Inspire Medical Systems, Inc. Q4 FY2020 Earnings Call

Greetings, and welcome to Inspire Medical Systems' Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Bob Yedid of LifeSci Advisors.

Thank you, Laura, 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 3 and 12 months ended December 31, 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 2021 financial and operational outlook, and improvements in market access, are based on 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. See our filings with the Securities and Exchange Commission, including our annual report on Form 10-K to be 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, February 23, 2021. 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 fourth quarter and full year 2020 business update. Let me begin by expressing my gratitude to the entire Inspire team for their immense efforts through the significant challenges we all faced in 2020. No one could have envisioned the effects of the COVID-19 pandemic and the necessary stoppage of procedures in the first half of the year and during the resurgence late in 2020 and the continuation into 2021. As a team, we made a commitment to stay focused on our patients and to steadfastly prepare for the time when centers were again able to offer Inspire therapy. As a company, we maintained our field expansion and continued to reach out and educate potential patients and physicians. We leveraged digital tools to continue community health talks about the therapy and supported virtual appointments. These efforts resulted in a very quick restart to our business as reported in our third quarter call. I am very pleased to announce this momentum continued, and we had an extremely strong fourth quarter as well. In the fourth quarter of 2020, we generated worldwide revenue of $46 million, which was an increase of 71% compared to the fourth quarter of 2019. Importantly, while there was some pent-up procedure demand from earlier in the year from patients previously scheduled for implant but delayed due to COVID, this growth was largely driven by the additional centers and territory managers we continued to add throughout the pandemic and the increased number of procedures occurring at existing centers. As I stated on our last call, our Inspire team, the centers, and all health care providers have continued to adapt and identify safe ways to operate and treat patients in need. We are pleased as the number of potential patients seeking information on Inspire therapy and those that underwent diagnostic and implant procedures during the quarter has returned to pre-COVID levels. Of course, as we have seen, business conditions during COVID are always evolving, and we continue to monitor the impact of the pandemic. In late 2020 and into early 2021, we experienced some cancellations and delays in localized cases in select states. Currently, more centers are back scheduling cases, and we do not expect to see a sustained impact going forward. We expect our normal Q1 seasonality due to high deductible insurance plans resetting at year-end and increased caseloads as patients sought to have their procedures completed in the fourth quarter. Even though seasonality may be more pronounced than in past years, we are already experiencing a rebound in procedure scheduling. With this in mind and assuming continued normalized operations, our strong performance in the second half of 2020 and the positive trends in implant activity provide us with the confidence in the outlook for our business for 2021. Therefore, we are providing full year 2021 revenue guidance of $183 million to $188 million, which would represent an increase of 59% to 63% over full year 2020 revenue of $115.4 million. To reiterate what I said earlier, our impressive results in the second half of 2020 and our confidence in our prospects for 2021 are indicative of the forward planning and preparation during the peak of the pandemic. Of course, as always, our primary focus remains on the patients to ensure that each and every one has the best possible outcomes from Inspire therapy. With that, let's now get into the details surrounding the fourth quarter. Beginning with capacity. During the fourth quarter, we added 55 new U.S. implanting centers, ending the year with a total of 425. This is well above our guidance of adding 28 to 30 new centers in the fourth quarter of 2020. Several of these new centers continued to be carryovers from earlier in the year, but we continue to pursue an expansion in the number of centers and plan to open 34 to 38 new centers per quarter in 2021. Included in this increase in new centers is a growing number of ambulatory surgical centers, or ASCs, driven by the favorable reimbursement environment. We will continue to add both hospitals and ASCs going forward and do expect to see a growing percentage of Inspire procedures being performed in ASCs. Regarding the U.S. sales team, we created 9 new sales territories in the fourth quarter, bringing our total to 107. For the full year, we opened 34 new territories, a 47% increase over the 73 territories at the end of 2019. As I noted earlier, we did not slow our cadence of hiring territory managers during the peak of the pandemic to ensure that we were in a strong position once cases were able to resume. During 2021, we plan to increase our cadence of opening new sales territories by adding 8 to 9 new territories per quarter compared to our guidance of 6 to 7 in the fourth quarter of 2020. We also continued increasing the number of regional managers and field clinical representatives, ending 2020 with 20 and 44, respectively. The addition of new centers and the continued build-out of our field organization will increase our capacity and will remain one of our core focus areas for 2021. Our other strategic focus to increase capacity is achieved by increasing the utilization at existing centers. Our challenge in 2020 was that utilization was significantly impacted by the pandemic. And while we have made significant progress in the second half of 2020, we expect this to further improve in 2021. To make this point, historically, about 50% of our growth was from opening new centers and about 50% was from increased procedures at existing centers. For the year 2020, however, this was skewed to about 65% of the growth coming from opening new centers. We plan to focus on increasing utilization at existing centers, and as a result, expect growth between new and existing centers to be more balanced during 2021. The second area of focus is to improve our ability to assist patients interested in Inspire therapy by making a connection with a qualified health care provider. Our outreach programs are very effective in generating interest in Inspire therapy, primarily through the inspiresleep.com website. During 2021, we plan to streamline this process even further for the patients. To accomplish this goal, we are continuing to broaden our call center concept, the Inspire Advisor Care Program, or ACP. The primary purpose of this program is to assist patients with making a connection with a qualified health care provider based on their specific needs. We ended 2020 with approximately 180 of our centers utilizing the ACP, and the ACP answered about 25% of all calls to physicians. We plan to significantly increase the number of centers under the ACP to nearly 500 by the end of 2021. This will enable the majority of the calls to be answered through the ACP. To leverage this expansion, it is essential for us to stay active in identifying and educating new patients. Creating this awareness remains the core objective of our direct-to-consumer activities. To this end, we refreshed our outreach programs, including filming 4 new TV commercials, which we started airing in January. We also continue to utilize our website and online tools to help patients connect with physicians. For 2020, the number of visitors to our website was over 4.8 million. In addition, nearly 62,000 physician contacts were established via the website, representing a significant year-over-year increase of 73%. Combining this growth with the effectiveness of the ACP has us in a strong position to increase the adoption of the therapy. Switching gears to reimbursement. I'd like to highlight that 2021 will be our first full commercial year without a significant reimbursement-related headwind in the United States. This means that we can focus on scaling our business. As you know, in 2020, all Medicare local coverage decisions, or LCDs, were formally published, and we have Medicare coverage in all 50 states. On the commercial policy front, we added 11 positive policies in 2020, covering a total of 55 million lives. And today, we have policies representing over 220 million covered lives. At this point, Anthem is the last of the large commercial payers in the U.S. that have not yet agreed to provide coverage for the Inspire therapy. Despite this, we have had success supporting customers with obtaining prior authorization approvals including with Anthem. Looking at the prior authorization metrics, in the fourth quarter, our internal reimbursement team supported 1,452 prior authorization submissions. This compares to 988 submissions in the fourth quarter of 2019 and 1,233 submissions in the third quarter of 2020. The news regarding prior authorization approvals is also positive. In fact, 1,276 patients received an approval in the fourth quarter compared to 751 approvals in the fourth quarter of 2019 and 1,039 approvals in the third quarter of 2020. We continue to experience increased approval rates into the high 90%. And further, the median time for insurance approval remains at approximately 12 days, down from 25 days in 2019. These rates have improved significantly due to the large and growing number of positive coverage decisions. As we have said previously, given the improved reimbursement environment for Inspire therapy, these metrics are less meaningful in evaluating the overall progress of our business going forward, and we will no longer report on these metrics after today's conference call. Staying with reimbursement but switching to coding. As we discussed on our last call, the new CPT code was approved, and the process to determine the surgeon reimbursement rate is ongoing and is expected to become effective January 1, 2022. In the interim, the surgeon payment was significantly increased by $450 in 2020 with the Medicare policies providing a payment for the sensing lead Category III new tech code. This is a meaningful additional payment for surgeons as the average Medicare reimbursement for the base code is $600 to $800. This payment for the pressure sensing lead was also adopted by most commercial payers. From a facility perspective, the new CPT code should not change the payment to the hospitals or the ASCs. Further, a new Category I code was approved for the drug-induced sleep endoscopy, or DISE, diagnostic procedure. This has also been an ongoing challenge for ENTs and facilities, and the more appropriate reimbursement provided by this new code should resolve this frustration. Moving on. Europe also had a very strong quarter driven by improved patient flow, particularly in Germany and the Netherlands. Effective January 1, Inspire therapy is now integrated into the German hospital reimbursement system with a formal DRG. Since 2016, Germany's reimbursement for the Inspire procedure has been provided through the NUB process for new diagnostic and treatment procedures. The decision to include Inspire into the DRG catalog demonstrates that our procedure has become part of routine clinical practice in Germany. In Japan, we continue discussions with the MHLW regarding the reimbursement of Inspire therapy. Our team met in person with the MHLW last week. And while we do not have a resolution to date, we remain active in discussions and expect to meet in person again in early Q2. Our expectation remains that Japan reimbursement should be consistent with the U.S. and Europe. And to this end, we will remain patient and continue the ongoing discussions with the Japanese authorities. Switching gears to R&D. Similar to the third quarter, we increased our R&D expenses year-over-year in the fourth quarter as we continued to invest in enhancing our technology platform. The Inspire Cloud project, our cloud-based patient management system, continues to advance with the addition of a substantial number of centers in the U.S. and in Europe who are using the tool. In 2020, we launched the Inspire Sleep app for use on a patient's smartphone as an educational tool. Version 2 of the app was released later in the year and interfaces with the Inspire Cloud and allows physicians to collect clinical data from patients directly. The Inspire Cloud project and the Inspire Sleep app are the first steps in establishing interconnectivity between the patient and their health care provider. The next step is FDA submission of the New Patient Remote, which will be Bluetooth-enabled to allow for data from the implanted system and data collected by the remote to be uploaded to the Inspire Cloud via patient smartphone using the Inspire Sleep app. We anticipate that the New Patient Remote will be submitted to the FDA in the second quarter of 2021. Longer term, the design work for our fifth-generation Inspire neural stimulator continues to progress. As previously discussed, we anticipate that this will be a multiyear effort to develop the Inspire V device and obtain regulatory approval. We continue to conduct feasibility trials with several technology innovations which will make the Inspire V neural stimulator state of the art and expect that it will further improve the performance of the system, including simplifying the implant procedure. Finally, I'd like to welcome Bryan Phillips to Inspire. He recently joined our team as General Counsel, Chief Compliance Officer, and Secretary. Bryan is an accomplished legal executive with broad corporate experience in the health care industry and understands the dynamics involved with the growing medical device company through his years at SurModics. We welcome Bryan to the team and look forward to his meaningful contributions. In summary, we continue to experience significant momentum in all key areas of our business. Implant activity trends remain highly positive, and we continue to be well positioned to assist patients as they progress on their Inspire therapy journey. As I stated earlier, our core focus for 2021 is to continue to expand our business by increasing capacity and improving the process to connect patients with the proper health care provider. We also intend to achieve further advancements in reimbursement that build upon our recent positive coverage decisions, continue our efforts to strengthen the growing body of clinical evidence in support of Inspire therapy, and invest in the continued development of our innovative R&D platform. We remain extremely excited about the future prospects and are confident that we will have the appropriate strategy in place to drive long-term shareholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Thanks, Tim. I would also like to begin by recognizing the entire Inspire team for their tremendous effort in 2020 as we faced unprecedented challenges. Based on our fourth quarter results, we believe that we are well positioned to expand the adoption of Inspire therapy, positively impacting the lives of patients with untreated obstructive sleep apnea. We are entering 2021 in a strong financial and operational position. Total revenue for the fourth quarter of 2020 was $46 million, a 71% increase from the $26.9 million generated in the fourth quarter of 2019. U.S. revenue in the fourth quarter was $42.7 million, an increase of 72% from the $24.9 million in the prior year period. In the fourth quarter, European revenue increased 64% to $3.3 million. The U.S. average selling price in the fourth quarter was approximately $23,800 which was consistent with the prior year period. The European ASP was about $23,600 during the quarter compared to $22,400 in the fourth quarter of 2019. The higher European ASP was primarily driven by favorable changes in foreign currency exchange rates. Our gross margin in the fourth quarter was 84.4%, consistent with the 84.2% gross margin achieved in the prior year period. Total operating expenses for the fourth quarter were $45.9 million, an increase of 44% compared to $32 million in the fourth quarter of 2019. This increase was primarily due to investments in the expansion of our sales organization, as Tim highlighted, as well as increased direct-to-consumer marketing programs, continued product development efforts, and general corporate costs. As we noted on our previous earnings call and recent webcast presentations, the increase in operating expenses is reflective of our plan to achieve continued growth and our consistent focus on furthering investing in our commercial and development initiatives. Our net loss for the fourth quarter was $7.5 million, a decrease compared to $9.1 million in the fourth quarter of 2019. The net loss for the fourth quarter was $0.28 per share compared to $0.38 per share in the fourth quarter of 2019. For the full year 2020, our total revenue was $115.4 million, a 41% increase from the $82.1 million generated in 2019. The U.S. revenue for 2020 was $106.1 million, an increase of 44% over 2019. European revenue in 2020 was $9.3 million, an increase of 11% over 2019. Given the significant progress we have made in scaling our business, we are providing full year 2021 revenue guidance in the range of $183 million to $188 million, which would represent growth of 59% to 63% over full year 2020 revenue of $115.4 million. Historically and similar to other elective procedures, we have experienced some seasonality in our business. In the U.S., we have higher procedure volumes in the fourth quarter as patients with high deductible health plans seek to schedule procedure prior to their deductibles resetting at the beginning of the year. We also experienced some localized delays in scheduling cases due to the pandemic resurgence in late 2020 and early '21. However, we do not expect that these delays will be sustained. Given these factors, we anticipate that seasonality may be more pronounced than in past years. Moving to the balance sheet. As of December 31, 2020, our cash and investments totaled $234.4 million. This strong cash position allows us to continue to execute 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 fourth quarter was 27 million. We anticipate that the weighted average number of shares for the first quarter of 2021 will be approximately 27.1 million. In summary, our business is performing extremely well. We are very pleased with our results in 2020 and are excited about our long-term growth prospects.

Our first question comes from Richard Newitter with SVB Leerink.

Congrats on the fantastic quarter and impressive guide there. Just to start off maybe on the guidance. Can you give us a sense as to what you're assuming in terms of the percentage of accounts that ASCs will comprise in 2021? I think you said in 3Q, it was 15%. I'm not sure what you said it was in 4Q. And can you remind us what the utilization differences are between kind of what can get done in an ASC versus other settings?

Absolutely. We did increase the number of ASCs in the fourth quarter, and it's still just above 15%. And it's a little early to be able to measure utilization between hospitals and ASCs. We're going to continue to focus on both to keep that mix. Although I think it's safe to say, as we mentioned earlier, that the number of procedures in ASCs will continue to grow probably faster than they will in hospitals because of the number of ASCs that we'll bring on board.

Got it. And in the past, we've asked you why aren't you going harder and faster at the opportunity and hiring reps faster. And you've always said that you want to make sure to preserve the quality of procedures, doing the procedures, etc. But here, you are kind of talking about 34 to 38 new accounts per quarter, and you definitely are planning on some territory expansion that's above consensus. So I guess the question is, what's changed to give you the confidence to be able to push the pedal to the floor a little bit here? And it feels like there's definitely a strong inflection here, so maybe if you could elaborate on that a little bit. Again, congrats.

Yes. Thanks for asking that and bringing the quality into it because that remains the number one focus, and that is all about patient outcomes. We always talked about a balance between growing fast and maintaining strong patient outcomes. So as we have scaled the organization, remember, we talked about in '19 going to the 4 area vice presidents and a regional manager and allowing us to scale. But we always had the headwinds of reimbursement that limited our ability to really ramp up too fast. But now this year with the reimbursement headwinds kind of behind us, we have also scaled our training team. And so as we start to open up additional centers and bring on additional new sales territories, we can do that while maintaining the same quality because our training procedures have improved and just the expansion of the training team overall to be able to control those outcomes. And then I'd also want to add, remember, we've also brought in a new focus to field clinical reps, right? And we're looking to increase the ratio of field clinical reps to territory managers to be able to help in-service the technology but also assist in operational procedures. So we are not moving away from quality. We're making sure that is number one on our list. But we're comfortable that where we are today and with the reimbursement environment, we can scale the business a little quicker, and that's why we're being a little aggressive there.

Our next question comes from the line of Chris Pasquale with Guggenheim.

Congrats on a great year. Curious whether the guidance assumes anything from either Japan or Australia, the two new territories that you're still waiting on some reimbursement progress from.

No. From my comments, Japan, we did have a face-to-face meeting with them. We don't have agreement on reimbursement yet. We have discussions that we'll be working in concert with the MHLW over the next six weeks, and we hope to be meeting again in person with them in the second quarter. Our intention is certainly to come to an agreement, but our expectations remain that reimbursement in Japan should be consistent with the United States and Europe. And we're going to continue to pursue that and provide the evidence that's necessary to show that that's appropriate. So we did not build that into any of the guidance in 2021. We would like to do the first implants in Japan in '21 but really set up for a broader launch in '22. As far as Australia goes, we do have approval from a regulatory standpoint, but we don't have the reimbursement to be able to launch there. That's going to be an ongoing activity. We are in communication with the authorities regarding the reimbursement in Australia as well, but we have not built that into 2021 either.

Okay. And then, Tim, you talked a lot about trying to get new sites, as they're coming on, to commit to giving you a couple OR days a month to try and ramp that number of procedures percent. I'm curious how effectively you've been able to sort of get that messaging through and get centers to buy into that and whether the ramping up of the call center to cover a bigger proportion of your installed base is a key element to that because that really puts you guys in the mix in terms of filling those days.

That's a great question. Please hold onto it for future quarters. Unfortunately, we currently lack the data to support that point. However, our hypothesis is that if centers can commit more operating room time, they will have a better understanding of the upcoming procedures. It's not only about the surgeons; the entire operating room staff needs to be informed about what to expect. Additionally, those involved in coding and billing must know what to anticipate when it comes to invoicing. Consistency across all areas will enable centers to provide better care for more patients. The Inspire Cloud is designed to enhance efficiencies at these centers. Furthermore, when we bring ambulatory surgery centers back into the conversation, we believe they will be more flexible in dedicating days for Inspire procedures, which will help their staff plan accordingly. We will continue to monitor this closely and keep an eye on utilization trends moving forward. The Advisor Care Program will significantly assist us in bringing qualified patients to ENT specialists. As we progress and integrate more centers into the ACP, we should be able to provide evidence of its effectiveness.

Our next question comes from the line of Robbie Marcus with JPMorgan.

Congratulations on a great quarter. I have just one question. You mentioned that in the fourth quarter you returned to pre-COVID levels and do not foresee significant disruption in 2021, which contrasts with what many other medtech companies are reporting. I'm curious to know if, even though you've returned to pre-COVID levels, there are still some patients or volumes that are not being addressed. Additionally, could there be a backlog in 2021 and into 2022 since many patients who would have received therapy did not?

Absolutely. We've got to go back to what we were talking about a little bit earlier. In the fourth quarter, we did have a little bit of backlog that we are working from due to the COVID period. And so that had a significant impact. But also, of the 55 centers we opened, a number of them had been in the works for quite a while, but they just weren't able to open until the centers were able to restart. The second part of that is we did see an impact from the resurgence of the pandemic, probably mostly in December and into January. So yes, we're experiencing the same challenges every other company is seeing as well, but we're starting to see most of our centers reopen and reschedule these cases. We don't see that as a sustained challenge going forward. As Rick commented, we may have a little bit more seasonality because it was impacted a little bit more from the resurgence of COVID-19 at the beginning of Q1. But as a whole for the year, we think we're in pretty good shape, and that's why we're putting out a little bit aggressive guidance going forward.

Our next question comes from the line of Lawrence Biegelsen with Wells Fargo.

This is Shagun in for Larry. Just a few questions from me. So on the guidance, I was wondering if you could elaborate on the cadence of revenue growth and OpEx spend through the course of the year. I know you did give some color on Q1. And then is there operating leverage opportunity in 2021? And how should we think of DTC investments this year?

Yes. This is Rick. Thanks for your question. As we just talked about, we're watching Q1 closely with seasonality. But we do not provide quarterly guidance, but we do think we will have a little bit more pronounced seasonality in the first quarter due to some of those resurgences of COVID impacting certain areas in December as well into January. But on an overall basis, we're confident in our full year guidance, which represents 59% to 63% growth overall. So from a guidance standpoint, that's our annual guidance. From an operating leverage perspective, we did have improved leverage year-over-year as we had a strong fourth quarter on the top line. We are still investing in our business. We're in the early innings, if you will. We're at 425 centers. We're going to continue to add 34 to 38 on a quarterly basis going forward, and we're also going to continue to increase the number of territories that we add. We did increase our DTC efforts. We produced 4 new commercials in the fourth quarter, which we will start to air in 2021. In our 10-K, you'll see that our DTC was about $26.4 million for the full year 2020, and in 2019, it was $18 million. So we're going to continue to support our expansion with increased DTC efforts.

Got it. That's helpful. And then if I could just ask a question on competition. Are you seeing anything from Nyxoah in Europe? As you know, they are conducting a study in Australia in patients with and without CCC. If their study is positive in that patient population, how would that impact Inspire? And then separately, I'm sure you saw Signifier Medical received approval for the eXciteOSA device. Any thoughts there would be helpful.

Thanks for your question. From a Nyxoah standpoint, we haven't really seen any impact yet. We know they're conducting trials. We think that's wonderful, and we will anxiously await to see that data and how it emerges. So we won't make any other comments on that. I know they're pursuing some clinical work in Europe, as well as in the United States, and we think that's good for them to continue to collect clinical evidence and be in a position to present that in the near future. As far as Signifier and the other competition, no, I don't think we have really any comments at this time. We'll await till they start to issue some data, and we'll just focus on taking care of our patients and making sure that we maintain our own safe and effective outcomes. So thank you very much.

Our next question comes from the line of Jon Block with Stifel.

For guidance, let's begin with a conservative approach similar to what we observed in previous years, particularly in 2018 and 2019. Regarding the gross margins for 2021, Rick, the midpoint is 84%, which is somewhat lower than your past figures. Considering the factors involved, we have stable pricing in the U.S., likely increased international pricing due to foreign exchange rates, and certainly an increase in volume. So, despite it being a slight change, what accounts for the decrease in gross margin? I also have a follow-up question.

Let me take the first, and I'm going to hand it over to Rick and he can talk about the gross margins. From a guidance standpoint, where we stand today is we're watching the environment that we all live in. As we discussed with Robbie's question, we're just keeping an eye on how COVID rebounds quickly and our ability to continue to open up these centers, continue driving utilization, and get the Advisor Care Program rolling. Remember, we ended the year at 180 centers. We need to keep quickly adding on more centers, taking a higher percentage of the calls because we believe that will improve our ability to connect patients with their health care providers. So we did want to put out guidance that we are comfortable with. We have done that in the past. We're not changing that strategy going forward. But again, there's a lot of work that needs to be done as we get through this pandemic and try to get life back to normal. And even last week, we felt for the people down south with the weather. Our warehouse is right next to HealthLink and FedEx in Memphis, and we lost several shipping days. Our team is resilient and can move product to cover cases throughout the U.S. We don't think any of that will have a long-term impact, but it's just some of the ongoing challenges we have to face. We are happy to see it warm up down there and the south getting back to normal. So again, we have confidence in our guidance, but we always provide ranges that we believe we can achieve. That doesn't mean there's still not a lot of work that we need to deal with. And let me hand off to Rick for gross margin.

Yes, gross margin's pretty straightforward. We do still have a little bit of variability on a quarter-to-quarter basis. We're still working off a relatively low base. And so we're at 84.4%. It's down a little bit from the third quarter. But again, as Tim mentioned, we're putting forth our guidance 83% to 85% for 2021. So I think it's enough to...

Okay, yes. That's helpful. Tim, that was very helpful perspective on the 2021 guide. I think to zoom out for a moment, Tim, can you revisit cohort data and sort of any color on the earlier classes of hospitals? Are they still growing? And if so, what does their growth trajectory look like for the more recent cohorts? And then sort of as a tack on to that, more broadly speaking, physician payment coupled with DISE could increase quite a bit in coming quarters. Can you talk about this as a potential opportunity for Inspire to reengage with previously trained docs or centers that might be running at suboptimal utilization because of some of the challenges they encountered earlier on in the process?

Absolutely. It's a great opportunity. I think the newer centers understand the new reimbursement environment. So they're coming in with a certain level of expectation, and we want to get them up to a higher implant level. But we don't want to lose sight on the early adopters who, remember, are largely the large academic centers. When you think of 2022 and all the news and the huge academic hospitals taking care of all the COVID cases, that put a challenge on the utilization of our classes because the early classes consist of those top centers committed to addressing the pandemic. So they're still rebounding and coming back. I think long term, the story will be very strong. But as we mentioned in the comments, a higher percentage of our growth last year came from opening new centers, not from increased utilization. We want to see that return to normal. I think we can achieve that based on what you highlight with the improved reimbursement for physicians and for centers, which will no longer have to deal with risks of not getting paid for Medicare.

Our next question comes from the line of Bob Hopkins with Bank of America.

You have Brad Bowers on for Bob tonight. I have a question on ASCs. I know one of your partners, USPI, just acquired 45 ASCs in December, at least they announced the plans to. So I was just wondering if that was contemplated in your guidance or how quickly you think that you would be able to penetrate those new centers.

Great question. I think it's probably at the realm of detail specific. I commend them on acquiring 45 ASCs. But we're still at the very beginning of working with USPI and identifying which of their ASCs will be adopting Inspire. Over the last couple of quarters, just a handful have really started Inspire programs. But we will continue in earnest with USPI. But also, what’s the other second one?

SCA, Surgical Care Affiliates.

Yes, so we will continue with that, and there are others we are working on to establish national pricing agreements with. This is a major focus area for us, but we are still in the early stages. We also don't have specific details regarding their additional 45, which I think is great for them.

Got it. Just a quick follow-up. I want to ask more specifically about revenue per center growth as you expand deeper into ASCs. Do you anticipate that growth will slow as some centers come on board, or do you believe there's sufficient deeper penetration within some of the older, more recent cohorts to maintain that momentum?

Well, thank you very much. I think we want to keep improving on that, and we always talk about units per center per quarter. Even though we're bringing on a lot more centers, as we did 55 in the fourth quarter, and that increases the denominator which pushes the utilization down a little bit, we're going to continue driving that utilization to keep that number growing. I think ASCs provide an opportunity to actually increase that, again, due to their flexibility and scheduling and their ability to take care of the patients, considering that the nature of the implant is just a short 2-hour outpatient procedure. Thanks so much.

Our next question comes from the line of Amit Hazan with Goldman Sachs.

I'll keep it quick. Just a couple of quick ones. Just first of all, just on the first quarter, just making sure if I kind of read your comments correctly. It sounds like February has actually gotten better from January. I wonder if you can comment on that. And then relatedly, kind of Street sitting here at $36 million for the first quarter. Does that sound like it contemplates your seasonality comments enough?

Well, I mean, I'm going to just generally comment. I do think that coming out of December into January, we had a lot of regions affected by the pandemic. We all watch the news, and we all know those regions. We transferred from the Midwest down to the southeast, and we had many centers holding off on procedures from the Carolinas to Georgia to Alabama and Mississippi and a little bit into Florida. So there's always a little bit of concern there. We do see those centers scheduling patients now, and we see just normal seasonality starting to pick up in February as it does every year. So yes, it's safe to say that activity in February picks up from January, and we anticipate March will continue forward. So as far as the specific comment about where the Street is in Q1, can't really comment on that, as you know. We think we will see a little bit more seasonality than in previous years. But again, we're being pretty aggressive in our overall growth guidance of 59% to 60-plus percent growth throughout the year. So we believe we're going to be strong in the second half of the year.

Okay. And just as a follow-up on your comments on Germany, maybe just a quick color there would be helpful to just understand the significance of the DRG and what that could mean for the sales ramp there this year.

Thank you, Amit. I think it will be helpful in Germany because going from the NUB1, which is an annual negotiation that hospitals have to have with the payers. When we go to a DRG, it establishes a more permanent formal reimbursement. This year is a little variable because the centers have to negotiate their individual rates. But when they negotiate the DRG, it allows them to include other parts of the procedure that were not previously reimbursed, such as sleep endoscopy, right, and other components of the procedure. It gives them an avenue this year to increase the reimbursement. I think you're seeing that a little bit with the ASPs driven by exchange rates. After this year, that's when the formal reimbursement gets locked in. Long term, this helps the centers because they won’t have to do ongoing negotiations, and it provides credibility to the maturity of the therapy, allowing us to open additional centers. We continue with the direct-to-consumer outreach in Germany as well. We have an active call center in Germany that connects patients with their health care providers. This is the next natural step in establishing a more permanent reimbursement.

Our next question comes from the line of Adam Maeder with Piper Sandler.

Congrats on the progress. A nice finish to the year. I'll keep it to one. Just on Anthem, Tim. You guys have made a ton of reimbursement progress over the past 12, 24 months. Anthem was really the only small hiccup last year. I know you're planning to reengage there or you're currently reengaging, so just latest thoughts around process and timelines and level of confidence that you're going to be able to overturn that negative decision. I think you've talked about having some new data post-market, Germany RCT data being published here in the near future. So just any update on that as well.

Absolutely. I was looking to see the number of publications that we put out last year, just to show that we spent so much time in our ongoing clinical evidence. I think it's close to 50 peer-reviewed publications on Inspire therapy were published in 2020. A couple of those were from an idea that came from Aetna years back about a controlled study comparing patients with Inspire therapy to a group without Inspire therapy. The reason they didn't receive Inspire therapy was that the insurance company didn’t authorize the procedure. There's also a randomized study coming out of Germany that I know the authors have prepared a manuscript for submission. This will be a new Level I randomized study that should publish this year. We have the ADHERE registry that has well over 2,000 patients enrolled. We'll continue to provide annual updates and build on that. Given that, we're going to keep working on peer-reviewed published evidence to maintain focus. Number two, we have a strong focus for all Anthem patients to have rights to Inspire therapy. We work with healthcare providers to have them submit prior authorizations to Anthem, and Anthem is being very good stewards. They're reviewing cases, and they are approving cases. In fact, we see an increasing number of Anthem patients. Eventually, Anthem will review their own data as well as additional data from the peer-reviewed publications. We remain greatly confident that we will convince Anthem that it's appropriate to write a positive coverage decision, and we encourage them to continue reviewing. If it means we have to wait until the annual review in summer, so be it. But we'll keep providing information as it becomes available.

Our next question comes from the line of Ravi Misra with Berenberg Capital Markets.

If I could just start, Medicare obviously is going to be a larger portion of your revenue this year. Just curious in terms of how we should think about it in terms of the growth guidance you've given and how to layer it in with the commentary amongst new centers and growth from existing centers.

Absolutely. Let's go to the numbers. I think it's all over the place and changes quickly because we're in the COVID environment. We need to let it settle down. But I think at the end of the year, our revenue will run around 70% commercial, 25% Medicare, and 5% VA and military. Interestingly, VA and military are down quite a bit because those facilities were not allowed to do elective procedures, and they just started really late. I think we can expect to see a resurgence in the VA centers early in the year. This will be the first full year with the Medicare population and the Medicare decision. However, you also have to layer in that the Medicare population is more susceptible to COVID, but that same population is being vaccinated. There are a lot of variables to combine, but it does bring confidence that Medicare is actually going to have a strong year. But we are not going to rest on that because our direct-to-consumer marketing programs are set up and even the four new TV commercials are targeting a commercial age group of patients. What I'm trying to say is that we’re going to continue to push all three elements: to grow commercial, Medicare, and VA health to be consistent with each other. It's probably that commercial and Medicare will grow quicker than VA just due to the number of VAs in the United States. But it's a great question, and I do think Medicare is going to have a really good year. It's great for the Medicare age population now that we have the policy decisions in place. Now that we can control COVID globally, we can increase the number of Medicare age patients that can have Inspire therapy.

If I may ask two more questions, one related to product development and the other a broader topic. You've mentioned working on remote programming. Could you outline the steps needed to secure FDA approval in terms of studies or clinical design? Additionally, when considering value-based care in healthcare, I'm curious about its emergence in the sleep segment. Can you share what research Inspire plans to conduct over the next three to five years that could demonstrate how this procedure or product is reducing costs in the system? Or is that not something you anticipate within that timeline?

Ravi, that's a good question. While I'm thinking of a good answer, I'm going to answer your first question. That's pretty straightforward. The FDA has already approved remote programming, and they have established a new digital technology group at the FDA. In fact, our team is going to communicate and set up a meeting with that digital team. We still can't travel yet, right? But we're planning a virtual meeting with that digital team to lay out what our plans are. The first step is this Bluetooth-enabled remote that will allow communication between Inspire Cloud and the implanted product. That will go to the FDA in the second quarter, and hopefully, they will do a quick review. The next step is enhancing Inspire Cloud to allow a physician to log in and send instructions through the remote via the patient's smartphone. Technology-wise, we can handle this, but we need to make sure we do it in the proper sequence and keep the FDA fully aware of our plans and procedures. We believe we will be able to achieve this in the near future. Regarding value-based care, long discussions have taken place in medical devices for years. It’s very difficult to quantify because measuring improvements in sleep apnea criticality and how it relates to reduced hypertension and early mortality is complex. The CPAP companies have struggled with this for years. That does not mean we won’t try. As we get into the ADHERE registry, that will eventually integrate into the Inspire Cloud. We will build our evidence base and collect information. We are even starting smaller-scale outcome studies with leading institutions to show advanced benefits and to highlight to large payers that there's economic value in covering Inspire. If there's a way to work with them to identify that value, call it many years for us to accomplish, but we know that's there, and we want to achieve it.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tim Herbert for closing remarks.

I just have a couple of comments. I want to thank you all for joining the call today. I'm grateful to the entire team of dedicated Inspire employees for their enthusiasm, their hard work, and their continued motivation to achieve successful and consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as healthcare teams for their continued efforts as we grow our business in the U.S. and Europe. For all of you on the call, we appreciate your continued interest and support of Inspire. We look forward to providing you with further updates throughout 2021. Everybody, please stay safe and healthy, and thank you again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your evening.