Inspire Medical Systems, Inc. Q2 FY2023 Earnings Call

Good afternoon. My name is Dilem, and I'll be your conference operator today. I would like to welcome everyone to the Inspire Medical Systems Second Quarter 2023 Conference Call. All lines have been muted to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now hand the call over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Thank you, Dilem, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the three and six months ended June 30, 2023. A copy of the press release is available on our website. On this call management will make forward-looking statements within the meaning of the Federal Securities Laws. All forward-looking statements, including without limitation, those relating to our operations, financial results and financial condition, investments in our business, full year 2023 financial and operational outlook and changes in market access are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. Please see our filings with the Securities and Exchange Commission including our Form 10-Q which was filed with the SEC earlier this afternoon for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, August 01, 2023. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Ezgi, and thanks, everyone, for joining our business update call for the second quarter of 2023. As always, we start with our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire therapy. As of the end of the second quarter, over 46,000 patients have been treated with Inspire therapy. Over the past week, we shared some exciting announcements with the additions of Carlton Weatherby as our Chief Strategy Officer and Dr. Charisse Sparks as our Chief Medical Officer. As we continue to expand our business, we need strong leadership to guide the team, with our focus on increasing the adoption of Inspire therapy in the obstructive sleep apnea market. OSA is a large and under-penetrated market, and we see many years of sustained, healthy, organic growth ahead of us. Carlton joins us from Medtronic, where he was General Manager of the Spinal Division. He brings a wealth of talent and experience that will be invaluable as we continue to scale our business. Dr. Sparks is a board-certified physician with extensive business and leadership experience, including direct experience with Inspire as a board director. She will lead Inspire's clinical program, provide executive oversight to ensure high-quality patient outcomes, and serve as a liaison for the ENT and sleep physician communities. In connection with her appointment, Dr. Sparks will transition from her current role on the Inspire Board of Directors. We look forward to Carlton and Charisse's contributions toward our mission of serving the many patients with untreated OSA. With that, let's review our results. In the second quarter, we generated revenue of $151.1 million, representing a 65% increase compared to the second quarter of 2022. Our growth continues to be driven by higher utilization at existing centers and is complemented by the activation of new centers. Given the strong momentum we are seeing in our business, we now expect full revenue to be in the range of $600 million to $610 million, a 47% to 50% increase compared to 2022. In the second quarter, we continue to increase our capacity to support the strong demand for Inspire therapy by adding 72 new implanting centers in the U.S., ending the quarter with a total of 1,045 centers. For the remainder of 2023, we continue to expect to activate 52 centers to 56 centers per quarter. Regarding the U.S. sales team, we created 19 new sales territories in the second quarter, bringing our total to 261. We continue to expect to add 12 to 14 U.S. sales territories per quarter for the remainder of 2023. In the second quarter, the number of visitors to our website surpassed 2.9 million. From these visits, we had over 12,000 physician contacts, and even with the typical summer slowdown in contacts, we steadfastly improved our conversion of patients receiving therapy. We continue to make numerous changes to our website to enhance how patients engage with our advisor care program, and we have a new website designed in the works for later this year. Further, we are continuing to increase the use of digital scheduling for Inspire consultations through our ACP. We previously mentioned one of the limiting factors to the adoption of Inspire therapy is the capacity of ENT surgeons performing the procedure. To this end, we are focusing on providing robust training programs to new physicians and reducing the time required to qualify and support patients through the entire Inspire journey. We believe that both of these focus areas will provide implanting surgeons with additional time to perform Inspire procedures. One example to improve the patient experience and reduce the time burden of the surgeons is our ongoing PREDICTOR study, which is designed to replace a drug-induced sleep endoscopy, or DISE, with an office-based airway exam. We have completed the data quality checks from the first 300 patients and are actively enrolling the second group of 300 patients with a higher BMI. We will be moving toward preparing a publication from the first data set and expect that these results will be presented in the fall. Another example relates to the growing adoption of the SleepSync patient management system. SleepSync is designed to streamline the patient journey from initial contact through diagnosis, system implant, and post-procedural longitudinal patient management. The utility of this platform continues to improve, as is highlighted by the recent launch of the Inspire Bluetooth-enabled patient remote, which is the link between the patient's device and SleepSync. The next step is our new physician programmer, called the SleepSync Programmer, which was approved by the FDA in the second quarter and will formally launch in the U.S. in early 2024. The SleepSync Programmer allows physicians and their staff to log in from their own computer to access the programming screen and view all patient activities stored in the SleepSync system. Once launched, this technology will remove the necessity for Inspire to provide tablets as part of the physician programming system and will pave the way for future remote patient programming. Staying with product development, the Inspire 5 team is excited to announce the submission of our PMA supplement to the FDA. Subject to the FDA's review process, we expect approval in early 2024. Recall, Inspire 5 incorporates the sensor inside the neurostimulator using an accelerometer to measure respiration and will eliminate the need for the pressure sensing lead. Further, Inspire 5 is a platform device, which will enable firmware upgrades transitioning to Inspire 6 and beyond, whereby further product enhancements such as auto-activation will be introduced. From a research, clinical, and regulatory viewpoint, in the second quarter we received FDA approval to expand our indication to include patients with a BMI up to 100 events per hour up from 65 and raise the BMI warning in the labeling from 32 to 40. Furthermore, we are happy to announce that the ADHEAR registry has met its target of 5,000 patients and moving forward, patients will be enrolled into the ADHEAR 2.0 registry, which will be integrated into the SleepSync system and included as part of a broader software release later this year. A quick comment on reimbursement, as the new proposed OPPS rules were recently published and showed an increase to the national Medicare payment to hospitals of about $1,000 to $30,355 and an increase for ASCs of about $300 to $25,470. We also highlight the significant increase in the reimbursement of the DICE procedure, which increased from $180 to $1,639 for the Medicare facility payment. We do see a slight reduction in the physician payment proposed, but this is tied to the overall RVU rate which typically rebounds by the final November rules. Today, ASCs continue to make up about 23% of our total number of centers, but longer term we continue to see the Inspire Therapy migrate more to the ASC setting, but this is challenged by the varying Medicare reimbursement rates in different states. We also have seen a stronger rebound in Medicare cases over the last two quarters, and with the Medicare reimbursement rates lower, especially in the south, this is limiting Medicare cases to the hospital outpatient setting. While we are able to obtain sufficient OR time in hospitals, our long-term programs will focus on ASC reimbursement and education for ASCs as we see this as an efficient site of service for the Inspire procedure. Finally, while we are very happy with the strong Medicare rebound, we expect that the balance will shift more heavily towards commercial cases as we progress through the year. Switching over to our international business, the European team achieved a very successful second quarter, growing 81% over the prior year. This robust growth was driven by a strong performance in Germany and supported by the Netherlands and Switzerland. We are very excited about the strength we are seeing in Belgium, which finalized countrywide reimbursement earlier this year and look forward to building momentum in the quarters ahead. We are also excited about our new country manager in France and we continue to prepare for a full market launch there pending the final reimbursement announcement expected later this year. Finally, we have made progress with reimbursement in the United Kingdom and expect additional patients receiving Inspire therapy in this region. In Asia, we are seeing great momentum in Singapore with procedures showing significant growth both sequentially and year-over-year. In Japan, we continue to advance our efforts of going direct by hiring and training additional team members, have completed the Japanese website, and are seeing increased activity with physicians and active centers. Regarding operations, we continue to make progress with the production ramp of the silicone-based stimulation and sensing leads. We remain in a challenged position with the sensor manufacturing yields. However, we have incorporated a recent manufacturing change and expect to grow inventory as we move through the quarter. We remain in a positive inventory position with short-term plans in place to grow to our goal of one quarter of safety stock by year-end. We feel good about our inventory position in our other products. In summary, we continue to see significant momentum in our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy. We will continue to increase utilization at our existing centers while adding capacity by opening new centers. We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term stakeholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Thank you, Tim, and good afternoon, everyone. Total revenue for the second quarter was $151.1 million, a 65% increase from the $91.4 million generated in the second quarter of 2022. U.S. revenue in the second quarter was $144.7 million, an increase of 65% from the $87.9 million in the prior year period. The primary growth driver in the U.S. was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers, our continuing direct-to-consumer marketing, and a higher number of territory managers. We are pleased to announce revenue outside the U.S. increased to $6.3 million, which is an 81% increase year-over-year on a reported basis, while units sold outside the U.S. grew 72%. The U.S. average selling price in the second quarter was $25,000, compared to $24,100 in the prior year period. The increase reflects our 5% price uplift that began in May of 2022. We expect the U.S. ASP to remain steady at the current level. The ASP outside the U.S. was $22,100 during the quarter, compared to $21,000 in the second quarter of 2022. Gross margin in the second quarter was 83.9%, compared to 84.5% in the prior year period, primarily due to additional manufacturing costs of sensors and lower yields, prior to process enhancements, as well as higher costs of certain component parts, partially offset by the price increase, which is now fully in effect. Total operating expenses for the second quarter were $143.4 million, an increase of 57%, as compared to $91.2 million in the second quarter of 2022. This planned increase was due to the expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts, and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $4.9 million in the second quarter, compared to $297,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances compared to a year ago. Net loss for the second quarter was $12 million, compared to $14.5 million net loss in the prior year period. The net loss per share was $0.41 compared to $0.53 in the second quarter of 2022. The net loss for the second quarter includes $3 million of R&D expenses associated with pre-launch inventory related to Inspire 5 that is expensed for accounting purposes. The weighted average number of shares outstanding for the second quarter was $29.2 million. We expect the third quarter weighted average shares outstanding to be approximately $29.4 million. Given our continued operating leverage improvement, our cash and investments increased to $467 million at June 30, from $452 million at March 31. This strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers while training and opening new implanting centers. Moving on to updated 2023 guidance, given the strong momentum we are seeing in our business, we now expect full year revenue to be in the range of $600 million to $610 million, an increase from our previous guidance of $580 million to $590 million. This updated revenue guidance represents 47% to 50% growth compared to full year 2022 revenue. Similar to prior years, as we progress through the second half of the year, we generally see increased seasonality in the fourth quarter as patients and physicians attempt to schedule Inspire procedures before high deductible health plans reset at the beginning of the year. We continue to expect full year gross margin to be in the range of 83% to 85%. As Tim noted, we expect to activate 52 to 56 new U.S. centers per quarter and establish 12 to 14 new U.S. sales territories per quarter for the remainder of 2023. In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2023. With that, our prepared remarks are concluded. Dilem, you may now open the line for questions.

Your line is open, John.

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

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

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

You bet, thank you. GLP-1 concerns. We're happy with GLP-1. We think it's complementary to Inspire. Again, it's very specifically discussed that the Inspire mechanism of action is to move the tongue base forward. We don't address lateral wall collapse that is associated with higher BMI patients. Let that sink in. We've talked about this before. When patients go on a GLP-1 drug and they lose weight, they tend to lose that weight in the neck circumference, which is addressed by lateral wall collapse, which is outside of our mechanism of action. Therefore, if we can get higher BMI patients to lose weight, it will relax their lateral walls, and there will be predominantly tongue base obstruction, which is highly effectively treated with Inspire by stimulation of the hypoglossal nerve. So again, two different mechanisms of action being treated by GLP-1 and Inspire, and very complementary to each of them. We do have our own research project to address lateral wall collapse, but that's a longer-term solution, but in the meantime, if we can see progress with the GLP-1 drugs helping patients lose weight and moving them towards the Inspire indication, it's going to be highly beneficial. At this point, it's a little early, so we haven't seen a lot of movement out in the field. We don't hear a lot of feedback from our physicians, but we welcome the opportunity to take care of the patients as they start to lose weight. International is exciting, and I think we've seen some great progress internationally. John, you've been following Inspire for quite some time, and what we've always said is we don't make strong investments in a country until we've established a reimbursement pathway in that country. And in the case of Germany, we've had great success there, and as we're coming well after COVID, now we're seeing a strong rebound. Germany's had a very good quarter. The Netherlands overcame some reimbursement challenges and are opening up new centers, which provides growth there, but the exciting news is in Belgium. They completed the countrywide reimbursement. They will have a strong second half as they start scheduling their cases. And we already have the announcement on countrywide reimbursement in France, and we expect the new coding to come out relatively soon so we can do a full launch there. So a lot going on in the international markets. We really like what's happening. The team is well organized. And then in the Asian markets, Singapore, as we said, is doing well. And going direct in Japan is really starting to show good progress, and we look forward to reporting more activity there in the future. So thank you very much.

Thanks, Tim. Great call. Thank you.

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

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

Absolutely. And thanks, Robbie. As far as the label updates go, also remember we recently received a pediatric approval for Down syndrome and that is going along well, and we're opening up more children's facilities. Most of those facilities are already tied in with existing Inspire centers. So we can take care of those kids. The label update for BMI is a pretty immediate introduction because there's just not a lot of options for those patients that have a higher apnea hypopnea index above 65 going up to 100. And so that really helps us get the approval with the insurance company. So that's a pretty immediate return. We're going to see a little bit increase in procedures right there. BMI, we've got to be a little cautious because just bringing in a BMI patient up to a BMI of 40 is a little dangerous because the probability of them having lateral wall collapse, which again, that presents as a complete concentric collapse when you do a DISE procedure and remember we treat tongue-based obstructions with the anterior-posterior, with the tongue moving forward. So with a higher BMI, we're being very careful to not fill the appointment books of the ENT surgeons with high BMI patients who won't qualify for Inspire anyway. Now, those are the patients that will be good candidates to get on the GLP-1 drugs, if you will, to help them lose some weight, relax the lateral walls, and allow us to assess if our tongue-based collapse can be properly treated with Inspire. So to summarize, the BMI is going to be an indication of expansion. I think in the past we've talked about it being about a 10% increase over our published TAM. BMI, we're going to be careful about because our current system doesn't treat lateral wall, but we now have the advantage of the GLP-1 to be able to address that market as well, albeit they need to lose the weight first, and we know that takes a little bit of time with the drugs.

Great. And maybe one on spending. There was clearly, you called out, I think it was $3 million or so in Inspire 5 build-up in and inventory and R&D accounts for a lot of the step-up. But maybe just give us an update on how you're thinking about balancing the great top-line growth versus margin leverage and views on profitability going forward. Thanks a lot.

Yeah, hey, Rob, it's Rick. So yeah, we understand profitability is important, and we continue to create leverage in our P&L, but our real focus is top-line growth and growing the adoption. So we do invest in a disciplined manner. We continue to do that. We've made investments in DTC, R&D, and all areas of our business, but we have been improving our leverage with our operating expenses. R&D is 20% of revenue. It was 20% of revenue in the first quarter. We've talked about we expect that to be in the high teens or so, but we're making tremendous investments, as Tim talked about, in the prepared remarks. But actually, in the second quarter, given the current macro supply chain environment and our confidence in Inspire 5 approval in 2024, we are purchasing some Inspire 5 components now, but for accounting purposes, it must be recorded as R&D expense. I don't mean to get into the fine details of that, but that accounted for 200 basis points of our R&D as a percentage of revenue. That being said, stock-based compensation is a big number. In the quarter, it was nearly $22 million, and so taking that out, we've generated cash. We're cash positive by $15 million. So profitability will come. We haven't changed our tone on that, but we're really focused on the long-term top-line growth.

Great. Thanks for taking the questions.

Thank you. Our next question comes from Danielle Entalfi from UBS. Please go ahead.

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

Sure. Hi, Danielle. I think the Medicare, historically our blend has always been about 65% to 70% commercial, 25% to 30% Medicare, and about 5% VA or military, and that probably purposely doesn't add up to 100%. But as we've seen in the last couple of quarters, we saw a good Medicare rebound. Usually in Q1, we see heavy Medicare because we have the high commercial in Q4, again, going back to the high deductible insurance plans. And so in Q1, Q2, we just saw a higher percent, not quite 50%, but approaching it for Medicare. So while that's really exciting for that population, it does put some challenges to the reimbursement in ASCs, and that's kind of what we're highlighting. We're able to handle and cover those cases all in a hospital setting or in ASCs in the north, but that does present a longer-term challenge. As we progress into Q3, and certainly into Q4, as Rick highlighted, it becomes more weighted towards commercial cases, because again, the high deductibles really kind of drive the fourth quarter. So I would expect our percentages to move back to more traditional ratios. And then overall, obstructive sleep apnea is a young person's disease. And in the clinical studies, we saw the average age of our studies were down at 54 during the early commercial years. Of course, reimbursement's easier with Medicare, so it kind of rises up a little bit. But we think that it should be back in the average age in the 50s. Remember, now we have the pediatric approval. The youngest person is really just single-digit years of age. So we're across the board on treating patients, but for the most part, I think that we want to keep our ratios focused on the commercial side, certainly complementary with the Medicare and always provide service to the VA and military.

Okay, got it. Congratulations on that. Once that is approved, should we expect a gradual rollout, or how should we approach building capacity for Inspire 5 ahead of the launch and its potential impact on margins? Thanks so much, everyone.

Thanks, Danielle. I think people are excited about Inspire 5. Obviously, the removal of the pressure-sensing lead is both an improvement for the patient. It makes the procedure more comfortable for an ear, nose, and throat surgeon to perform. It gives us and the patient an improved reliability. Even though we have a small number of revision surgeries, the culprit for most of those is that pressure-sensing lead. So we want to be able to get this out broadly in the market as soon as we can. Once approved, I'm sure we'll do a small pilot study just to make sure it works well with all the SleepSync system, the new remotes, and the adoption into the market and by mid-year, we expect to go for fully launching this. And we believe once launched, it will be a very quick transition across the board.

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

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

Hi, Travis. Thank you. I think the sleep endoscopy increase in reimbursement was a nice surprise. We know that they have been working on that when it initially came out at just $180 or what it was, was very disappointingly low for a 15-minute procedure and it wasn't worth hospitals or ASCs to be able to do that procedure. But moving that up, I think it actually brought the economics from the actuals over the last couple of years, kind of drove that calculation and getting it to $1,600 really is going to be beneficial for the centers providing that DICE procedure. Then again, on the other hand, as we got done talking with our Predictor study, we want to reduce the reliance on DICE anyways to be able to go to an office exam. We'd rather have the ENTs and the OR suites spend that time doing implant procedures rather than DICE. So very happy about the reimbursement there and I'm sure all the centers and ASCs will be equally excited when that takes effect in November. As far as the increase to the hospital and ASC payment for the Inspire procedure, that's tied to the overall APC, Ambulatory Procedure Code, and again, very happy with the continued increase and that's been pretty steady of an increase year over year for the last several years. So again, it just continues to move north and that's really good for the hospitals and ASCs, but we just have to address the Medicare ASC payments in this.

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

Hey, Travis, it's Rick. So as we talked about, we're really proud of the achievement of the team in the first half of the year. and we talked about all the opportunities with some of the label changes and the change in the BMI warning and other catalysts. So we have increased our guidance up to 600 to 610 and so we talk about the step that, and I mentioned this in the prepared remarks, that we generally see a strengthening in our year in the fourth quarter, given the commercial mix with physicians and patients attempting to schedule those procedures before those high deductible plans reset at the beginning of the year. We will continue to increase our spending. We have shown leverage. We expect to improve that as we progress throughout the year. And so we're excited about the second half of the year, but there will be a strengthening in the fourth quarter.

Great, thanks a lot. And congrats again.

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

Hi, Tim, Rick, and Ezgi, congrats on the next quarter and thank you for taking the questions. I wanted to ask about the OUS business and apologies if this was asked earlier in the Q&A, but obviously, a big increase sequentially to $6 million. So the question is, is this kind of the new watermark? What drove the performance and anything to call out from a competitive standpoint in Europe and then I had a follow-up. Thanks.

Sure. I think it really is down to the performance of the Inspire team. And the focus in Germany was really strong and drove most of that growth. I also want to compliment the team in the Netherlands with opening new centers in the Netherlands. That's something we haven't been able to do for several years. And also Switzerland and the rest of the stock market really did very, very strong. We haven't really seen the performance from Belgium yet. That's still forthcoming. You're going to see with the implementation of the national insurance coverage in Belgium. They're going to have a strong second half. So that's going to continue to move north. I think the UK has done implants, but now we're able to open up additional centers in the UK, which is really promising. And we previously announced that we were awarded countrywide reimbursement in France, but France is working through the coding set, the CPT coding equivalent in France, to make sure that when they lay this out publicly and put this on their registry, that it will have the CPT codes in place. We expect that to happen post-vacation time in Europe, and so that will do a full launch in the latter half of the year, which is really exciting for France, which is obviously one of the largest markets in Europe. So while we have good progress in Europe, I think the upside is still yet to come. And it's really driven by the introduction of reimbursement in those countries, and that's what's really going to continue to drive the business. No comment on competition. I'm not sure that has any kind of impact on us over there, but the team is really moving very, very strong. And later in the year, I think you're going to start to see some progress over from Asia. As we mentioned, Singapore is doing really well and Japan, we're just coming through the transition to direct representation in that country, and you're going to start seeing activity in Japan, which is really our focus in the Asia markets.

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

Absolutely. We're still in the pilot center of digital scheduling, but probably about 60 plus centers are using the tool right now and that's really exciting because it's good for the patients. They don't go through the poor experience of getting voicemail at a center when we're trying to make those appointments. So we're going to continue to push that. We're entering the second phase of that where we can add additional centers partnering with our software company to interface into their digital scheduling. So really that's what's happening there. I think some of the top centers, we're going to be pushing that obviously quicker with those centers with the higher utilization because that really just, again, streamlines that process going forward and the second question? ASC mix. Oh, ASC mix. I think that comes down to just a little bit higher Medicare mix and Medicare tends to be dominated in the hospital setting, especially down south where they have the reduced Medicare rates, but as we progress back to higher commercial rates as we progress through the quarter, I think that you'll see more and more progress with ASCs. But it really is our long-term vision that ASCs will be a key catalyst for driving the business and we need to continue to provide education to ASCs when they negotiate their contracts with commercial payers to make sure that they have the support for Inspire. And we need to work on the reimbursement levels from a Medicare standpoint and the proper mix between commercial and Medicare and ASCs.

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

Great job on another successful quarter. For my first question, I recall you previously mentioned various initiatives aimed at improving throughput efficiency. One of those involves increasing the number of physicians at implanting centers. Can you provide an update on the percentage of your centers or installed base that have more than one physician? Additionally, how should we approach this topic in the upcoming quarters?

Yes, we don't have a specific number at this time, but we know that the growth continues. It's essential that when representatives meet with surgeons, they establish a backup in case the primary surgeon is unavailable to perform procedures. Many of our surgeons operate at multiple sites, which typically include both hospitals and ambulatory surgical centers. This setup allows us to have multiple surgeons available in most facilities, and since many surgeons also manage various sites of service, it tends to balance out the situation. We are particularly excited about our active fellows program in both ENT and sleep. Our aim is to engage with surgeons as they transition into their first jobs, ensuring they bring their Inspire experience with them. We are actively training these fellows before they start working to integrate Inspire into their practices. We recently completed our annual fellows course, and while I don't have the exact numbers for the ENTs who graduated this year, we anticipate that around 50% of them will be able to perform Inspire procedures in their first year, similar to sleep physicians. We plan to continue expanding this program and enhance the teaching of Inspire at the medical school level.

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

Yes, we are seeing continued growth across all of our centers. Same-store sales drove growth in the second quarter, just as they did in the first quarter, and I believe this will continue as we move forward. We are excited about the increase we experienced with Medicare in the second quarter, which overshadowed some of the commercial cases that we expect to pick up in the second half. The demand remains strong. As you pointed out, we are still under-penetrated in the total addressable market, and there are limitations on the number of surgeons performing the procedures. We need to address that and work through the backlog of patients. People are indeed eager to have their obstructive sleep apnea treated. Our direct-to-consumer efforts continue to be effective, with high contact rates and strong conversion of patients through implants. We need to open up more operating room time by training and encouraging ENT specialists to dedicate more of their time to these patients.

And I show our next question comes from the line of Larry Biegelsen from Wells Fargo.

It's Lei calling in for Larry. Congratulations on the quarter. Regarding the guidance, you increased the full year revenue forecast by slightly more than the earnings beat. It appears that in the second half, your top line growth is around 30%, while you experienced over 70% growth in the first half. Can you explain the reason for this deceleration? Is there more to it than just conservatism and a general lack of confidence in the second half outlook? I have a follow-up question as well.

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

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

Sure. Great question. Carlton is a great talent. And as we continue to grow, we need that leadership to be able to scale our business. And I definitely see where you're coming from that. Our investments in the past are focused on technical tools that can help us grow the adoption of Inspire. That's not changing. I think we're going to focus on building the Inspire business to treat obstructive sleep apnea, nothing has changed there. And yes, we've been successful at making sure we have a strong balance sheet. But our focus today remains with obstructive sleep apnea and leveraging tools as we have with Ognomy and EnsoData to be able to help patients make appointments with physicians to integrate in with the SleepSync system. But again, we're keeping our focus. We're growing the adoption of Inspire, and Carlton is going to be just instrumental in helping us with our overall strategy plan and understanding what this organization looks like when we go to $1 billion, $2 billion in annual revenue and what does the organization need to look like, not only from our external team but from our operational side, our clinical evaluation, our quality and our overall company as a whole.

And I show our next question comes from the line of Anthony Petrone from Mizuho Americas.

Congrats on another strong quarter here. Maybe a quick one just on Inspire 5, just to sort of clarify the pricing strategy for the latest gen system as we look toward a rollout, how will it stack up against the existing systems out there. And then a quick follow-up would be, when we look at the two themes of GLP-1s potentially lowering BMI for even patients now contraindicated above 40 BMI, but with that label expansion up to 40 BMI, when you think of those two out there now concurrently, how many patients can that actually bring into the category where they would be eligible for hypoglossal nerve stimulation?

As we prepare for the launch of Inspire 5, we are still assessing our pricing strategy. This will involve a shift since we will not be selling the pressure sensing lead. We need some additional time for this evaluation. Historically, we have implemented price increases alongside technological advancements, and Inspire 5 represents a significant improvement. It will also facilitate our progress to versions VI and VII and beyond. We will share more updates on this in the future. Regarding GLP-1, I noticed the note you released yesterday and your conversation with a doctor was quite interesting concerning GLP-1’s role in relation to Inspire and its impact on weight loss. We understand that with a BMI over 35, we can screen out more than a third of patients due to complete concentric collapse or lateral wall collapses linked to larger neck circumferences. At a BMI of 37 to 40, the screening exclusion could exceed 50%. Given the patient numbers in this category, if GLP-1 helps them lose weight and alleviates the lateral wall aspect of their obstructive sleep apnea, it could significantly benefit our Inspire business. However, this will take time. Your report indicated limited activity so far, and we've yet to receive substantial subjective feedback from the field regarding GLP-1 progress, but we believe developments are on the horizon.

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

Congratulations on a strong quarter. Regarding utilization in the U.S., I'm curious about the factors that may be influencing it. When we consider the distribution of physicians or centers, is the increase in utilization coming from a specific segment, or is it more widespread across different types of centers? Additionally, for those centers that are performing at the higher end of the scale, are we still seeing improvements in utilization, or are they nearing a plateau?

Thank you for the question. I believe we still have a significant journey ahead regarding utilization. When discussing the characteristics of the higher-end sites, the most important factor is the presence of a dedicated team. This allows surgeons to concentrate on their specialties while relying on sleep physicians for ongoing patient management and device programming. The most effectively utilizing centers have multiple surgeons and a clear division of responsibilities, making it easy for patients to navigate their journey from initial screening to implant and ongoing management. Educating tier 2 and tier 3 sites on the necessity of building a team is essential. We have great respect for ENT surgeons who are dual board certified in sleep medicine, as they are our early adopters. However, they must partner with sleep physicians and other surgeons to enhance their capacity. Notably, the centers with the highest capacities also report the best patient outcomes, which makes sense because everyone at those facilities understands their roles and what constitutes a successful outcome. We continue to encourage increased utilization, which you have also pointed out in your initiation report. Therefore, moving forward, we will keep emphasizing utilization growth.

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

We are definitely focusing on high BMI. We've ensured all physicians are informed about the high BMI approval immediately. We're collaborating with commercial payers to update their policies on this matter, along with other factors, including the pediatric population. It's crucial because these patients have limited options. Regarding high BMI and our discussions about GLP-1, we are cautious about venturing too quickly into high BMI since these patients might have a higher chance of being screened out during the DISE procedure due to complete concentric collapse or lateral wall collapse. These are the patients we believe could benefit from GLP-1 drugs. Thus, we are being very deliberate about high BMI, with strong efforts on pediatric patients with Down syndrome, and we'll provide more updates soon about the transition of DISE to the PREDICTOR, which will also be an essential factor for payers.

And I show our next question comes from the line of Matthew Mishan from KeyBanc.

I wanted to discuss SleepSync and how many of the new centers you are adding are also adopting it. Additionally, where do these centers stand in the process, and what is the status of some of the larger centers regarding reimbursement for remote patient monitoring?

Great question. The Bluetooth remote that was launched last year really is the big change to SleepSync. It provided the utility of the system to directly interface the patient's device with SleepSync so the physicians and the healthcare providers can now have a real-time view of how those patients are doing. When we open new centers, as we have for the last several quarters, new centers being trained are automatically put on SleepSync. And our process is going back to the older centers that have been out for a while and starting to train them to add SleepSync to their process. But as far as new centers goes, it's standard requirement right upfront. We train all of them to make sure they're a part of it. It's necessary to have this direct communication. And as we mentioned, we already have the new physician programmer approved, and we're going to launch that in the beginning of next year. All the actions taken with the physician programmer are automatically stored in SleepSync. And all the information from the patient remote from the implanted product is transitioned via the patient's smartphone to SleepSync. And we're going to be introducing tools such as the sensor that goes under patients' mattresses to be able to record and monitor a patient's quality of sleep that will be part of SleepSync. We are interfacing with our minority investments, Ognomy and EnsoData, so their data automatically uploads to SleepSync. And what SleepSync is going to be, it's going to be an all-encompassing patient management tool that's going to have not only the objective evidence for the quality of sleep, but they'll also be able to input the subjective data from the patient, how do they feel when they do a telemedicine, right? What kind of complaints do they have? Is everything working fine with them? And then the next step after this with SleepSync is we're going to be able to start taking action from a physician's office to a patient's home with remote patient programming. That's going to be tremendous. We're already working on that in-house. We're already in communication with FDA as well on that. So that's going to be a key step going forward.

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

Today, we are still experiencing strong interest in our direct-to-consumer approach, and we are successfully building our brand, which is evident to many patients who visit our website. Physicians, including general practitioners and family practice doctors, have also recognized this. Many of them visit our website to prepare for inquiries from their patients, seeking information on how to discuss our services. We engage in a significant educational effort with these doctors, guiding them on how to communicate with their patients and refer them to ear, nose, and throat specialists. At this point, we are responding to external demand to integrate our services into their practices. When we receive an inbound call from a center, we ask them to complete an application. While this may seem presumptuous, it's actually a structured form designed to clarify roles within the center. It helps us identify key personnel, such as the ENT and sleep physician, as well as their support from upper management and whether they have a proper navigator and operating room team in place. Additionally, it helps us understand their connection to sleep practices and enables us to coordinate essential functions for successful onboarding and utilization. We are still in the early stages of bringing on new patients, and currently, our center capacity is limited. Therefore, we must continue to increase the number of centers we are training.

And I show our last question comes from the line of Suraj Kalia from Oppenheimer & Co.

Congratulations on the quarter. Tim, I have a few questions for you. Regarding your comments on GLP-1s, I'd like to understand better. You mentioned high BMI patients and lateral collapse, and I appreciate that insight. How do you assess the net change? Patients in the 30 to 35, 37 BMI range will also be affected, so I’m interested in how you stratify the influx versus the outflux. That's my first question. My second question is, what percentage of your patients are currently using hypoglossal nerve stimulation but haven't even tried CPAP? Also, can you provide a specific example of remote programming in action? It could be related to neuromodulation or anything else. I'm asking because general otolaryngologists, as we've discussed before, seem a bit disconnected from the programming aspect and often hand it off. I would appreciate it if you could address these in the time remaining. Thank you.

No, those are all really good. Let me walk through this. The key issue is the percentage of patients with a high BMI who actually experience a lateral wall collapse. As you mentioned, not everyone does, and many patients with a BMI of 37 only have a tongue base collapse, so they can pass a sleep endoscopy and proceed to Inspire. The concern you raised is how many patients must be evaluated to see who can pass a DISE to qualify for Inspire and how much capacity this takes up in ENT practices with patients who cannot get Inspire. This is why we are being particularly cautious regarding high BMI patients. The positive aspect is that with PREDICTOR, we can conduct a soft airway exam in an office to assess the likelihood of a lateral wall collapse, and we're already planning for the next 300, so there's much more to come on stratifying those groups. I believe the GLP-1s could help patients with lateral wall collapse achieve a complete concentric collapse, and ideally, we want to see them lower their BMI to ideally present as only a tongue base collapse. Tracking this will be important moving forward. Your second question was about what percentage of our hypoglossal nerve stimulation patients have actually tried CPAP, particularly regarding the Philips recall and whether many patients bypassed CPAP to go directly to Inspire. The reality is likely that the vast majority of our patients have tried CPAP. Insurance companies generally require this step. There may be a small number who bypassed CPAP due to issues obtaining a machine, given the shortages from ResMed and Philips due to the recall. However, historically, very few of our patients manage to bypass CPAP, so this probably does not significantly affect inventory. Regarding Neuromod, I believe Abbott has some diabetes products approved. If you look at how SleepSync is structured, its screens are modeled after the patient management system that ResMed developed. Sleep physicians are familiar with managing their patients using systems like Brightree, so if we can align our screens similarly, they will be more comfortable using SleepSync. Our aim is to support sleep physicians in longitudinal management and remote programming. While ENTs may handle some certified sleep cases, we are primarily designing SleepSync for those management needs. The FDA has previously approved similar systems for implanted products, so we have a strong foundation to proceed. Thank you very much, Suraj. I know we're over time, but I want to express my gratitude to everyone for joining the call today. I'm always thankful for the dedicated Inspire employees for their passion, hard work, and commitment to achieving successful patient outcomes. The Inspire team's dedication to patients is unmatched and essential to our success. I also want to thank our employees and healthcare teams for their ongoing efforts as we focus on expanding our business in the U.S., Europe, and Asia. We appreciate your continued interest and support for Inspire, and we look forward to sharing further updates in the months ahead. Please stay safe and healthy. Thank you very much.

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