Inspire Medical Systems, Inc. Q3 FY2020 Earnings Call

Greetings, and welcome to the Inspire Medical Systems Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid. Please go ahead.

Thank you, Stacy, 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, Inspire released financial results for the three and nine months ended September 30, 2020. A copy of the press release is available on the company's website. I'd like to remind you that on this call, management will make forward-looking statements within the meaning of the Federal Securities laws. All forward-looking statements, including without limitation, operations, financial results, and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2020 financial and operational outlook, and improvements in market access, are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC today 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, December 2, 2020. And with those prepared remarks, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob. Thanks everyone for joining the call today for our third quarter of 2020 business update. I'd like to begin by reiterating how very proud I am of the Inspire team and how hard they have worked through all the challenges experienced thus far in 2020. These efforts resulted in an extremely strong third quarter with momentum in our business that we expect to continue through the end of the year and into 2021. In the third quarter of 2020, we generated worldwide revenue of $35.8 million, which is an increase of 72% compared to the third quarter of 2019. Our strong rebound in the third quarter included patients who were previously scheduled for implant but delayed due to COVID, and this combined with the continued enhancements of the core fundamentals of our business drove the high level of procedures that was sustained throughout the quarter, and we do not foresee any pause in our momentum. Importantly, our Inspire team, the hospitals, and all health care providers have continued to adapt and identify safe methods to continue to operate and treat patients in need. Simply stated, the patient flow, diagnostic, and implant activity has rebounded and is back to pre-COVID levels and beyond. That said, business conditions during COVID are always evolving, and we continue to monitor the impact of the pandemic, especially with the most recent spikes. However, to date, we have not seen suspension of cases. With this in mind, and assuming continued normalized operations, our strong performance in the third quarter and the positive trends in implant activity provide us with confidence in the outlook for our business for the remainder of the year. Therefore, we are increasing our full year 2020 revenue guidance to between $110 million and $112 million, which is an increase from our prior guidance of $88 million to $92 million following our second quarter results. These impressive results and our confidence for the remainder of 2020 are indicative of a multitude of factors primarily focused on our forward planning and preparation during the pandemic period. We previously discussed the four groups of patients, including those who are unable to undergo their Inspire procedure during the pandemic. Each of these patient groups is critical to our success, but beyond this, it is the continued development of our core business that truly drives our business forward. Let's get into the details around the third quarter. First and foremost, our focus remains on the patients to ensure that each and every one has the best possible outcome from Inspire therapy. We know that all patients are different, and individual attention is required to assure consistency in their safe and efficacious outcomes, and we see that remaining at the highest level. Later, we'll provide an update on the development of our digital technology, which will be a productive tool to help clinicians track patients and their outcomes and further drive consistent patient care globally. Beginning with capacity. During the third quarter, we added 42 new U.S. implanting centers and ended the period with a total of 370. This is well above our prior guidance of adding 20 to 24 new centers per quarter. Since we were not able to schedule implant procedures earlier in the year, we had several sites that planned to open in the second quarter, and these carried over into the third quarter. Driven by the more favorable reimbursement environment, we have increased our focus on adding ambulatory surgical centers or ASCs to further drive capacity. To date, we have signed two national contracts with United Surgical Partners International and Surgical Care Affiliates, which collectively represent over 620 ASCs in the U.S. We understand that we will certainly not open all of these, but working with the corporate groups, we can identify which ASCs focus on ENT procedures. At the end of the third quarter, ASCs made up nearly 15% of our total UTM planning centers, up from 10% at the end of the second quarter. We will continue our efforts toward adding stand-alone ASCs, other national ASC groups, as well as not losing our focus on opening hospital systems. With that said, we are accelerating the opening of new centers and are increasing our guidance to open 28 to 30 new centers in the fourth quarter compared to our prior guidance of adding 20 to 24 new centers. Regarding the U.S. sales team, we created seven new sales territories in the third quarter, bringing our total to 98. As a reminder, we did not slow our cadence of hiring territory managers during the shutdown period to ensure that we are in a strong position once cases were able to resume. You will recall that we opened nine territories in the second quarter. We have also continued increasing the number of regional managers, ending the third quarter with 18, as well as field clinical representatives, ending the third quarter with 36. From a territory manager perspective, we will continue to target opening six to seven new sales territories in the fourth quarter. This cadence in new centers and territories will continue to have a positive impact on our long-term growth. As we review some of the key initiatives from the third quarter, what remains most critical for us is to stay active in educating new patients, creating this awareness as a core objective of our direct-to-consumer activities. You will recall that during the latter half of the second quarter, we resumed radio and TV initiatives in our larger markets as the impact of COVID lessened after focusing on smaller markets earlier in the year. We also continue to utilize our website and virtual tools to help patients connect with physicians and in many cases using telemedicine. During the first nine months of 2020, the number of visitors to our website was over 3.6 million, which is a 15% increase year-over-year. In addition, over 43,000 physician contacts were established via the website, representing a robust 39% increase year-over-year. Moreover, in order to increase the percentage of patients reaching out to health care providers resulting in an Inspire implant, we continue to expand our call center concept called the Inspire Adviser Care program. The primary purpose of the adviser care program is to assist patients in connecting with the appropriate health care provider based on their specific needs, which in turn should improve our overall conversion rate. We continue to experience positive results and will continue expanding the program during the fourth quarter and into 2021. In fact, by the end of next year, we expect the program to be available to the majority of our centers. Switching gears to reimbursement, the third quarter was very positive for Medicare-aged patients. We noted that local coverage decisions or LCDs are now in place in all 50 states. And we saw a very good uptick in Medicare cases. In the third quarter, Medicare continued to represent approximately 30% of all Inspire cases, meaning we are experiencing balanced growth between Medicare cases and commercial cases. In the third quarter, commercial cases continued at around 65%, and the VA military impact was at 5%. On the commercial policy front, we added several positive policies in the third quarter including Humana, Florida Blue, and Blue Cross Blue Shield Minnesota, among others. To date, we have policies representing over 207 million covered lives compared to 145 million a year ago. The last remaining large commercial payer is Anthem. During the third quarter, they published their annual review, and this update did not change their policy, as Anthem continues to label hydro stimulation as investigational and not medically necessary. For Anthem patients who have Medicare Advantage or commercial Medicare, they follow positive coverage decisions of the Medicare LCDs and are therefore covered. While Anthem did conduct an internal review, there were several clinical publications that were not included in the technical assessment, and they took a different interpretation of several publications that were contrary to the Blue Cross Blue Shield Evidence Street technical assessments conducted early in 2019. That said, Inspire continues to conduct clinical trials on the safety and efficacy of Inspire therapy, and there is additional data that will be published shortly, including from a new European randomized clinical trial for which a manuscript is being prepared. We will continue to provide Anthem with the latest clinical evidence and encourage them to conduct an interim look rather than wait until the next annual review. Until then, Anthem continues to approve patients for Inspire therapy under the prior authorization process. The approval rates and time to approval for Anthem patients continue to improve. In fact to-date in 2020, the overall approval rate for Anthem patients is 82%, and the average time to approval is 90 days. This has significantly improved compared to 73% in 158 days in 2019 and 68% in 191 days in 2018. Looking at the broader prior authorization metrics, in the third quarter, our internal reimbursement team supported 1,233 prior authorization submissions. This compares to 812 submissions in the third quarter of 2019 and 566 submissions in the second quarter of this year. This significant growth is attributable to both patients who had their sleep endoscopy procedures suspended due to COVID as well as new patients entering the process. The news regarding prior authorization approvals is also positive. In fact, 1,039 patients received an approval in the third quarter compared to 672 approvals in the third quarter of 2019 and 541 approvals in the second quarter of this year. We have experienced increased approval rates in the mid-90s, and further, the median time for an insurance approval is now down to approximately 12 days from 25 days in 2019. These rates continue to improve due to the large and growing number of commercial insurance policies. As we have said on our last call, given the improved reimbursement environment for Inspire therapy, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. And as we previously stated, we do not intend to continue to report on them after the end of 2020. Staying with reimbursement, but switching to coding, we have a significant announcement regarding the long-term coding of the Inspire procedure. The American Academy of Otolaryngology or the AAO, which is the ENT Physician Society, has long been working with Inspire to first create the new tech code 0466T for the pressure sensor and then to convert this from a Category III code to a Category I code. In the process, the AAO reviewed physician payment in connection with the existing base code 64568 for implanting the Inspire system. Remember this base code is shared with vagal nerve stimulation, and the AAO felt that the work to implant an Inspire system was not adequately reimbursed. Therefore, the AAO submitted a new all-encompassing CPT code for the Inspire procedure to include the neuro-stimulator, the stimulation lead, and the sensing lead. At the October 20 CPT Meeting of the American Medical Association, this new CPT code was approved as a Category I code. The next step is to value the work associated with the Inspire procedure, and this process has already been initiated. The results will determine the RVUs, or Relative Value Units, that surgeons are reimbursed for an entire procedure. The new code will officially be published for use in January 2022, and the results of the survey will be available around mid-year 2021. In the interim, the surgeon payment will significantly increase by $450 already in 2020 with the Medicare policies and payment of the sensing lead Category III new tech codes, which was meaningful for surgeons compared to the average Medicare reimbursement for the base code of $600 to $800. From a facility perspective, the additional good news is that this new CPT code will not change the payments of the hospital or ASCs. The proposed 2021 facility Medicare payments were released in the third quarter and proposed an $850 increase over the 2020 rates of $29,000 per hospital and $24,000 for an ASC. Again, these are national average Medicare payments, and commercial payments tend to be 1.4 times Medicare for hospitals and up to 1.9 times Medicare for ASCs. Finally, the AAO also received approval for a new Category I code to improve reimbursement for the diagnostic procedure or drug-induced sleep endoscopy. This has also been an ongoing challenge for ENTs to get reimbursed, and this new code will resolve this frustration. Okay, moving on. Europe also had a very strong quarter driven by solid patient flow, particularly in Germany and the Netherlands. Like in the U.S., several areas in Europe have again experienced spikes in COVID cases, and we are closely tracking the impact against scheduled Inspire procedures. To-date, we have not had cases suspended and therefore continue to expect a strong fourth quarter in Europe, assuming these normalized operations. In Japan, we are making progress in establishing a distribution agreement, as we also progress with discussions with the MLHW, which is the Ministry of Labor Health and Welfare. This group remains under a backlog of work due to COVID, but we continue to have dialogue and expect to learn more about the proposed reimbursement level by year-end and continue to plan for the first implant in 2021. We were pleased to receive regulatory approval in Australia during the third quarter, which was earlier than we had anticipated. We have applied for reimbursement in Australia, and the application is under review by the Medical Service Advisory Committee. The reimbursement process is anticipated to be completed during 2021, and we expect to launch Inspire therapy in Australia thereafter. Further, our ongoing clinical study for adolescents with Down syndrome continues to progress. In fact, we recently received a grant from the National Institute of Health to support the expansion of the study to include additional patients, centers, and clinical endpoints. Okay, switching gears again. Similar to the first and second quarters, we increased our R&D expenses year-over-year in the third quarter as we continue to invest in enhancing our technology platform. The Inspire Cloud project, our cloud-based patient management system, continues to progress with the addition of a significant number of centers in the U.S. and in Europe, who are using this tool. Earlier this year, we launched the Inspire app on patient smartphones as an educational tool. The second version of the app was released in the third quarter and interfaces with the Inspire Cloud, and allows physicians to collect clinical data from patients directly. We continue to enhance the functionality of this app as part of our overall digital platform development. The Inspire Cloud project and our app are just the first steps in establishing interconnectivity between the patient and their health care provider, with a long-term plan to improve outcomes by tracking patients' activity and adherence and monitoring for any issues with device use. We also have active projects to improve the physician programmer and the patient remote control, which will be Bluetooth-enabled. Longer term, the design activity for our fifth-generation Inspire Neurostimulator continues. As a reminder, we anticipate that this will be a multi-year effort to develop the Inspire 5 device and obtain regulatory approval. We continue to conduct feasibility trials with several technology innovations, which will make the Inspire 5 neurostimulator state-of-the-art and expect that it will further improve the performance of the system, including simplifying the implant procedure. In summary, we believe there is significant momentum in all key areas of our business. Implant activity trends are highly positive, and we remain well-positioned to assist patients as they progress on their Inspire therapy journey. We remain focused on improving utilization and our conversion rate, achieving further advancements in reimbursement that build upon recent positive coverage decisions, growing the body of clinical evidence in support of Inspire therapy, and investing in the continued development of our innovative R&D platform. We are extremely excited about our future prospects and are confident that we have the right plan in place to ensure long-term success. With that, I'd like to turn the call over to Rick for his detailed review of our financials.

Thanks, Tim. As Tim noted, we are extremely pleased with the strong restart to our business once the shutdown from the COVID-19 pandemic reversed, as our core business grew through increased implants, diagnostic procedures, physician contacts, and prior authorization submissions. Total revenue for the third quarter of 2020 was $35.8 million, a 72% increase from the $20.9 million generated in the third quarter of 2019. U.S. revenue in the third quarter was $33.1 million, an increase of 78% from the $18.6 million in the prior year period. In the third quarter, European revenue increased 23% to $2.7 million. Our U.S. average selling price in the third quarter was $23,800, which was consistent with the prior year period. The European ASP was $23,300 during the quarter, as compared to $21,700 in the third quarter of 2019. The higher European ASP was primarily driven by favorable changes in foreign currency exchange rates. Our gross margin in the third quarter was 85.5%, compared to 83.4% in the prior year period. The solid improvement was primarily due to manufacturing efficiencies and improved yields, which led to cost reductions with our third-party contractors. Based on these ongoing efficiencies and cost reductions, we are increasing our full-year gross margin guidance to be in the range of 84% to 85% compared to our prior guidance of 82% to 84%. Total operating expenses for the third quarter were $40.5 million, an increase of 56% as compared to $26.1 million in the third quarter of 2019. This increase was primarily due to the expansion of the U.S. and European sales organizations, as well as increased direct-to-consumer marketing programs, continued product development efforts, and general corporate costs. As we said during our second quarter earnings call, the increase in operating expenses is reflective of our plan to achieve continued growth and our consistent focus on investing in commercial and development initiatives. Our net loss for the third quarter was $10.4 million compared to $8.2 million in the third quarter of 2019. The diluted net loss per share for the third quarter of 2020 was $0.39 per share compared to $0.34 per share in the same period last year. Moving to the balance sheet. We continue to maintain a solid cash position. As of September 30, our cash and investments totaled $234.6 million. The strong cash position allows us to continue executing on our growth strategy of increasing patient flow at existing centers and training and opening new implanting centers. The weighted average number of shares outstanding for the third quarter was 26.8 million. We anticipate that the weighted average number of shares for the fourth quarter will be approximately 27 million. As we stated earlier, while business conditions have normalized within our implanting centers, we continue to monitor the impact of the pandemic, especially with the recent COVID spikes but have not seen any immediate suspension of cases. With this in mind, and assuming ongoing normalized operations, our strong performance in the third quarter and the positive implant trends provide us with confidence in our outlook for the remainder of the year. Therefore, we are increasing our full-year 2020 revenue guidance to between $110 million and $112 million from $88 million to $92 million, which represents 34% to 37% growth over full-year 2019 revenue. In summary, the key metrics throughout our business remain strong, and we are well-positioned to achieve significant long-term growth. We are extremely pleased with our third quarter performance and are excited to continue executing on our growth strategies. With that, our prepared remarks are concluded. Stacy, could you please open up the call for questions?

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Robbie Marcus from JPMorgan. Please go ahead.

Great. And I will say congratulations on a phenomenal quarter. Well done. I'll just ask both my questions upfront into one bigger question. It just really came in well above I think even some of the better case expectations, my math rest were doing $1.4 million annualized revenue to get to your guidance range, it's over $1.5 million in annualized revenue in the fourth quarter. Centers are doing close to $400,000 of revenue percent or so. It's clear that each center is doing more procedures rather than just adding more reps and more centers here. So, I was hoping you could give us a deeper accounting of where you are today in terms of how deep your center penetration is? How much more is there to go? And if you can wrap in some of the DTC advertising and what you're doing on the patient side to drive such impressive growth year-over-year? I imagine people will still say your fourth quarter looks conservative in light of your third quarter which I think everyone will appreciate. But maybe you could just help us understand what's really going on here where you see yourself in the curve? And how much more is there to go? Thanks.

Very good. Well, first off, I think it's how we conducted business during the shutdown period and as frustrating as that was, our staff and our team and the physicians and the centers remained very motivated and continued to communicate with patients. When we previously talked about our four groups of patients including one the group that unfortunately had their procedures postponed because of COVID; two, the group that was unable to schedule their cases; three, the group that were unable to have sleep endoscopy procedures because those were also postponed; and the fourth group was those that were just entering the process and just came to the website. We continued to drive all those processes. We continued to hire territory managers. We continued to do the prep work for opening new centers, albeit as we mentioned, we couldn't open them in the second quarter, but we can certainly open them in the third quarter and that has continued to carry forward as we move forward. We have not completely worked through all patients in all buckets, including the first group of patients. We still have patients who have their cases postponed that they're just not ready to come back in. So, we're still working through all four groups of patients. We keep track of them closely. But then on the other side, as we're able to open up procedures, this is a procedure that patients are looking to have Inspire therapy to treat their sleep apnea, so they're motivated to get in and get scheduled. Hospitals are motivated to get these procedures going in Inspire. Yes, it is, and there's an economic benefit for hospitals and ASCs to perform these procedures. We certainly had a priority as we opened up some of our centers, but it really came down to our territory managers really staying focused through the whole process and continuing to build our patient group. We continued our direct-to-consumer. I'll defer to Rick in a minute here to let him talk through a little bit about what we did for spending and direct-to-consumer in the second and third quarters. But we continued our advertising. We started our call center, and we continue to communicate with patients. So, are we at penetration level with hospitals? Not yet. No. We did provide a new incentive for our sales reps this year to grow and improve utilization at existing centers. Now, Rob, as we talked in the past, we balanced our growth, 50% of our growth comes from opening new centers, but more importantly, 50% of our growth comes from increasing utilization at existing centers, and we want to maintain that balance. So, we provided a new incentive for our sales reps to be able to continue to add capacity at centers, maybe add a second surgeon to be able to get these cases scheduled, which of course drives the revenue that an individual territory manager can generate and also improve the number of implants per center. So, we have another gear to go as far as utilization and helping centers perform consistently more higher-level patient implants. Let me go to Rick over there. You want to comment on DTC?

Yes, sure. So, as you recall during the end of the first quarter and in the second quarter, we did shift our direct-to-consumer efforts from those large markets that were more impacted to the smaller markets that were less impacted. And we held back a little bit, but we continue to invest and lean forward a little bit as we started in the beginning of the third quarter. And so specifically, we increased sequentially our DTC efforts by just over 30% of sequentially on a quarterly basis, and we spent $6.8 million in DTC efforts in the third quarter. But we, as Tim mentioned, the fact that all four buckets were continuing to address those patients, we wanted to continue to spend dollars as we opened up new centers and added territory managers to support the patient flow.

Great. Appreciate the answer.

Thanks very much, and let me just add congrats on really nice progress across so many different aspects of the business. I thought I could ask the question about 2021 and just see how much color you're willing to give at this early stage. The Street is sitting at about $145 million. Obviously, with some of the things you talked about today, that seems to us like that's in okay territory, but I wondered if you could talk at least qualitatively about that? And any other puts and takes we should be considering for the top line next year and kind of while you're at it, if you're able to just talk through the P&L next year same thing, kind of anything you would call out, salesforce hires, DTC spend that could help us in modeling.

Right. Very good. As far as when we set up 2021, we obviously are not putting out guidance yet on revenue or even opening new centers or the cadence of hiring new sales territories. But I think it's safe to say that we're going to continue to be aggressive with that. I don't see backing down on the numbers that we have. We'll probably get a little bit more aggressive with hiring new centers as well as new territories as we move into 2021. The reimbursement really helps. Having the Medicare, having all the positive commercial policies. Anthem, while disappointing, it's still okay, because we're still able to get patients approved to the prior authorization process; we will continue to stay on top of Anthem to get them to write a positive policy. But we're seeing some other positive trends as well. Additional clinical evidence, the digital tools that we are putting in play with Inspire Cloud, the Inspire app, the addition of the adviser care program, and adding additional centers to be able to improve our conversion rates of physician contacts to implant and making sure that we get the patients to the right physician, I think, is really going to help us continue the momentum as we move into 2021. Rick, you got something that you want to add there?

Yes. Regarding walking through the P&L, we had a nice improvement in our gross margin, 85.5%. We had cost efficiencies and some price reductions. Again, we use third-party suppliers for our products. And so, that gave us confidence to increase our guidance for our annual gross margin. We expect that to continue into the future. We have increased our operating expenses. As Tim mentioned, we have numerous development projects going on with the Inspire Cloud, the multi-year project of Inspire 5, as well as the app. And so, the current spending on R&D, $7.3 million, that's really going to be our baseline, and we'll maintain or increase that going forward into 2021. And then also, as Tim mentioned, as we add additional territory managers, add additional centers, and continue to spend on our direct-to-consumer efforts, we will continue to run our cadence as we've done in the past. And we think that will help us have sustained long-term growth.

That's great. Just a quick follow-up for me, and I'll get back in queue. Just on Anthem, Tim, as you had mentioned. Just curious, what is the pathway forward here just given the decision? I think you said something like 82% approval rate. Did you get feedback on why it was not adopted that's more specific that you could share? And then, the data that you're citing that's coming, do you think that's going to be what they're looking for to get you over the hump on that one?

Yes. They are quite conservative and take pride in being cautious in their approach. We can only rely on their published policy and review, as direct conversations are not permitted. We disagreed with their interpretation of the STAR trial and will continue our communication through written means. Additionally, we have completed a European study that has not yet been publicly presented, but the manuscript is being prepared for review. Several other publications are either forthcoming or have already been published. We are consistently enhancing our clinical evidence, including the ADHERE Registry, which has over 2000 enrolled patients. This registry will evolve as it integrates into Inspire Cloud, allowing us to expand our safety and efficacy evidence. As we obtain more data on Anthem-sponsored patients, we plan to publish a paper on their clinical outcomes and share it directly with Anthem. We are committed to the prior authorization process, having been doing it effectively since our approval in 2014. Our strong team knows how to communicate effectively, and we remain persistent, which will ultimately influence Anthem's policy.

Good afternoon. Thanks for taking the question. I'll echo the prior congratulations on a really nice quarter, guys.

Thank you, Larry.

Of course. Tim, I have a short-term question and a long-term question. I'll start with the long-term question regarding the new CPT codes. The press release mentioned both the implant and the ICE, and you noted an increase in surgeon payment. At this point, do you have any idea how much that could be? Also, how can you be confident in that now, considering the RVU survey still needs to be conducted? I have one follow-up.

When we discuss the AAO and engage with physicians, it's important to note that the CPT code 64568, initially developed in 2012, has not been revalued or resurveyed since its inception. The original survey was conducted among a small group of neurosurgeons, which we believe caused it to be undervalued by 30%. This was prior to the introduction of the pressure sensor. The main concern expressed by ENT surgeons has consistently been the reimbursement level of this code. The AAO conducts surveys that are sent to all Inspire-trained physicians, focusing on specific incision times to calculate RVUs. They are optimistic that the new code's payment level for ENTs will be higher. We feel reassured by this situation, and we appreciate our collaboration with the AAO as they work diligently to address these issues. They previously hesitated to share the code due to ongoing conflicts with neurosurgeons, as usage is increasingly leaning towards Inspire. The AAO recognizes the significant role hypoglossal nerve stimulation will have in ENT surgeons' practices moving forward, so they sought to take control of their own code. They deserve credit for their efforts, especially in navigating the challenges of the COVID period to secure a Category I code. Additionally, they acknowledged current coding challenges, making a substantial effort to simplify this process for the benefit of surgeons in both hospitals and ASCs in the long run.

Thanks, Tim. And the short-term question is how much visibility do you have on Q4? I'm asking because of the spike in COVID cases and the risk of reduction in elective procedures, which is kind of on investors' minds obviously this week last week? So is there some conservatism baked into the Q4 guide for that? Thanks for taking the questions.

Thank you, Larry. I've had the opportunity to participate in regional manager meetings and learn about their strategies for collaborating with surgeons. We are making sure to ask all of our hospitals and doctors if their cases are scheduled and what risks they perceive related to COVID. Importantly, hospitals, physicians, and our staff have adapted to operating in a COVID environment. It's essential to use safety measures, including proper PPE and testing, and to follow the correct procedures. We have specifically inquired about the recent spikes in cases, and to this point, we have not observed any suspension of elective procedures. We feel confident that our centers will continue their operations and have the capacity to handle both COVID-related cases and the Inspire procedure. As of now, we remain very confident, and we did not account for any suspension in our planning.

Thanks, and congrats on the outstanding results. Tim, you mentioned the different patient buckets. Can you quantify how much of Q3 volume you think came from deferred procedures? I know you said you still think there's some pent-up demand left to be addressed, but those patients may very well take a while to come back if they haven't already. I think it would be helpful as people think about Q4 to compare guidance to a Q3 baseline without that catch-up phenomenon that you benefited from?

There is definitely some residual effect from Q3 that makes it difficult to compare revenue between Q2 and Q3. We put significant effort into expanding our patient groups, and while this may have had some impact, I don't have a specific figure for you. I wouldn't say it was substantial. We are confident moving forward with our strategy to incorporate more patients into the process. Although there is a residual effect from post-COVID, the growth in new patients is notable. Moreover, we also experienced some delays with patients unable to complete their final diagnostics or sleep endoscopy. We anticipate more of that in the fourth quarter since there are limits to how quickly we can ramp up and carry out procedures. However, our patient pipeline remains robust, and the influx of new patients continues to be very strong.

Okay. So, if I don't want to put words in your mouth but I'm paraphrasing what you're saying, it sounds like you view the third quarter as really the culmination of the progress you guys have made on a number of different fronts over the last 12 months to 18 months, not an unusual quarter that was really impacted mostly by this pent-up demand phenomenon?

Yes. I think there's a little bit of an element of bolus effect, but I think it's really the work that the team has been doing as you said well. Sure Rich. I don't think we've really experienced the full impact of ASCs yet. I go back to prior workdays right, working on my Medtronic days in sacral nerve stimulation for urology and spinal cord stimulation for pain and even the new some of our other friends like Axonics and Nevro. And look at the percent of their cases that are done in ASCs today. Well, until you have reimbursement in place, you can't start down that process. And so 2019, 2020 are the years that we're really able to get that reimbursement locked in, and now we're able to kind of step up a little bit. So now you're seeing the national contracts, and gives us the right to start opening up more of those ASCs. And you're right, I think that you can drive higher utilization at those ASCs, especially when you have strong reimbursement that we see with level five APC payment as well now with the future increased surgeon payment. I think you'll see that further down the road. Don't have an exact number for you on utilization to date, but as I mentioned, ASCs still are only about 15% of our total number of centers. So, it’s still relatively small, but I think you will see a more significant increase in the number of ASCs as we move into 2021. And the goal would be, to your point, to improve utilization right alongside with that.

Great. Thank you.

You bet, Chris. Thanks.

Hi. Thanks for taking the question, and congrats on the present quarter. Wanted to just follow-up on the ASC comments a little bit specifically in the context of utilization. Your utilization of account by my math took a pretty sizable step up this quarter and it's growing 30% and your implied Q4 utilization per account is looking like it's over 20% and that's despite 30% to 40% increases in your account base. And that's a big step function up. I was just wondering, is that a function in part of the ASC utilization uplift? And can you give us a sense of what the ASC utilization is versus just the traditional hospital utilization? We've heard it as much as triple. So I'm just wondering if question in light of the comments that you could be applicable ASCs, it would be helpful to know what kind of utilization bifurcation you're seeing between those two care settings?

Sure Rich. I don't think we've really experienced the full impact to ASCs yet. I go back to a prior workdays right working on my Medtronic days in sacral nerve stimulation for urology and spinal cord stem for pain and even the new some of our other friends like Axonics and Nevro. And look at the percent of their cases that are done in ASCs today. Well, until you have reimbursement in place, you can't start down that process. And so 2019, 2020 are the years that we're really able to get that reimbursement locked in, and now we're able to kind of step up a little bit. So now you're seeing the national contracts and gives us the right to start opening up more of those ASCs. And you're right, I think that you can drive higher utilization at those ASCs, especially when you have strong reimbursement that we see with level five APC payment as well now with the future increased surgeon payment, I think you'll see that further down the road. Don't have an exact number for you on utilization to-date, but as I mentioned, ASCs still are only about 15% of our total number of centers. So it's still relatively small, but I think you will see a more significant increase in the number of ASCs as we move into 2021. And the goal would be to your point to improve utilization right alongside with that.

Okay. Thanks for that. And then just thinking about your guidance for the fourth quarter very robust. You're clearly not baking in any meaningful slowdown due to COVID in your momentum, but I appreciate why you gave your rationale for that on the capacity side. You don't see any hospitals able to manage through COVID and better at dealing with the world as it is today. But how do you tap for what patient willingness will be as we move into these COVID months and COVID surges continue to materialize? What was your thinking there? That would be helpful. Thanks.

What we've been seeing is patients are very motivated and the amount of patients 3.6 million people come to our website, especially during a stay-home pandemic period, people realize the quality of life with untreated moderate to severe sleep apnea is not good, and productivity is down. The relationships are stressed. These are motivated people. They want to be able to find a solution and they go and they do all this research, and they learn about Inspire. And remember these people have tried and are unable to use CPAP and they've probably benefited from CPAP for a while, but they can't have sustained benefits, so they need to find an alternative. We haven't had a problem with patients really motivated to come back in. There are certainly a group of patients that are a little more timid, and they want to hold up a little bit longer, and that's just fine. And we're keeping communication with them. But again, a great number of patients really have been motivated to come to the website, get educated, go through sleep endoscopy, get their insurance approved, and get scheduled for cases, and you saw the significant number of implants in Q3, and we expect that going forward. We don't think there's going to be too much holdback from a patient perspective.

Hey guys. Congrats on the strong quarter. And thanks for squeezing me in here. I'll keep it one. Just on the OUS business, I know it's a relatively small part of the overall sales number today, but Q3, OUS came in nicely above our expectations. I was just hoping to get some additional color on what drove the nice performance in Europe. I think you mentioned some price benefit. And then just looking forward, how should we think about Europe in subsequent quarters? Would you expect to kind of, I guess, build off this by watermark? Thanks so much, guys.

Thanks, Adam. They had a very good third quarter, and to address Chris's earlier question, Europe was also impacted by being shut down, which resulted in a backlog of cases that could be rescheduled. However, Andreas, our VP in Europe, has been actively working on expanding his team and opening new centers, particularly in Germany, while enhancing patient flow in the Netherlands, Belgium, and other countries. This sets up Europe for future growth. Although there is a temporary backlog effect, they reported a strong quarter. I believe this momentum will continue into the fourth quarter and beyond. We previously mentioned that maintaining international revenue around 8% means it must grow at a pace similar to the United States, and we might also benefit from expansions in Japan, Australia, and other regions. The focus right now is on growth in Europe, and we expect to see significant progress with permanent reimbursement in Germany and improved patient flow in the Netherlands soon.

Thanks so much for the color, Tim.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.