to $1,618 for the Medicare facility payment in the hospital setting.

The physician reimbursement had a slight decrease due to the general RVU reimbursement rate, but this is typically adjusted prior to the January 2024 effective date. Let's switch over to product quality. Our real-world evidence continues to show strong patient outcomes and patient satisfaction with Inspire therapy. We recently published our 2023 Patient Experience Report, which shows continued improvement in our already low revision and explant rates and demonstrates our unwavering commitment to outcomes. This report can be accessed on our website at inspiresleep.com. We continue to make investments in our clinical research, as evidenced by the PREDICTOR study results, which were presented at the International Sleep Surgical Society meeting in Nashville in September. The results indicate that a narrow airway correlates with complete concentric collapse. Furthermore, each millimeter increase in pharyngeal width correlated to a 10% decrease in the likelihood of complete concentric collapse.

Additionally, the results from the initial subset of 300 patients demonstrated that BMI plays a key role, as BMI was correlated with increased lateral wall collapse, which is a contributor in complete concentric collapse cases. In the early results, each unit increase in BMI correlated with a 14% increase in the odds of complete concentric collapse. Importantly, these results do not vary from the results of the initial feasibility study. With these encouraging results, additional patients are being enrolled for validation, with the intent of identifying specific patient populations for which DISE may not be required. We expect to complete enrollment of the second subset of 300 patients by year-end, and publish results once the full data set has been enrolled and analyzed. On the product development side, our pipeline remains robust.

We submitted the Inspire V PMA supplement to the FDA at the end of the second quarter, and we have received the initial set of questions from the FDA. The team is working diligently on a thorough response to these questions. Recall, the Inspire V system incorporates sensing capability into the neural stimulator using an accelerometer, and will remove the need for the pressure-sensing lead. We have several additional system-level qualification tests to be completed and expect to submit a response to the FDA in early 2024. And with the normal review time, we expect approval in 2024, and following a limited market release, we are targeting for full commercial launch in 2025. Looking ahead to 2024, we will launch our new connected physician program in the U.S., called the SleepSync Programmer.

This will allow physicians to access our programming screens from their own computers and eliminate the necessity for Inspire-provided tablets as part of the physician programming system, and also paving the way for future remote patient programming. We continue to increase the adoption of our SleepSync digital platform and work on enhancements to streamline the post-procedural, longitudinal patient management. Before I turn this over to Rick, I would like to address the impact of GLP-1s on our business. Despite the negative stock market reaction, we have not seen any adverse impact on our business, and we see tremendous opportunity to work alongside this class of drugs to treat the many patients living with OSA. As you are all aware, OSA is a multifactorial disease with many independent factors, including age, gender, weight, and neck circumference. Inspire is designed to address anterior-posterior airway collapse, also known as tongue-based collapse.

Patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral wall collapse. A combination of tongue-based collapse and lateral wall collapse is identified as a complete concentric collapse of the upper airway, which is detected during a DISE procedure, and Inspire is contraindicated for complete concentric collapse. Also, while weight loss can help reduce a patient's AHI and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients. However, we expect GLP-1s will help patients address their lateral wall collapse, potentially bringing them into our indication. Furthermore, we believe the introduction of a pharmaceutical treatment option will significantly increase patient awareness and have a positive impact on the overall diagnostic rate of OSA, which still remains very underdiagnosed in the 20-30% range today.

The combination of these factors should have a positive impact on our business. Lastly, as shown on our ongoing ADHERE patient registry, the average BMI of patients treated with Inspire therapy is 29, and the American Academy of Sleep Medicine guidelines recommends weight loss prior to surgery for patients with a BMI greater than 35, and nonsurgical solutions for patients with a BMI greater than 40. Therefore, there is not a significant overlap in the Inspire patient population with the GLP-1s today. 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 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, and good afternoon, everyone. Total revenue for the third quarter was $153.3 million, a 40% increase from the $109.2 million generated in the third quarter of 2022. U.S. revenue in the third quarter was $147.5 million, an increase of 39% from the $106.3 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, our continuing direct-to-consumer marketing, and a higher number of territory managers. Revenue outside the U.S. increased to $5.8 million, which is a 99% increase year over year....

The US average selling price in the third quarter was $25,000, compared to $24,400 in the prior year period. We expect the USASP to remain steady at the current level. The ASP outside the US was $21,700 during the quarter, compared to $20,500 in the third quarter of 2022. Gross margin in the third quarter was 84.1%, compared to 81.9% in the prior year period. Recall, the third quarter of 2022 was negatively impacted by obsolescent charges related to the transition from polyurethane to silicone-based leads and the introduction of our Bluetooth remote in the US.

Total operating expenses for the third quarter were $142.4 million, an increase of 34% as compared to $106.6 million in the third 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. However, on a sequential basis, operating expenses were relatively flat, reflecting our commitment to improving our operating leverage. Interest and dividend income totaled $5.5 million in the third quarter, compared to $1.4 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 loss for the third quarter was $8.5 million, compared to $16.8 million in the prior year period, representing $0.29 compared to $0.60 in the third quarter of 2022. This includes $1.7 million of R&D expenses associated with pre-launch inventory related to Inspire V that is expensed for accounting purposes, bringing the total of expensed pre-launch inventory to $4.7 million year to date. The weighted average number of shares outstanding for the third quarter was 29.4 million. We expect the fourth quarter weighted average shares outstanding to be approximately 29.6 million. Our cash and investments were $467 million at September 30. 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 continuing momentum in our business and taking into account the EU MDR approval challenge in Europe, we now expect full year revenue to be in the range of $608 million-$612 million, an increase from our previous guidance of $600 million-$610 million. This updated revenue guidance represents 49%-50% growth compared to full year 2022 revenue. We continue to expect full year gross margin to be in the range of 83%-85%. As Tim noted, we continue to expect to activate 52-56 new U.S. centers and establish 12-14 new U.S. sales territories in the fourth quarter 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. Delam, 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 star one one on your telephone. To withdraw your question, please press star one one again. We ask that you please 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. And I show our first question comes from the line of Danielle Antalffy from UBS. Please go ahead.

Danielle Antalffy (Senior Analyst)

Hey, good afternoon, everyone. Thank you so much for taking the question. Tim and Rick, just wanted to follow up on the comments around the prior auth, and just if you can give any context around, you know, how many centers were piloting this program. Just trying to get a sense of, or if you can give us the number of what you think is it, you know, how many procedures did not get done because of it? Anything you can give there, and I do have just one follow-up.

Rick Buchholz (CFO)

Okay, very good. What we know is we continue to scale the organization and, we need to start building independence. And so we're working with some of the key centers to be able to help them along with their independence of the prior authorization. And we wanna stay involved with some of the difficult cases, and involves both the field and the prior authorization team. So it was a pilot study with a significant number of centers, and the centers that we've chosen, of course, are the, the those centers that have higher utilization to be able to leverage the learnings at those centers.

So while we don't have the exact numbers for you yet, we are comfortable that we're able to work with those centers and re-energize the field team, and re-energize the prior authorization team to support these centers to get the prior authorization submissions back online. And we're seeing continued growth there and confidence moving forward.

Operator (participant)

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

Robert Marcus (Analyst)

... Yeah, thanks for taking the question. Maybe to follow up on Danielle's, I'll ask both of them up front. One, it said in the release you, you started to learn about this early in the third quarter. I imagine it probably overlapped with the second quarter call. So just wondering, when you knew about it and why not mention on 2Q? And then as you look to 2024, I realize it's, it's still early, but it, I, I think it's important for investors. Any early thoughts you have, and how do you feel about where Street Consensus is? Thanks a lot.

Tim Herbert (President and CEO)

Gotcha. Well, we're gonna start off by looking at certainly we needed data as we continue to move through the, the first and second quarter. We talked about first quarter is really focused on Medicare cases as we come out of the fourth quarter. We also are in the process of implementing the pilot program. Further into the second quarter was being educated with new centers, and that's when we were able to start to track that a little closer. It wasn't until the beginning of the third quarter that we realized we needed to take some corrective action, and we implemented that change, but we also wanted to watch for the data on those changes, which, of course, we don't see till later into the third quarter.

At that point, with our capacity, it's challenging to be able to add those additional implant procedures within the third quarter. But it started to become evident, maybe a little bit in the second quarter, but with tracking the data, we really didn't take the action until early in the third quarter when we had strong confirmation on that. I'm going to hand off to Rick there for talk about next year.

Rick Buchholz (CFO)

Yeah. Hi, Robbie. Thanks for the question. So, we provide annual guidance, and we've only provided guidance through 2023. Normally, we don't comment on consensus, but I mean, that being said, our focus is to continue on increasing utilization that we've proven, and also increasing capacity by adding new centers, territory managers, as well as really focusing on capacity by adding new implanting or additional surgeons, because the majority of our centers only have one implanter. Also, as a reminder, too, we expect to get some utilization tailwind as our centers mature. Roughly half of our centers have been added in the last two years.

So as we look towards 2024, you know, we expect that we'll continue to improve our operating leverage, as we progress, you know, through 2023 as well as 2024. I would note, though, one headwind is what we mentioned earlier about the EU MDR challenge in Europe, and that could carry over into early 2024, as Tim mentioned.

Robert Marcus (Analyst)

Okay, thanks a lot.

Tim Herbert (President and CEO)

Thanks, Robbie.

Operator (participant)

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

Speaker 16

Hi, it's Lei calling in for Larry. Thanks for taking the question. I will also ask my two upfront. Just on the Q4 numbers, the implied Q4 growth is at 16% sequentially. In that number, what's assumed about impact of the prior auth program? Is there any implications from what you learned in Q3 going into Q4? And related to that, the $4 million that's coming out in Q4 due to supply in Europe, does that go into backlog? So when you get the clearance in Europe early next year, do you get that $4 million back? And then my second question is on the Inspire V. Can you give any color on the, you know, the type or number of FDA questions that you got, and if you need to do additional analysis?

I guess the bottom line there is, you know, what gives you the confidence that you would get approval in 2024? Thank you.

Tim Herbert (President and CEO)

Sure. You bet, Lei. The Q4 numbers, when we look forward to that, that does include the improvements that we're seeing with the prior authorization, as we discussed. We see good momentum going forward in that. We did include a note on the European regulatory challenges of the $4 million. Now, remember, we're working a derogation process, so we hope that we can actually overcome that during the quarter, but we can't be predictive of that. So we're being a little bit careful as we work through those opportunities. Certainly, we already received approval in the Netherlands, and we're hoping that we can have communications with the other countries as well to kinda help that through. As far as the Inspire V, we give the FDA a lot of credit.

They did a great review on that. To put this in perspective, it is a Class III active implantable neural stimulator. The submission was 13,000 pages, so it's quite an extensive job for the FDA to review that. They came back with a series of questions in detail, and both around the product itself, on biocompatibility, around electromagnetic compatibility. The team has diligently kinda worked to answer each of those questions, but we're confidently moving forward with preparation of those questions. And once we put everything together with the programmers and the patient remote and the neural stimulator into our system-level testing, we will be submitting right back to the FDA. So I have strong confidence that we'll continue to work with the FDA to move toward approval. Thank you.

Operator (participant)

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

Travis Steed (Medical Device Analyst)

Hey, thanks for taking the question. I did want to ask about Medicare versus commercial mix. I know we saw that change last quarter. Was that due to the prior auth in any way? And if you could talk about kind of the mix this quarter, and the growth in kind of the Medicare versus commercial business, if you saw the Medicare business still hold in. And any comfort you can give on, just to make sure that, like, I know you're talking about the prior auth submissions, but just give comfort that this was more of a self-inflicted wound versus something changing on the demand side. Thanks a lot.

Tim Herbert (President and CEO)

Yeah, thanks. Got that. From the mix, yeah, we did highlight on the second quarter that we saw extraordinary little bit higher mix of Medicare versus the commercial. And so while we always say in the beginning of the year in Q1, it tends to be heavy Medicare, and by the time you get to the Q4, it tends to be heavy commercial, naturally, because of the high deductible insurance plans resetting at the beginning of the year, and the focus in Q4 is always with commercial cases. That continues to hold true. But in the second quarter, we highlighted that there's maybe a little bit higher mix of Medicare. I think it's a combination of a couple things, but with a delay in prior authorization submissions, yes, that is correlated with commercial cases and does work in line with that hypothesis.

So we do believe it is related to the comments we made back in the second quarter. We have confidence in the prior authorization process for the simple reason. We've already seen improvements, and we've seen the trends moving forward, and that gives us the confidence to be able to increase our guidance as we move into the fourth quarter. And the team, both the field and the internal prior authorization teams, are working well with our customers to make sure that we continue to help them get their accurate and timely submissions of the prior authorizations. And as I mentioned, Travis, we're already seeing improvements in the metrics.

Travis Steed (Medical Device Analyst)

Great. Thanks a lot.

Tim Herbert (President and CEO)

Thank you.

Operator (participant)

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

Jonathan Block (Managing Director in Healthcare Sector)

Thanks, guys. Good evening. I'll ask both my upfront as well. Maybe the first one, Tim, you mentioned the DTC switch, you know, maybe going forward from sort of this broad base to more targeted, the prior metrics that you gave, you know, won't be relevant, it seems, in 2024 and beyond. With such a big TAM, why is now the time to change it, you know, from that broad base to more targeted? And then the second question, admittedly, you know, some other people went there, but I, I think it's an important one. There's always the fear that, you know, hyper-growth companies can't see the next cut coming.

So can you give just some more details on how the trends changed, call it, you know, as you worked your way throughout 3Q or even what you saw in the first part here in the fourth quarter, to actually raise the guidance midpoint by $5 million, even while taking on that, call it, you know, $4 million inventory headwind from the international markets? Thanks, guys.

Tim Herbert (President and CEO)

Got it. DTC, we're not changing it now, but you got to go... John, you've been with us since the beginning, from the beginning of time. Remember back, even when we did our clinical studies, we did radio ads to recruit for the clinical study. Then when we got FDA approval, we started really slow with some Facebook and some radio, and it was several years before we even started to change to get into television. Then later on, we continued to grow, and just a few years ago, we started national TV campaigns. This is just an ongoing evolution of our experience with direct-to-consumer and the learnings that we've adopted over time.

What we've realized now going forward is we can even take it to the next level, and we can start really targeting our DTC towards qualified patients and really refining that approach, and it's going to show to be more targeted and more efficient. That's just a natural, natural progression of our program. It also goes hand in hand with the use of our digital tools and the technology to be able to help patients get their appointments and help with the conversion process and really help people get in front of physicians and healthcare providers and give them an opportunity to receive Inspire therapy. It's not an immediate change. It's an ongoing evolution of our DTC program, and look forward to reviewing that going forward.

Certainly understand your concerns with the hyper-growth concept, but what do we see around the corner. In this case, we pretty good data that shows limitations on the prior authorizations really had an impact, and it kind of is a little bit more reflective. I know we don't talk often about month-to-month comparisons in the quarter, but we did see an uptick in this last two months of the quarter that really gave us confidence going forward and a significant uptick in the specific number of prior authorizations. And again, as part of evolution, as we move forward, we know the confidence in getting approvals from insurance companies with prior authorizations has gotten extremely high, and so it makes it more predictive to be able to have comfort moving forward. So we think we're aware of what the future holds.

We think that we're well-positioned to manage our DTC and manage our conversions and handle the growth appropriately.

Jonathan Block (Managing Director in Healthcare Sector)

Perfect. Thanks for the color.

Tim Herbert (President and CEO)

Thanks, John.

Operator (participant)

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

Richard Newitter (Managing Director)

Hi, thanks for taking the questions. I'll ask my Q up front as well. As we think of the prior authorization situation, are you basically recapturing all of the backlog, for lack of a better descriptor, that may have materialized in 3Q in 4Q? Or is, you know, does your guidance assume, you know, some percentage of that backlog? Or tell me if that's not the right way to think about it. And then just secondly, you know, you grew your revenue 2x your expense rate.

I guess, you know, how do we think about operating leverage and that revenue growth to OpEx growth, especially as we kind of look out, you know, even into 2024, and any color that you can provide on profitability and how the new DTC... Or not new, but how your approach to more targeted DTC could potentially drive increased efficiencies in the P&L. Thank you.

Tim Herbert (President and CEO)

Perfect. Thanks, Rich. I'm gonna let Rick handle the second question there on profitability, but let me address the prior authorization and how do we work back with our centers to recapture those patients? It's a combination of working the field team, getting in with the centers to make sure that they're taking care of the patients who have a right to work with their healthcare provider to be able to be provided therapy if they qualify. So the field team is working directly with the sites to make sure that we have the proper team in place at the site, make sure the patient navigators and the healthcare providers are tracking those patients to make sure that they get the information necessary to get the prior authorizations put together.

Our internal prior authorization team is supportive of these centers to make sure we get timely, accurate, submissions in. So we will capture a lot of these patients. Now, the question that you ask is really about when. And so the key is gonna be, we know the time from insurance approval to implant is variable, but it, it tends to run a little longer because of, again, our capacity with ENTs, which we're working to improve and train additional ENTs, get optimization in the procedures, as well as open new centers. But we're gonna work hard to make sure every patient has an opportunity. It's gonna be challenging for us to capture all of those patients in the fourth quarter. I think we will see some of those patients even move in.

We're already scheduling cases, not only later in the quarter, but we are scheduling cases in Q1, today already. So I think it's a combination of the two. But the focus is we're committed to the patients, we're committed to giving each of those patients the best opportunity.

Rick Buchholz (CFO)

Yeah, I'll follow, I'll follow on with what Tim said, Rich. I mean, we're gonna continue to run our playbook. We know profitability is important. We continue to make investments in our business because we really want to focus on long-term top-line revenue growth. With our strong gross margins, we know profitability will follow. We've made some good strides year-over-year, quarter-over-quarter. Our net loss in the third quarter was $8.5, compared to $16.8 a year ago. We continue to be positive EBITDA. We were about break-even on that metric in the first quarter, but we've continued to improve that, improving our leverage.

In the third quarter, our adjusted EBITDA was $6.6 million, and that compares to a $2.4 million loss in the third quarter of last year. So we are making those investments, yet we are still showing leverage and improving leverage, and we know it's gonna be important, and we'll give more clarity on that, you know, as we get closer to 2024 or into 2024, when we provide our guidance around next year.

Tim Herbert (President and CEO)

Thank you, Rich.

Richard Newitter (Managing Director)

Thank you.

Operator (participant)

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

Adam Maeder (Managing Director and Senior Research Analyst)

Hi, Tim. Hi, Rick. Good evening. Thank you for taking the questions. I'll keep it to one. I just wanted to follow up on PREDICTOR. You presented the first data set, I think, a month or two ago. Have you started to dialogue with payers yet? If so, how have those initial conversations been going? And how do we think about the pace of policy changes and any impact to the business in subsequent quarters? Thanks.

Tim Herbert (President and CEO)

Absolutely. PREDICTOR, no, we're still working with the physician group. The first 300 patients closely aligned with the feasibility study that was performed by Dr. Weiner a year ago. And so we are in the process of enrolling the next 300. We're making very good progress with that. We're over half the way through that enrollment and expect to be close to finishing that enrollment by the end of the year to be able to give us a really good data set to predict what patients will not have complete concentric collapse and therefore not require a sleep endoscopy procedure. So we're still kind of refining that work, and then that will be brought forward to the payers when we have that.

In the interim, the prior market access team is communicating with the payers, and we just mentioned Aetna and Humana. We had another payer come through today with an updated policy on the high AHI, high BMI, and pediatric population with Down syndrome. So we are making progress on both fronts and starting communications, even with CMS, on the Medicare side. So really looks good. We're happy with the data that we see. We want to collect the second group of 300 patients, and then we'll really be able to communicate with the payers on finding the proper course forward for the patients. So thanks, Adam.

Adam Maeder (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

I show our next question comes from the line of Chris Pasquale from Nephron Research. Please go ahead.

Chris Pasquale (Senior Analyst)

Thanks. One question on the prior auth issue and then one on margins. Tim, it sounds like basically you attempted to wean centers off of a service the company was helping them with, and they had a hard time making that transition, and then the fix was to go back to helping them a lot. So is that right? And obviously, there was a reason you guys tried to do this and push them off on their own to begin with. So how do you get to that point and to your point, you know, put yourself in a better position to scale?

Tim Herbert (President and CEO)

Great question, and then we'll come back to you on, on, question for Rick there. I think the key is learning, and I think we did it as a pilot program and we positioned it well, we educated the team, but it's a strong transition for the centers. And while they submit their own prior authorizations, it's really our responsibility to give them a little bit of support on that, and also the field team being involved in the whole patient flow and tracking patients, where are they now in the process. So we're really in detailed work on working with the navigators and the physicians to make sure that their patients have the best opportunity. But we need to kind of review this whole prior auth.

As we continue to scale, we need to continue to encourage centers to be more independent, and we're gonna continue to look at what the best approach to this. Maybe it is transitioning with a third party in the interim. There's several different ways that we can go down this pathway. The advantage we have going forward is our technology is evolving significantly with the SleepSync system. So now we're in a better position to help patients through the overall process, and I think that's gonna help us with the education to make sure that we don't lose sight of patients and when they go into the dark hole. So we're able to track them going forward.

So we've learned, obviously, quite a bit with this process, and they're gonna be really able to come back, circle back around. And as we continue to scale, it's gonna be an important step for the organization to take, and we're well aware of that, and we'll continue to take steps forward. Now, I'll come back to you. You had a que- second follow-up.

Chris Pasquale (Senior Analyst)

Yeah, thank you for that. And then, Rick, just a detailed question: 29.6 share count for the fourth quarter, looks like that implies a net loss position for the company. You guys were GAAP profitable last year in the fourth quarter, and given the progress you made, it seemed like you might get there again this time around. So just wanted to clarify if you're thinking you'll be in a net loss position in 4Q.

Tim Herbert (President and CEO)

Yeah, we provide annual guidance, and we don't provide quarterly guidance, Chris, and so we're gonna continue to run our playbook. As I said, we're gonna make those investments. And so, but we are, you know, taking a very disciplined approach to spending, as we always do. But, you know, on an overall basis, you know, we expect to continue to gain leverage. One thing I didn't point out is, you know, we've, we're not burning cash. Year to date, we've actually generated $16 million of cash, and our overall cash balance is $467 million. So, we'll give more clarity on that, again, as we get closer to 2024.

Chris Pasquale (Senior Analyst)

Thank you.

Operator (participant)

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

David Rescott (Senior Research Analyst)

Oh, hey, great. Thanks for taking the questions. I wanted to follow up on or ask on your comments on the expanding coverage with Aetna and Humana. You know, I know you've talked in the past about how these newer indications could be somewhat market expansion or obviously, you know, some of those patients may have been getting prior auth in the past as well.

So just wondering, you know, with the updates you've seen or with the expanded coverage you've seen so far, whether or not you have increased confidence in the ability for those newer indication expansions to truly be somewhat market expansion, and whether or not you've seen any type of at least increase, maybe in those accounts already that have seen the indication expansion or that's still, you know, that's still too early. And then my second question, you know, just broadly, I guess, on the kind of consumer, you know, spending segments, and we've broadly gotten a little bit of questions.

I'm just wondering, you know, a month and a half or so into Q4, whether or not you're really seeing any type of weakness at all, just from a consumer spending standpoint as it relates to the interest in an Inspire procedure. Thank you.

Tim Herbert (President and CEO)

Thank you. Let's go back to expanded coverage. Let's kind of take these one at a time, and I think they're kind of key. I think from a high AHI, that's a pretty easy threshold. That's... These patients just don't have any other options. And so while we've been able to work with payers to try and get prior authorization approvals, it's not always easy. Aetna is a perfect example. Aetna does not authorize prior authorizations. So if you have a patient who's not indicated for Inspire and has a high AHI above 65, you really don't have a good pathway going in to get them to give you a special approval, and so those patients tend to get locked out. Now that they update those policies, the Aetna patients that have an AHI between 65 and 100 do have a pathway forward.

That's really a great step forward. That will have a strong impact going forward because there's obviously a lot of patients in the backlog that with a high AHI, they simply didn't qualify... And so that I think is a real positive. I think the pediatric patients with Down syndrome is again, another strong breakthrough. This is a new indication. It's still in the educational process of building awareness with the families and the physicians, and we're starting to see a better uptick there. And the good news is, most of the key children's hospitals are associated with other academic or other larger hospitals that already provide Inspire therapy. So it's a natural growth for those centers to be able to add in this really important patient population.

We continue to do clinical research in that group, as well as to continue to grow the clinical evidence with the pediatric population. When we get to BMI, now we've got to be a little careful, because remember, with BMI, we're talking about making sure that they have the proper physiology to be to receive Inspire therapy. We talk about if you have too high of a BMI, you have a lateral wall collapse. That's what is related to the GLP-1s. The tongue-based collapse is related to Inspire. The two in combination work together. So if we have patients with a high BMI, we're going to be very careful to not straight encourage them that they can go today and go get Inspire because they may have the lateral wall collapse.

That may require them to lose weight, be it a GLP-1 or a bariatric surgery. But we need to be careful with the high BMI patients to make sure that they have tongue-based collapse for which Inspire can treat. So again, we're going to be a little careful with that population to make sure we set expectations correctly. But high AHI is a go, high or the pediatric population is a go, and then the BMI, we're going to be a little bit careful. As far as the consumer spending, we don't see that really affecting our business. The key to it is patients with untreated, moderate to severely bad apnea. Let's take that a step further.

Patients who have been diagnosed and have tried CPAP, so they know the benefits of positively addressing their disease, yet not being able to be treated with CPAP, those are the patients that are pretty motivated to get Inspire. Once they get into the process, I don't think we have many people that drop out because of economic reasons, whether it be the copay with their private insurance, or I think the estimate from Medicare, it's about $800 out of pocket for a Medicare procedure. We don't see patients really walking away because of that expense.

David Rescott (Senior Research Analyst)

Thank you.

Tim Herbert (President and CEO)

Thanks, David.

Operator (participant)

Thank you. Our next question comes from the line of Anthony Petroni from Mizuho Group. Please go ahead.

Anthony Petroni (Analyst)

Good afternoon. Thanks for getting us in here. So staying on the coverage theme, that'll be question one and then one on GLP-1s. Tim, when you think about Aetna and Humana, and you talked about AHI up to 100, and then pediatric, BMI, a little tricky. I mean, is that something that you're already seeing here in November? And so, i.e., is it a 4Q phenomenon where that can sort of boost volumes in 4Q, or is it more of a 2024 event? And again, if you can quantify how large of an opportunity you think just getting the commercial payers on board with FDA label, you know, how much of a shot in the arm of growth does that represent?

Then quickly, just on GLP-1, Eli Lilly has a study next year, the SURMOUNT-OSA study, and a lot of talk on this call about, you know, certain percent of the patients are strictly weight. Some of them are anatomical. You mentioned tongue collapse, lateral wall collapse. You know, what do you, what are you expecting out of that study? Do you think we could see that nuance where maybe it'll, it'll prove out that a GLP-1 is, is not, you know, is really not going to be, you know, the biggest driver of reducing AHI, or perhaps it will be. So maybe just some thoughts on that study next year. Thanks.

Tim Herbert (President and CEO)

Yeah, absolutely. Yeah, let's go back to the coverage first. I think with the high AHI, those are patients that have been trying to get Inspire already. Many patients are getting stacked up. Remember the old days, we used to do a prior authorization, and then once denied, we'd have to submit in a first appeal, and if that was denied, we'd go to second appeal, then we'd have to go to an external medical review, which was an independent arbitrator. The problem with the high AHI before the approval is, those patients would have to go through that process. Now, with Aetna and some other payers who don't allow prior authorization, they just don't have that ability going forward. Same with Medicare. So these coverages going to really help them a lot.

I think you're already going to see some of those transition in during the fourth quarter, but certainly further into 2024, but we're already seeing those patients coming through. From a pediatric standpoint, almost a whole new program, because this is about brand awareness and making sure that the pediatric physicians and the families really understand about Inspire, and it's kind of more of a market development play. So I think longer term, that's probably more of a 2024 and increase going forward there, but really a, really a positive market to, to be in. And we're going to want to continue to expand that into other indications in the pediatrics groups and, and people that we can help along. GLP-1s, expectations of the SURMOUNT trial. I think we're looking at maybe some of the early data will get released in the spring.

I think maybe it's going to be a little bit more of a detailed readout in the July timeframe. What we expect from that, when we're able to look at that study and look at the demographics of the study, the average BMI, the mean BMI, is 40, and the mean AHI is 50. And if you kind of look back at all the other studies on weight loss, even with the significant reduction in BMI, which would be great if all those patients achieve it, it's still not gonna be to a point where they're gonna have a clinically relevant reduction in AHI. We read through the detailed protocol, and there's only so much detail we see, but it is a detailed randomized study. It is complex, but it only needs to show us a statistically significant change in AHI as compared to placebo.

So it's not as robust of a study that can really show clinical relevancy. So we expect that they'll probably show a statistical reduction. But again, we think that if the patients are able to lose that weight, stay compliant to the drug, and keep the weight out, that they will, in fact, become close to the Inspire indication, which is, we believe, is really a positive. On the same token, there is two arms in that. There's a CPAP arm, and there's a non-CPAP arm. And that's been a discussion that's been kicked around, too, on what would these drugs do when we get on the market? We've queried a lot of our physicians.

In fact, we're working with some of our physician groups to really understand how GLP-1s are going to affect our market going forward and how it's gonna affect the patient population. And some of our doctors, in fact, not only longitudinally manage patients, but they also have a weight loss clinic. And they have patients already come in who, either with bariatric surgery and those with GLP-1s, have lost weight and now find themselves in a position where they have tongue-based collapse to be treated with Inspire. So we're gonna continue to build on that, on that evidence as we continue to build forward. And the other side to it is, I think, people talk about, will people just start with GLP-1s and wait until they get onto CPAP? And we're not seeing that either.

I think you heard, Mick and ResMed talk about this a little bit, too. We're seeing patients are gonna start therapy at the same time they get diagnosed or prescribed GLP-1s, and by the time that they may be not compliant to CPAP and they get to Inspire, they'll already be down that pathway. So again, we think GLP-1s are gonna be complementary to our business, and I think when you see this data coming out, it's gonna show more evidence to that, and, we're gonna certainly be there to, help those patients out if they qualify, and we'll continue to track this very closely.

Anthony Petroni (Analyst)

Thank you so much.

Operator (participant)

Thank you.

Tim Herbert (President and CEO)

Thanks very much.

Operator (participant)

Thank you. I show our next question comes from the line of Mike Kratky from Leerink Partners. Please go ahead.

Mike Kratky (Senior Research Analyst)

Hi, everyone. Thanks for taking our question. Just really on that same GLP-1 front, I mean, can you talk a little bit more about what you've heard from surgeons regarding the current portion of your patients that are already getting GLP-1, and if that's actually leading to an increase in terms of the number of patients that you're seeing?

Tim Herbert (President and CEO)

Absolutely. Now, the key is, it's still very low quantity. It's still, when we talk about GLP-1s, we have to bring it up to our physician groups. The people that talk about GLP-1s is really from the Street, from Wall Street, and that's where we get all the questions. And when we get our advisory committee together and we get our doctors together, we have to ask the questions about GLP-1s because it doesn't have presence today. And when we get to the groups that do have weight management centers and have some experience with it, they have anecdotal experience with patients who had complete concentric collapse and went to the weight management clinic and went on GLP-1s, and some were able to come back.

So very low numbers now because we're so early in the game right now, and I think we're really ahead of where these GLP-1s are gonna go and what impact they're gonna have. And our job in the meantime, we're keeping our head down. We're not worried about it. We know our patient demand is there, but if we can have patients with a complete concentric collapse find a way to be able to lose weight, relieving the lateral wall collapse, thereby qualifying for Inspire, that's really gonna be a benefit for the patient and certainly a benefit to Inspire going forward.

Mike Kratky (Senior Research Analyst)

Understood. Thanks.

Tim Herbert (President and CEO)

Thanks, Mike.

Operator (participant)

Thank you. I show our next question comes from the line of Mike Polark from Wolfe Research. Please go ahead.

Michael Polark (Senior Equity Research Analyst)

Good afternoon. Thank you. Just one on the prior auth topic. I'm curious, when you launched this pilot earlier this year, did you have an expectation that this was gonna work well? Meaning, like, is this how therapies like this typically progress, centers become more autonomous, or did you view your strategy as maybe more of a potential outlier outcome? And then the second piece of this is, I imagine within the pilot, some centers did well on their own, some did less so. What are the characteristics of a center that was performing well with this pilot?

Tim Herbert (President and CEO)

Great question. So if you kind of look at the evolution of therapies, we are in a pure market development program, if you will, right? We're introducing hypoglossal nerve stimulation into the obstructive sleep apnea market, and that's while the necessity to provide the guidance to the centers for submitting these prior authorizations is necessary, and it evolves over time. As you continue to scale the business, it's a natural progression to be able to move forward to building independence and educating centers on the specifics of Medicare, the specifics of individual payers, what to put into prior authorizations, what to be careful of, what patients are not indicated, what do you do with the off-label patients? It's a pretty complex process that we certainly have expertise on.

But if you go back to, well, Mike, you've been around forever. Not calling you old, but you've been very experienced in the field. Go back to the spinal cord for pain days. Those started out at Medtronic and prior authorization, sacral nerve for urology and the InterStim program, which I worked on way back when. That actually starts out with a prior authorization, too. And as these programs evolve, it's natural to start building independence, and that's the natural course that we're starting. Did we plan it out accordingly and step forward? Of course. And did we expect to have success 'cause we chose centers in the pilot program to be able to who would best benefit from it? And some centers continue to be independent today, but others, we've needed to provide the guidance back to them.

So you're spot on with, there are always these areas of success. The characteristics of centers that can be successful are those that do the routine prior authorization for all the other procedures they perform. Some in sinus, whether it be oncology or cancer, whether it be trauma, whether it be tubes for kids' ears. So the larger centers that have experience doing prior authorizations are easier to adapt to it, and others just take a little bit more time from an educational standpoint. But it is just a natural transition for all new therapies.

Michael Polark (Senior Equity Research Analyst)

Thanks, Tim.

Tim Herbert (President and CEO)

Thanks, Mike.

Operator (participant)

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

Suraj Kalia (Managing Director and Senior Research Analyst)

Hey, Tim, Rick, can you hear me all right?

Tim Herbert (President and CEO)

Yeah. Hi, Suraj.

Suraj Kalia (Managing Director and Senior Research Analyst)

Perfect. Hey, Tim, I'll quickly throw a couple your way. Specifically, Tim, in terms of PREDICTOR and removing DISE from the picture. Tim, on one hand, DISE reimbursement, you know, has been increased to $1,100 or whatever, right? And now you remove it. Obviously, patient referrals and the flow improves. So I'm curious-

Tim Herbert (President and CEO)

Right.

Suraj Kalia (Managing Director and Senior Research Analyst)

How you think about the continuum of care. Now, the sleep docs are not gonna get the $1,100, right? So, to me, I'm just thinking, the general otolaryngologists, they'd be happy to implant, but the continuity of care is broken because they don't want to be involved, at least to a major part in terms of titrating, you know, and the follow-up. So I'd love to get some commentary there. Secondly, I know we've all belabored this prior auth to death, but forgive me for this.

Tim Herbert (President and CEO)

Right.

Suraj Kalia (Managing Director and Senior Research Analyst)

So Tim, what is it... Help us understand the leverageability in the model. If you can't give up on prior authorization handholding, right, DTC is needed. Obviously, clinical reps, you know, case, they need to be present cases. Help us understand the evolution of leverageability, where independent cases can be done at a certain period in time. Thank you for taking my questions.

Tim Herbert (President and CEO)

Absolutely. Okay, getting a note to make sure I captured that second question. Okay, so PREDICTOR, isn't that ironic? That and we're- when we're doing the PREDICTOR clinical study to find the group of patients that don't need to have a DISE at the same time, when the new code comes through and the new RUC survey of that code comes through, and they increase the facility payment. Now, what's important in here is that's the facility payment, it's not the physician payment. And the physician payment did not increase, and that's a smaller amount, not that significant. Although, if you ask your question another way, some of the ENTs can do these procedures in their own ASCs, so they can get a little bit of a benefit from it.

I think if you ask a lot of the ENTs, and we work with our physicians to make sure that this is true, they much rather do the implant procedure to move forward, rather than picking up a couple hundred dollars on doing a DISE procedure. I think that there's enough patients in the pipeline that demand is so high, we need to continue to drive efficiencies across the board. So the continuum of care works. We know that we want the sleep physicians to help with the diagnosis, but certainly do the longitudinal management, and there are CPT codes for them to do that whenever they have a visit, remote monitoring. Device programming has CPT codes. So there's codes there for the sleep physicians, and the ENT codes are in place.

We just got the new codes a year ago for the implant procedure, which is fairly reimbursed because it's been through two RUC surveys over the last two years. If we can continue to make improvements with, say, Inspire V and make that procedure more efficient, it will improve the economics of the implant procedure for the surgeons as well. It's still in the best interest that we perform DISE only on those patients that need DISE. Remember, the focus needs to be on the patient. That is not a good experience in the patient pipeline to have to have a DISE. We want patients to be able to be diagnosed in an office setting with the PREDICTOR which is a caliper measurement.

Being able to go straight to insurance approval and straight to implant, not having to have a disruption in the process for a sleep endoscopy, which adds a significant amount of time because it's an added procedure. Okay, on prior authorization, it is certainly leverageable. And the key on prior authorizations is, as you continue to evolve in time, the number of procedures and the time it takes to prepare a procedure is significantly reduced because of practice, and because we know what are the essential elements that need to be in a prior authorization submission. So we can drive the metrics down on the time it takes to prepare a prior authorization. And number two, the insurance companies know that those prior authorizations are coming, and when they have the proper indication, they can quickly approve those on-label procedures.

Now what you're seeing is healthcare is moving towards not allowing prior authorizations, and so it is in the responsibility of the center to make sure they have indicated patients. We can certainly leverage this going forward. We just got to make sure that we have the centers educated to be able to take this on, going forward. Thanks very much, Suraj.

Operator (participant)

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

Tim Herbert (President and CEO)

Yeah, I just want to say thanks to everybody for joining the call today as always. Very grateful to the growing team of dedicated employees, 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 of our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts as we remain focused on further expanding our business in the U.S., Europe, and Asia. For all of you on the call, we appreciate your continued interest and support. Look forward to providing you with further updates in the months ahead. Thank you very much.

Operator (participant)

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