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Edited Transcript of INSP.N earnings conference call or presentation 2-Nov-20 10:00pm GMT

·59 min read

Q3 2020 Inspire Medical Systems Inc Earnings Call MAPLE GROVE Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Inspire Medical Systems Inc earnings conference call or presentation Monday, November 2, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Richard J. Buchholz Inspire Medical Systems, Inc. - CFO * Timothy P. Herbert Inspire Medical Systems, Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Adam Carl Maeder Piper Sandler & Co., Research Division - VP & Senior Research Analyst * Amit Hazan Goldman Sachs Group, Inc., Research Division - Equity Analyst * Christopher Thomas Pasquale Guggenheim Securities, LLC, Research Division - Director and Senior Analyst * Jonathan David Block Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst * Lawrence H. Biegelsen Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst * Ravi Misra Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Richard S. Newitter SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst * Robert Adam Hopkins BofA Merrill Lynch, Research Division - MD of Equity Research * Robert Justin Marcus JPMorgan Chase & Co, Research Division - Analyst * Suraj Kalia Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Robert A. Yedid LifeSci Advisors, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Inspire Medical Systems Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid. Please go ahead. -------------------------------------------------------------------------------- Robert A. Yedid, LifeSci Advisors, LLC - MD [2] -------------------------------------------------------------------------------- Thank you, Stacy, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released its financial results for the 3 and 9 months ended September 30, 2020. A copy of the press release is available on the company's website. I'd like to remind you that on this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including, without limitation, operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2020 financial and operational outlook and improvements in market access are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC today for a description of these risks and uncertainties. Inspire disclaims any intention or obligation except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, December 2, 2020 (sic) [November 2, 2020]. And with those prepared remarks, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Bob. Thanks, everyone, for joining the call today for our third quarter of 2020 business update. I'd like to begin by reiterating how very proud I am of the Inspire team and how hard they have worked through all the challenges experienced thus far in 2020. These efforts resulted in an extremely strong third quarter, with momentum in our business that we expect to continue through the end of the year and into 2021. In the third quarter of 2020, we generated worldwide revenue of $35.8 million, which is an increase of 72% compared to the third quarter of 2019. Our strong rebound in the third quarter included patients previously scheduled for implant but delayed due to COVID, and this, combined with the continued enhancements of the core fundamentals of our business drove the high level of procedures that was sustained throughout the quarter, and we do not foresee any pause in our momentum. Importantly, our Inspire team, the hospitals and all health care providers have continued to adapt and identify safe methods to continue to operate and treat patients in need. Simply stated, the patient flow, diagnostic and implant activity has rebounded and is back to pre-COVID levels and beyond. That said, business conditions during COVID are always evolving, and we continue to monitor the impact of the pandemic, especially with the most recent spikes. However, to date, we have not seen suspension of cases. With this in mind and assuming continued normalized operations, our strong performance in the third quarter and the positive trends in implant activity provide us with confidence in the outlook for our business for the remainder of the year. Therefore, we are increasing our full year 2020 revenue guidance to between $110 million and $112 million, which is an increase from our prior guidance of $88 million to $92 million following our second quarter results. These impressive results and our confidence for the remainder of 2020 are indicative of a multitude of factors primarily focused on our forward planning and preparation during the pandemic period. We previously discussed the 4 groups of patients, including those who are unable to undergo their Inspire procedure during the pandemic. Each of these patient groups is critical to our success, but beyond this, it is the continued development of our core business that truly drives our business forward. Let's get into the details surrounding the third quarter. First and foremost, our focus remains on the patients to ensure that each and everyone has the best possible outcome from Inspire therapy. We know that all patients are different and individual attention is required to ensure consistency and our safe and efficacious outcomes remain at the highest level. Later, we'll provide an update on the development of our digital technology, which will be a productive tool to help clinicians track patients and their outcomes and further drive consistent patient care globally. Beginning with capacity. During the third quarter, we added 42 new U.S. implanting centers and ended the period with a total of 370. This is well above our prior guidance of adding 20 to 24 new centers per quarter. Since we were not able to schedule implant procedures earlier in the year, we had several sites that planned to open in the second quarter, and these carried over into the third quarter. Driven by the more favorable reimbursement environment, we have increased our focus on adding ambulatory surgical centers, or ASCs, to further drive capacity. To date, we have signed 2 national contracts with United Surgical Partners International and Surgical Care Affiliates, which collectively represent over 620 ASCs in the U.S. We understand that we will certainly not open all of these, but working with the corporate groups, we can identify which ASCs focus o ENT procedures. At the end of the third quarter, ASCs made up nearly 15% of our total US implanting centers, up from 10% at the end of the second quarter. We will continue our efforts toward adding stand-alone ASCs, other national ASC groups as well as not losing our focus on opening hospital systems. With that said, we are accelerating the opening of new centers and are increasing our guidance to open 28 to 30 new centers in the fourth quarter compared to our prior guidance of adding 20 to 24 new centers. Regarding the U.S. sales team. We created 7 new sales territories in the third quarter, bringing our total to 98. As a reminder, we did not slow our cadence of hiring territory managers during the shutdown period to ensure that we are in a strong position once cases were able to resume. You will recall that we opened 9 territories in the second quarter. We have also continued increasing the number of regional managers ending the third quarter with 18 as well as field clinical representatives ending the third quarter with 36. From a territory manager perspective, we will continue to target opening 6 to 7 new sales territories in the fourth quarter. This cadence in new centers and territories will continue to have positive impact on our long-term growth. As we review some of the key initiatives from the third quarter, what remains most critical for us is to stay active in educating new patients, creating this awareness as a core objective of our direct-to-consumer activities. You will recall that during the latter half of the second quarter, we resumed radio and TV initiatives in our larger markets as the impact of COVID lessened after focusing on smaller markets earlier in the year. We also continue to utilize our website and virtual tools to help patients connect with physicians and, in many cases, using telemedicine. During the first 9 months of 2020, the number of visitors to our website was over 3.6 million, which is a 15% increase year-over-year. In addition, over 43,000 physician contacts were established via the website, representing a robust 39% increase year-over-year. Moreover, in order to increase the percentage of patients reaching out to health care providers, resulting in an Inspire implant, we continue to expand our call center concept called the Inspire Advisor Care program. The primary purpose of the Advisor Care program is to assist patients in connecting with the appropriate health care provider based on their specific needs, which, in turn, should improve our overall conversion rate. We continue to experience positive results, and we'll continue adding -- expanding the program during the fourth quarter and into 2021. In fact, by the end of next year, we expect the program to be available to the majority of our centers. Switching gears to reimbursement. The third quarter was very positive for Medicare-aged patients. We noted that local coverage decisions, or LCDs, are now in place in all 50 states. And we saw a very good uptick in Medicare cases. In the third quarter, Medicare continued to represent approximately 30% of all Inspire cases. Meaning we are experiencing balanced growth between Medicare cases and commercial cases. In the third quarter, commercial cases continued at around 65%, and the VA military implants were at 5%. On the commercial policy front, we added several positive policies in the third quarter, including Humana, Florida Blue and Blue Cross Blue Shield of Minnesota, among others. To date, we have policies representing over 207 million covered lives compared to 145 million a year ago. The last remaining large commercial payer is Anthem. During the third quarter, they published their annual review, and this update did not change their policy as Anthem continues to label hypoglossal nerve stimulation as investigational and not medically necessary. For Anthem patients who have Medicare Advantage or who are commercial Medicare, they follow positive coverage decisions of the Medicare LCDs and therefore cover. While Anthem did conduct an internal review, there were several clinical publications that were not included in their technical assessment, and they took a different interpretation of several publications that were contrary to the Blue Cross Blue Shield Evidence Street technical assessment conducted early 2019. That said, Inspire continues to conduct clinical trials on the safety and efficacy of Inspire therapy, and there is additional data that will be published shortly, including from a new European randomized clinical trial for which a manuscript is being prepared. We will continue to provide Anthem with the latest clinical evidence and encourage them to conduct an interim look rather than wait until the next annual review. Until then, Anthem continues to approve patients for Inspire therapy under the prior authorization process. And the approval rates and time to approval for Anthem patients continues to improve. In fact, to date in 2020, the overall approval rate for Anthem patients is 82%, and the average time to approval is 90 days. This has significantly improved compared to 73% in 158 days in 2019 and 68% in 191 days in 2018. Looking at the broader prior authorization metrics. In the third quarter, our internal reimbursement team supported 1,233 prior authorization submissions. This compares to 812 submissions in the third quarter 2019 and 566 submissions in the second quarter of this year. This significant growth is attributable to both patients who have their sleep endoscopy procedures suspended due to COVID as well as new patients entering the process. The news regarding prior authorization approvals is also positive. In fact, 1,039 patients received an approval in the third quarter compared to 672 approvals in the third quarter 2019 and 541 approvals in the second quarter of this year. We have experienced increased approval rates in the mid-90s percent and further, the median time for an insurance approval is now down to approximately 12 days from 25 days in 2019. These rates continue to improve due to the large and growing number of commercial insurance policies. As we have said on our last call, given the improved reimbursement environment for Inspire therapy, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. And as we've previously stated, we do not intend to continue to report on them after the end of 2020. Staying with reimbursement, but switching to coding, we have a significant announcement regarding the long-term coding of Inspire procedure. The American Academy of Otolaryngology, or the AAO, which is the ENT physician society, has long been working with Inspire to first create the new tech code 0466T for the pressure sensor, and then to convert this from a Category III code to a Category I code. In the process, the AAO reviewed the physician payments in connection with the existing base code, 64568 for implanting the Inspire system. Remember, this base code is shared with vagal nerve stimulation and the AAO felt that the work to implant an Inspire system was not adequately reimbursed. Therefore, the AAO submitted a new all-encompassing CPT code for the Inspire procedure to include the neurostimulator, the stimulation lead and the sensing lead. At the October 20 CPT meeting of the American Medical Association, this new CPT code was approved as a Category I code. The next step is to value the work associated with the Inspire procedure, and this process has already been initiated. The results will determine the RVUs, or relative value units, that surgeons are reimbursed for an Inspire procedure. The new code will officially be published for use in January 2022 and the results of the survey will be available around midyear 2021. In the interim, the surgeon payments will significantly increase by $450 already in 2020 with the Medicare policies and payment of the sensing lead Category III new tech code, which was meaningful for surgeons compared to the average Medicare reimbursement for the base code of $600 to $800. From a facility perspective, the additional good news is that this new CPT code will not change the payments to the hospital or ASCs. The proposed 2021 Facility Medicare payments were released in the third quarter and proposed an $850 increase over the 2020 rates of $29,000 per hospital and $24,000 for an ASC. Again, these are national average Medicare payments and commercial payments tend to be 1.4x Medicare for hospitals and up to 1.9x Medicare for ASCs. Finally, the AAO also received approval for a new Category I code to improve reimbursement for the DISE diagnostic procedure, or drug-induced sleep endoscopy. This has also been an ongoing challenge for ENTs to get reimbursed, and this new code will resolve this frustration. Okay. Moving on. Europe also had a very strong quarter driven by solid patient flow, particularly in Germany and the Netherlands. Like in the U.S., several areas in Europe have again experienced spikes in COVID cases, and we are closely tracking the impact against scheduled Inspire procedures. To date, we have not had cases suspended and, therefore, continue to expect a strong fourth quarter in Europe, assuming these normalized operations. In Japan, we are making progress in establishing a distribution agreement as we also progressed with discussions with the MLHW, which is the Ministry of Labor, Health and Welfare. This group remains under a backlog of work due to COVID, but we continue to have dialogue and expect to learn more about the proposed reimbursement level by year-end and continue to plan for first implant in 2021. We were pleased to receive regulatory approval in Australia during the third quarter, which was earlier than we had anticipated. We have applied for reimbursement in Australia, and the application is under review by the Medical Service Advisory Committee. The reimbursement process is anticipated to be completed during 2021, and we expect to launch Inspire therapy in Australia thereafter. Further, our ongoing clinical study for adolescents with Down syndrome continues to progress. In fact, we recently received a grant from the National Institute of Health to support the expansion of the study to include additional patients, centers and clinical endpoints. Okay. Switching gears again. Similar to the first and second quarters, we increased our R&D expenses year-over-year in the third quarter as we continue to invest in enhancing our technology platform. The Inspire cloud project, our cloud-based patient management system, continues to progress with the addition of a significant number of centers in the U.S. and in Europe who are using this tool. Earlier this year, we launched the Inspire app on patients smartphones as an educational tool. The second version of the app was released in the third quarter and interfaces with the Inspire cloud and allows physicians to collect clinical data from patients directly. We continue to enhance the functionality of this app as part of our overall digital platform development. The Inspire cloud project and our app are just the first steps in establishing interconnectivity between the patient and their health care provider with a long-term plan to improve outcomes by tracking patients activity and adherence and monitoring for any issues with device use. We also have active projects to improve the physician programmer and the patient remote control, which will be Bluetooth-enabled. Longer term, the design activity for our fifth generation Inspire neurostimulator continues. As a reminder, we anticipate that this will be a multiyear effort to develop the Inspire 5 device and obtain regulatory approval. We continue to conduct feasibility trials with several technology innovations, which will make the Inspire 5 neurostimulator state-of-the-art and expect that it will further improve the performance of the system, including simplifying the implant procedure. In summary, we believe there is significant momentum in all key areas of our business. Implant activity trends are highly positive, and we remain well positioned to assist patients as they progress on their Inspire therapy journey. We remain focused on improving utilization and our conversion rate, achieving further advancements in reimbursement that build upon a recent positive coverage decisions, growing the body of clinical evidence in support of Inspire therapy and investing in the continued development of our innovative R&D platform. We are extremely excited about our future prospects and are confident that we have the right plan in place to ensure long-term success. With that, I'd like to turn the call over to Rick for his detailed review of our financials. -------------------------------------------------------------------------------- Richard J. Buchholz, Inspire Medical Systems, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Tim. As Tim noted, we are extremely pleased with the strong restart to our business once the shutdown from the COVID-19 pandemic reversed as our core business grew through increased implants, diagnostic procedures, physician contacts and prior authorization submissions. Total revenue for the third quarter of 2020 was $35.8 million, a 72% increase from the $20.9 million generated in the third quarter of 2019. U.S. revenue in the third quarter was $33.1 million, an increase of 78% from the $18.6 million in the prior year period. In the third quarter, European revenue increased 23% to $2.7 million. Our U.S. average selling price in the third quarter was $23,800, which was consistent with the prior year period. The European ASP was $23,300 during the quarter as compared to $21,700 in the third quarter of 2019. The higher European ASP was primarily driven by favorable changes in foreign currency exchange rates. Our gross margin in the third quarter was 85.5% compared to 83.4% in the prior year period. The solid improvement was primarily due to manufacturing efficiencies and improved yields, which led to cost reductions with our third-party contractors. Based on these ongoing efficiencies and cost reductions, we are increasing our full year gross margin guidance to be in the range of 84% to 85% compared to our prior guidance of 82% to 84%. Total operating expenses for the third quarter were $40.5 million, an increase of 56% as compared to $26.1 million in the third quarter of 2019. This increase was primarily due to the expansion of the U.S. and European sales organizations as well as increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. As we said during our second quarter earnings call, the increase in operating expenses is reflective of our plan to achieve continued growth and our consistent focus on investing in commercial and development initiatives. Our net loss for the third quarter was $10.4 million compared to $8.2 million in the third quarter of 2019. The diluted net loss per share for the third quarter of 2020 was $0.39 per share compared to $0.34 per share in the same period last year. Moving to the balance sheet. We continue to maintain a solid cash position. As of September 30, our cash and investments totaled $234.6 million. The strong cash position allows us to continue executing on our growth strategy of increasing patient flow at existing centers and training and opening new implanting centers. The weighted average number of shares outstanding for the third quarter was 26.8 million. We anticipate that the weighted average number of shares for the fourth quarter will be approximately 27 million. As we stated earlier, while business conditions have normalized within our implanting centers, we continue to monitor the impact of the pandemic, especially with the recent COVID spikes, but have not seen any immediate suspension of cases. With this in mind and assuming ongoing normalized operations, our strong performance in the third quarter and the positive implant trends provide us with confidence in our outlook for the remainder of the year. Therefore, we are increasing our full year 2020 revenue guidance to between $110 million and $112 million from $88 million to $92 million, which represents 34% to 37% growth over full year 2019 revenue. In summary, the key metrics throughout our business remains strong, and we are well positioned to achieve significant long-term growth. We are extremely pleased with our third quarter performance and are excited to continue executing on our growth strategies. With that, our prepared remarks are concluded. Stacy, could you please open up the call for questions? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Robbie Marcus with JPMorgan. -------------------------------------------------------------------------------- Robert Justin Marcus, JPMorgan Chase & Co, Research Division - Analyst [2] -------------------------------------------------------------------------------- I will say congrats on a phenomenal quarter. Well done. I'll just ask both my questions upfront into 1 bigger question. It just really came in well above, I think, even some of the better case expectations. By my math, reps were doing $1.4 million annualized revenue to get to your guidance range that's over $1.5 million in annualized revenue in the fourth quarter. Centers are doing close to $400,000 of revenue per center. So it's clear that each center is doing more procedures rather than just adding more reps and more centers here. So I was hoping you could give us a deeper accounting of where you are today in terms of how deep your center penetration is? How much more is there to go? And if you can wrap in some of the DTC advertising and what you're doing on the patient side to drive such impressive growth year-over-year? I imagine people will still say your fourth quarter looks conservative in light of your third quarter, which I think everyone will appreciate. But maybe you could just help us understand what's really going on here, where you see yourself in the curve? And how much more is there to go? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Very good. Well, first off, I think it's how we conducted business during the shutdown period. And as frustrating as that was, our staff and our team and the physicians and the centers remain very motivated and continue to communicate with patients. We previously talked about our 4 groups of patients, including one, the group that, unfortunately, had their procedures postponed because of COVID; two, the group that was unable to schedule their cases; three, the group that were unable to have DISE or sleep endoscopy procedure because those are also postponed; and the fourth group was those that were just entering the process and just come to the website, we continue to drive all those process. We continue to hire territory managers. We continue to do the prep work for opening new centers, albeit, as we mentioned, we couldn't open them in the second quarter, but we can certainly open them in the third quarter, and that has another -- that's still carrying forward as we move forward. We have not completely worked through all patients in all buckets, including the first group of patients. We still have patients who are -- have their cases postponed that they're just not ready to come back in. So we're still working through all 4 groups of patients. We keep track of them closely. But then on the other side, as we're able to open up procedures, this is a procedure that patients are looking to have Inspire therapy to take care of the sleep apnea, so they're motivated to get in and get scheduled. Hospitals are motivated to get these procedures going in Inspire? Yes, it is, and there's an economic benefit for hospitals and ASCs to perform these procedures. So we certainly had a priority as we opened up some of our centers, but it really came down to our territory managers really staying focused through the whole process and continue to build our patient group. We continued our direct-to-consumer. I'll defer to Rick in a minute here to let him talk through a little bit about what we did for spending in direct-to-consumer in the second and third quarters. But we continued our advertising. We started our call center, and we continue to communicate with patients. So are we at penetration level with hospitals? Not yet. No. We did provide a new incentive for our sales reps this year to grow, improve utilization at existing centers. Now Robbie, as we talked in the past, we balance our growth. 50% of our growth comes from opening new centers, but more importantly, 50% of our growth comes from increasing utilization at existing centers, and we want to maintain that balance. So we provided a new incentive for our sales reps to be able to continue to add capacity at centers, maybe add a second surgeon to be able to get these cases scheduled, which, of course, drives the revenue that an individual territory manager can generate and also improve the number of implants per center. So we have another gear to go as far as utilization and helping centers perform consist -- more higher level patient implants. Let me go to Rick over there. Do you want to comment on DTC? -------------------------------------------------------------------------------- Richard J. Buchholz, Inspire Medical Systems, Inc. - CFO [4] -------------------------------------------------------------------------------- Yes. Sure. So as you recall, during the end of the first quarter and in the second quarter, we did shift our direct-to-consumer efforts from those large markets that were more impacted to the smaller markets that were less impacted. And we held back a little bit, but we continue to invest and lean forward a little bit as we started in the beginning of the third quarter. And so specifically, we increased sequentially our DTC efforts by just over 30% sequentially on a quarterly basis, and we spent $6.8 million in DTC efforts in the third quarter. But we -- as Tim mentioned, the fact that all 4 buckets were continuing to address those patients, we wanted to continue to spend dollars as we open up new centers and add territory managers to support the patient flow. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Next question comes form Amit Hazan with Goldman. -------------------------------------------------------------------------------- Amit Hazan, Goldman Sachs Group, Inc., Research Division - Equity Analyst [6] -------------------------------------------------------------------------------- And let me just add congrats on really nice progress across so many different aspects of the business. I thought I could ask the question about 2021 and just see how much color you're willing to give at this early stage. The Street is sitting at about $145 million. Obviously, with some of the things you talked about today, that seems to us like that's in okay territory, but I wondered if you could talk at least qualitatively about that? And any other puts and takes we should be considering for the top line next year? And kind of while you're at it, if you're able to just talk through the P&L next year, same thing, kind of anything you would call out sales force hires, DTC spend that could help us in modeling. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [7] -------------------------------------------------------------------------------- Right. Very good. As far as when we set up 2021, we obviously, aren't putting our guidance yet on revenue or even opening new centers or the cadence of hiring new sales territories. But I think it's safe to say that we're going to continue to be aggressive with that. I don't see us backing down on the numbers that we have. We'll probably get a little bit more aggressive with hiring new centers as well as new territories as we move into 2021. The reimbursement really helps, having the Medicare, having all the positive commercial policies. Anthem, while disappointing, it's still okay because we're still able to get patients approved to the prior authorization process. We'll continue to stay on top of Anthem to get them to write positive policy. But we're seeing some other positive trends as well. Additional clinical evidence, the digital tools that we are putting in play with Inspire cloud, the Inspire app, the addition with the Advisor Care program and adding additional centers to be able to improve our conversion rates of physician contacts to implant and making sure that we get the patients to the right physician, I think, is really going to help us continue the momentum as we move into 2021. Rick, you got something that you want to add there? -------------------------------------------------------------------------------- Richard J. Buchholz, Inspire Medical Systems, Inc. - CFO [8] -------------------------------------------------------------------------------- Yes. Regarding walking through the P&L, we had a nice improvement in our gross margin, 85.5%. We had cost efficiencies and some price reductions. Again, we use third-party suppliers for our products. And so that gave us confidence to increase our guidance for our annual gross margin. We expect that to continue into the future. We have increased our operating expenses. As Tim mentioned, we have numerous development projects going on with the Inspire cloud, the multiyear project of Inspire 5 as well as the app. And so the current spending on R&D, $7.3 million, that's really going to be our baseline, and we'll maintain -- or increase that going forward into 2021. And then also, as Tim mentioned, as we add additional territory managers, add additional centers and continue to spend on our DTC efforts, and we will continue to run our cadence as we've done in the past. And we think that will help us have sustained long-term growth. -------------------------------------------------------------------------------- Amit Hazan, Goldman Sachs Group, Inc., Research Division - Equity Analyst [9] -------------------------------------------------------------------------------- That's great. Just a quick follow-up for me, and I'll get back in queue. Just on Anthem, Tim, as you had mentioned. Just curious, what is the pathway forward here just given the decision? I think you said it's something like 82% approval rate. Did you get feedback on why it was not adopted that's more specific that you could share? And then the data that you're citing that's coming, do you think that's going to be what they're looking for to get you over the hump on that one? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Yes. I think the -- well, they're very conservative. I think they pride themselves, Anthem prides themselves on being last, and they are in this circumstance. We can only interpret what we read in their policy and from their review. We don't -- are not allowed to have one-on-one conversations, but we can understand how they interpreted the STAR trial, which we thought was not appropriate, and we will continue to communicate with them on that through written communications. But we also have a European study that has been completed. It has not been presented in public yet, but the manuscript is being prepared and will be in for review soon. We have several other publications that will be coming out soon or already have come out. So we continue to build upon our clinical evidence. In fact, the ADHERE registry has well over 2,000 patients enrolled. That is going to start evolving because it's going to get folded into Inspire cloud, so we can only further grow the amount of safety and efficacy evidence that we have. And we'll just keep on Anthem. Eventually, what we'll do when we start getting into higher numbers of the ADHERE registry, we will write a paper on the clinical outcomes of Anthem-sponsored patients. And we're getting to that point of having that many patients with Anthem insurance who have clinical evidence, we'll publish that and give that directly to Anthem. So we're going to keep -- we know how to do prior authorization. We've been doing it since we got approval in 2014. We have a very strong team that knows how to communicate. We don't let up. We don't give up, and that we'll eventually get policy from Anthem. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question comes from Larry Biegelsen with Wells Fargo. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [12] -------------------------------------------------------------------------------- I'll echo the prior congratulations on a really nice quarter, guys. Tim, 1 short-term question, 1 long-term question. I mean let me start with the long-term question, on the new CPT codes. The press release talked about for both the implant and DISE, you talked about -- the press release talked about an increase in surgeon payment. Do you have any sense at this point how much that can be? And how can you be confident in that at this point given that the RUV survey still needs to be done? And I have 1 follow-up. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- I think that when we talked with the AAO and we even talked to some of the physicians and when we go all the way back to when that base code, the CPT 64568, it was originally developed in the year 2012, it has never been revalued or resurveyed since that time. And when it was first surveyed, that was for neurosurgeons doing vagal nerve stimulation. They, I think, had less than 20 surgeons conduct a survey. So we believe from the outset, it was always 30% undervalued. And then that was before we even talked about the pressure sensor. So the #1 complaint from ENT surgeons has always been the reimbursement level of that code. And I think when the AAO conducts the survey, they basically send information to every Inspire-trained physician. And they survey them on specific skin to skin incision times. And from that, they are able to calculate the RVUs. And the AAO when they looked at the payment level that ENTs were getting, they were pretty comfortable that the new code will be higher than that. So yes, we have a little bit of comfort with that. We're very impressed by the partnership with -- that we have with AAO in that they can think through this process and they didn't want to share that code because it was an ongoing problem sharing 64568 with the neurosurgeons because the utilization of that code is shifting more towards Inspire based on the number of cases, and they realize that Inspire and hypoglossal nerve stimulation is going to be a very important part of the ENT surgeons procedures long term. So they wanted to get control of their own code and I give them credit for really stepping up, pushing it through, and during this COVID period, able to get a Category I code. And on top of that, they understood that long-term challenges with DISE and that sleep endoscopy code, where there really isn't a clear pathway for coding that today. So AAO really took that up. So I think that is really going to have the long-term benefit for the surgeons, both in hospitals as well as in ASCs. -------------------------------------------------------------------------------- Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst [14] -------------------------------------------------------------------------------- And the short-term question is, how much visibility do you have on Q4? I'm asking because of the spike in COVID cases and the risk of reduction in elective procedures, which is kind of on investors' minds, obviously, this week, last week? So is there some conservatism baked into Q4 -- the Q4 guide for that? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Thank you, Larry. I had the opportunity to sit in on regional manager meetings. And hear their plans and what they're doing to work with their surgeons, we specifically are asking all of our hospitals, all of our doctors, do you have your cases scheduled, are they -- what risks do you have with COVID? And here's the key, hospitals, physicians, our staff,have learned to operate in a COVID environment. Safe precautions must be used using the proper PPE, proper testing, making sure that the right procedures are followed. And we've been specifically asking, especially with these spikes that you see and we have not seen suspension of cases to date. We're pretty confident that our centers will continue to proceed further. And they have capacity for COVID and they have capacity to continue with the Inspire procedure. So as we stand today, we remain very confident, and so we did not build suspension into our plan. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Next question is Chris Pasquale with Guggenheim. -------------------------------------------------------------------------------- Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [17] -------------------------------------------------------------------------------- Congrats on outstanding results. Tim, you mentioned the different patient buckets. Can you quantify how much of 3Q volume you think came from deferred procedures? I know you said you still think there's some pent-up demand left to be addressed, but those patients may very well take a while to come back, if they haven't already. I think it would be helpful as people think about 4Q to compare guidance to a 3Q baseline without that catch-up phenomenon that you benefited from? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- You're right. So there certainly is a little bit of a bolus effect from Q3 that I don't think you can normalize between revenue in Q2 and Q3. I think we worked so hard to build the other groups of patients that is -- while it may have a little bit of an impact, I don't have a specific number for you. I don't think it was overwhelming. And I think we are just stressing the confidence going forward with what we did to bring the other patients into the process. And so while, yes, there is a bolus effect from post-COVID, I think the growth that we have in new patients. And remember, though, we also had a little bit of a bolus effect in patients that we're not able to get their final diagnostics or their sleep endoscopy. And so you're going to see more of that in the fourth quarter because just from a process, you can only ramp up so fast and only do so many procedures. And so we have a pretty healthy pipeline of patients and plus, as we mentioned, the number of patients coming into the pipeline remain very, very strong. -------------------------------------------------------------------------------- Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [19] -------------------------------------------------------------------------------- Okay. So I don't want to put words in your mouth, but if I'm paraphrasing what you're saying, it sounds like you view the third quarter as really the culmination of the progress you guys have made on a number of different fronts over the last 12 to 18 months, not an unusual quarter that was really impacted mostly by this pent-up demand phenomenon? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [20] -------------------------------------------------------------------------------- Yes. I think there's a little bit of an element of the bolus effect, but I think it's really the work that the team has been doing, as you well stated. -------------------------------------------------------------------------------- Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [21] -------------------------------------------------------------------------------- That's helpful. And then I'm curious on the ASCs, I think you talked about these national contracts. I mean 600-plus site is obviously a big number. Do you have a sense yet how many of those are realistic targets for Inspire and just sort of a ballpark of what percentage of those could be accounts for you guys in the future? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [22] -------------------------------------------------------------------------------- We've had -- in the past, we've generally just responded to this question kind of saying 1/3 of hospitals and ASCs in the United States are potential candidates to do Inspire procedures. I think when you start looking at these national contracts, we get to work with the marketing group, and they get in the computer and say, okay, who's got ENT? Who does sleep surgery? Who might do vagal nerve stimulation? There's a lot of different experiences. And it really helps us to focus on who we're going to communicate with first to get those sites up and running. And really, because of the national contract, we're through the first step. All we really need to do is get in and make sure the team is formed and get through a training process. So long-long-term is a rough argument, I think we could be at 1/3 of those. But again, I'm being pretty general there. I think it's really about us being focused right now in opening centers at the current cadence that we always have, albeit we're being a little bit more aggressive and increasing our guidance at opening centers. Because we're increasing the size of our training team and increasing our capacity to handle additional centers. So we're not going to -- we're going to stay within our cadence, but we will be more aggressive in opening centers. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Next question, Richard Newitter with Leerink. -------------------------------------------------------------------------------- Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [24] -------------------------------------------------------------------------------- Congrats on the impressive quarter. I wanted to just follow-up on the ASC comments a little bit, specifically in the context of utilization. Your utilization per account, by my math, took a pretty sizable step-up this quarter and it's growing 30% and your implied 4Q utilization per account is looking like it's over 20%, and that's despite 30% to 40% increases in your account base. And that's a big step function up. I was just wondering, is that a function in part of the ASC utilization uplift? And can you give us a sense of what the ASC utilization is versus just the traditional hospital utilization? You referred to 60% as much as triple. So I'm just wondering especially in light of the comments that you could be applicable in 30% ASCs, it would be helpful to know what kind of utilization bifurcation you're seeing between those 2 care settings? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [25] -------------------------------------------------------------------------------- Sure, Rich. I don't think we've really experienced the full impact of ASCs yet. I go back to prior workdays, right, working on my Medtronic days in sacral nerve stimulation for urology and spinal cord stim for pain and even the new some of our other friends like Axonics and Nevro and look at the percent of their cases that are done in ASCs today. Well, until you have reimbursement in place, you can't start down that process. And so 2019, 2020 are the years that we're really able to get that reimbursement locked in, and now we're able to kind of step up a little bit. So now you're seeing the national contracts and gives us the right to start opening up more of those ASCs. And you're right, I think that you can drive higher utilization at those ASCs, especially when you have strong reimbursement that we see with level 5 APC payment as well now with the future increased surgeon payment, I think you'll see that further down the road. Don't have an exact number for you on utilization today. But as I mentioned, ASCs still are only about 15% of our total number of centers. So it's still relatively small, but I think you will see a more significant increase in the number of ASCs as we move into 2021. And the goal would be, to your point, to improve utilization right alongside with that. -------------------------------------------------------------------------------- Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [26] -------------------------------------------------------------------------------- Okay. And then just thinking about your guidance for the fourth quarter, very robust. You're clearly not baking in any meaningful slowdown due to COVID in your momentum, but I appreciate why -- you gave your rationale for that on the capacity side. You don't see [any hospitals able to manage through COVID and better at] dealing with the world as it is today, but how do you tap for what patient willingness will be as we move into these colder months and COVID surges continue to materialize? What was your thinking there? That would be helpful. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [27] -------------------------------------------------------------------------------- What we've been seeing is patients are very motivated and the amount of patients, 3.6 million people come to our website, especially during a stay-home-pandemic period, people realized that quality of life with untreated moderate-to-severe sleep apnea is not good. And their productivity is down. Their relationships are stressed. These are motivated people. They want to be able to find a solution, and they go and they do all this research and they learn about Inspire. And remember, these people have tried and are unable to use CPAP and they've probably benefited from CPAP for a while, but they can't have sustained benefits, so they need to find an alternative. We haven't had a problem with patients really motivated to come back in. There are certainly a group of patients that are a little more timid, they don't -- they want to hold up a little bit longer, and that's just fine. And we're keeping communication with them. But again, a great number of patients really have been motivated to come to website, get educated, go through sleep endoscopy, get their insurance approved and get scheduled for cases, and you saw the significant number of implants in Q3, and we expect that going forward. We don't think there's going to be too much holdback from a patient perspective. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Next question comes from Jon Block with Stifel. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [29] -------------------------------------------------------------------------------- First of all, just on 2020 guidance implied, I think, around 50% to 55% revenue growth for in the fourth quarter, you did over 70% in the third quarter. Maybe some -- not a lot for your comments, Tim, but some of the 3Q was aided by deferred 2Q procedures. I'm just curious, when we think about the 4Q year-over-year revenue guidance, should we think of that more as pure, call it, as sort of the right jump-off point into 2021? Or does that fourth quarter implied guide still have a decent amount of pent-up demand to it? And then I just got a follow-up. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [30] -------------------------------------------------------------------------------- That is a very good question. I don't think we're going to have too much demand leftover after Q4. I think that's pretty much going to be all organic or new patients in the process. And so I think from that standpoint, maybe there's a little bit more of the bolus effect in the fourth quarter, predominantly from the sleep endoscopy diagnostic side than it was from the implant. So yes, I think the way Chris asked that question, too, it's characterized a little bit of the bolus effect in Q3 and setting our plan for Q4. But I think in general, what you're suggesting is probably pretty appropriate, that we think that the pipeline is strong, as we mentioned, we're going to continue with our direct-to-consumer outreach programs, that Advisor Care program continues to grow, the number of patients downloading the Inspire app continues to grow and opening ASCs and driving utilization. And we're just kind of spending on a lot of places, but we'll keep focused on taking care of patients and having strong outcomes. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [31] -------------------------------------------------------------------------------- Got it. Helpful. And I think just to pivot, can you just talk about a couple of your key initiatives on the investment side? I mean they seem to be centered around the direct-to-consumer, the call center that you called out. I know it's early, but are there any metrics or growth figure that you can share? Any qualitative comments on what you're seeing from the DTC markets or what you're seeing from the centers, a subset of centers, that are currently in line with your call initiative? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [32] -------------------------------------------------------------------------------- I can tell you what some of our key performance indices, or KPIs, are in regards to our Advisory Care program. How this works is a patient will call in, and there will be -- somebody at the call center will talk to the patient and answer or ask a few questions to find out if they're a qualified patient, determine what physician they would be best served to. And then they will together contact a center to schedule an appointment. And we want -- like 80% of those calls answered live. We're not there yet, but we expect centers to make sure that when we have a phone number, it's a hot line coming in, we're calling to make an appointment when we have a qualified patient, we expect that we'll be able to make that appointment. KPI #2 is we expect to make that appointment within 2 weeks. And then the final thing is making sure that we can drive qualified patients to the right physician. What I mean by that is if somebody -- we have a lot of patients who call in who have never had a sleep study before and bless them that they're calling in, but they need to see a sleep physician first, get diagnosed for their sleep apnea and then try CPAP, knowing 50% will circle back around in a certain period of time. They need to go to a sleep physician and we can help them there. Other patients are ready to go with Inspire. They've been diagnosed. They've tried CPAP. They have the proper characteristics that we can identify over the phone. And so we set them up with the ENT. So the whole process is set up to improve conversion. And if we can improve the quality of patients coming to an ENT's office, by default, we get to improve the utilization of that surgeon to be able to do performance. The other question that we always pose to surgeons is how many dedicated OR days are you giving for Inspire patients. And when we start out training centers, we said we expect you to do at least 1 dedicated OR day a month. That can give you 2 to 3 implant procedures as well as sleep endoscopy procedures. As we grow, then you can go to 2, if not 3, dedicated OR days a month. The Ohio State University has rebounded extremely strong. Remember, they did 100 implants last year. So we know how to drive capacity, and now we put the incentive in there for our territory managers to help our centers add that capacity. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Next question comes from Bob Hopkins with Bank of America. -------------------------------------------------------------------------------- Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [34] -------------------------------------------------------------------------------- So just a couple of quick things because I know it's getting late. Can you just give us an update? Anything changing on the margin here in terms of the percentage of these cases requiring an overnight stay in kind of the average age of a patient? Just curious if in these COVID times, anything is changing there? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [35] -------------------------------------------------------------------------------- Now that's a really good question. Interesting enough, the STAR trial, which was our Phase III pivotal, the average age was 54. And then the ADHERE registry, which is our post-market study, the average age jumped up to 60. Well, that was really because of reimbursement because it's easier to get Medicare. Now that we got all these commercial cases and commercial cases are still running at 65% of implants and Medicare at 30%, I think we're seeing a little bit age reduction as far as implant procedures. I'm not going to get that number looked up here, but I'm sure it's coming back down. We believe it should be near the 54 years. Maybe there's a little bit of effect from COVID because the elderly population needs to be a little bit safe. And so they're being a little bit careful about scheduling their cases. But we certainly are tracking that. As far as overnight stays, the great majority of our cases are all same-day surgeries. They go home the same day. Very few have overnight stays. Maybe in Europe, the reimbursement is set up such that it's more beneficial to have overnight stays and the majority of patients in Germany do stay in the hospital. But in the U.S., it's outpatient again. That's why it lends itself to such a migration to ASCs. -------------------------------------------------------------------------------- Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [36] -------------------------------------------------------------------------------- And then Tim, one other quick question. Just in terms of the 2 national contracts on the ASC side, can you just give us a little bit of a more detailed sense as to what exactly that means? Do those like set pricing and facilitate contracting as you go into the individual ASCs? Or just exactly what is part of those national contracts? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [37] -------------------------------------------------------------------------------- Absolutely. Well, the key to it -- it's kind of the same thing as with the national health care policies we have or policy of contracts with like Kaiser or Intermountain or Ascension Health that we just signed. And what we do is the key #1 fundamental that we have at Inspire is everybody pays the same price. Period. I don't care if you're an ASC, Kaiser, the Cleveland Clinic or a small hospital in Alabama, everybody pays the same price because that's how we can hold consistency, and that's how we can sleep at night. So ASCs are the same thing. They -- when did their review their diligence, they did the value analysis or the value committee to make sure that it's worthwhile for their ASCs to be able to do these procedures. And then they enter into a contract. And of course, everybody when they do a national contract is certainly going to ask to have a little bit of a discount off the pricing, but we don't do that, Bob. And since 2004, when we got the FDA approval to this day, we stand firm. Everybody pays the same price. And when we negotiate these national contracts, what it is, is it is the value committee. It is the pricing that every center pays. And so now when we go to ASC, we don't have to go through that logistics part of it. Whenever we go to a Kaiser Hospital, whenever we go to Ascension hospital, Intermountain Hospital or all the other national contracts that we have, we just need to form the team, train the team and make sure we understand how to drive patient flow and how to be able to treat patients and have strong outcomes. -------------------------------------------------------------------------------- Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [38] -------------------------------------------------------------------------------- Great. And last quick one. Of all the positive news you guys announced today, which one do you think will have the biggest impact on your business over the course of the next 18 months? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [39] -------------------------------------------------------------------------------- Wow, that's a good question. Being able to manage in a COVID environment, I think, is very significant. We are very careful. All of our personnel carry their own PPE and people recognizing the dangers of COVID and being able to operate in COVID, yet still treat patients and have strong outcomes is tremendous. The coding -- the new code for a surgeon reimbursement, I think, will have a longer-term impact as far as transitioning even further to ASCs. I think the positive coverage policies and the Medicare LCDs is so tremendous. As you know, we talked, Anthem is frustrated, but it's just a matter of time before they write policies. So then what I -- I'm an engineer, Bob. What I get excited about is our technology development, our digital tools, our Inspire cloud, the new patient remote, the Inspire app is really going to play into it. And when we release Inspire 5, that's going to have an impact. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Next question comes from Adam Maeder with Piper Sandler. -------------------------------------------------------------------------------- Adam Carl Maeder, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [41] -------------------------------------------------------------------------------- Congrats on a strong quarter. I'll keep it to one. Just on the OUS business, I know it's a relatively small part of the overall sales number today. But Q3 OUS came in nicely above our expectations. I was just hoping to get some additional color on what drove the nice performance in Europe. I think you mentioned some price benefit. And then just looking forward, how should we think about Europe in subsequent quarters? Would you expect to kind of, I guess, build off this new high-water mark? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [42] -------------------------------------------------------------------------------- Thanks, Adam. I think -- so we had a very good Q3 and back to Chris' question early on, Europe was shut down, too. So Europe also had a little bit of a bolus effect from being able to reschedule those cases. But that said, Andreas, our VP in Europe has been so active in building his team and opening new centers specifically in Germany and finding better ways to improve patient flow in the Netherlands, as in Belgium and other countries, has really set up Europe for future growth. So yes, there's a little bit of a bolus effect, but they also had a very strong quarter. And I think you're going to see that even continuing into the fourth quarter and beyond. We talked about this before that if we can have international revenue hanging around 8%, that means international revenue really has to grow as fast as it's growing in the United States, and we may get some benefit by adding in Japan and then beyond that, Australia and further expansion after that. But the key to it right now is really the European growth. And I think you're going to see some strong changes with a permanent reimbursement in Germany as well as improved flow in the Netherlands in the near future. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Next question comes from Ravi Misra with Berenberg Capital Markets. -------------------------------------------------------------------------------- Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [44] -------------------------------------------------------------------------------- Just one on the coding announcement, Rick, Tim. Just -- it sounds like you're expecting a higher kind of rate based on the RVU selections that may come through next summer. But let's just say, RVUs are held flat. What would be kind of the change -- overall change in reimbursement? Maybe just to give us a benchmark. Then I'll just ask my second question upfront. Just curious to understand how you're accounting for ROI on some of your patient spend in terms of how quickly you expect people to come in. I mean your approval times are being reduced. Your kind of insurance, your patients submitting for prior auths are going up. Just how much of that is kind of related to the spend on advertising? If you could help us tease that out. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [45] -------------------------------------------------------------------------------- Yes, absolutely. Well, that's baseline physician reimbursement today. So right now, the code 64568, the national average medicare payment is $600 to $800. That's for Medicare. Commercial payers are about 1.4x of that, call it, $1,200, right? So it's between $600 to $800 for Medicare and maybe 1,200 -- $800 to $1,200 for commercial payers. And now they get the $450 for the pressure sensor, that's new with the Medicare policies. So they're anywhere between $1,000 and $1,200 for Medicare and then 1.4x that or $1,400 to what is that, maybe $1,600 for a 2-hour outpatient procedure. So that is the baseline, right? So when they do the rep process, what AAO looked at is they looked at the work to dissect down to the vagus nerve and place the electrodes from Cyberonics or I'm sorry, LivaNova implant for vagal nerve stim. And then they compare that to dissecting down, doing the nerve integrity monitor tracking, which nerve, which part of the hypoglossal nerve to place the electrodes because we do some detailed mapping and then placing the nerves on the distal branch of the hypoglossal nerve. AAO felt very confident that the work is significantly higher and will come in at a higher rate. As far as ROI, yes, we're very tightly watching that. And that's a long-term view. The key to it is we don't have very good data from our digital tools today. But as we move forward, now we're getting people coming to our website and they're immediately downloading the app and setting up a communication with us. And then when they're on the app, the app communicates with Inspire cloud. So we can get them into Inspire cloud. We can start tracking patients from the beginning to streamline their process, their Advisory Care program, the call center is just 1 tool to be able to streamline them to get them to the right doctor within a timely period of time. And all of those improve the conversion rates, which, of course, as you know, is going to reduce our cost per acquired patient. And we can look at it in a number of different ways, and we're tracking that very closely, right, the calls per -- the cost per call, the cost per appointment, the cost per implant, and we're tracking that very closely and believe that that's really going to have a strong benefit down the road. When we can continue to improve? Time from contact to implant as well as improve our conversion rates. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Next question comes from Suraj Kalia with Oppenheimer. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [47] -------------------------------------------------------------------------------- Congrats on the quarter. So Tim or Rick, forgive me if I got this wrong. The math is suggesting in the U.S., there were roughly 1,391 patients implanted in the quarter. Am I right on that math? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [48] -------------------------------------------------------------------------------- I don't know. -------------------------------------------------------------------------------- Richard J. Buchholz, Inspire Medical Systems, Inc. - CFO [49] -------------------------------------------------------------------------------- Can you repeat your question there, again, Suraj? -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [50] -------------------------------------------------------------------------------- So the math, if I take your ASPs, it's suggesting roughly around 1,391 patients implanted in the quarter. Am I approximately right? -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [51] -------------------------------------------------------------------------------- Yes, that's correct. Yes. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [52] -------------------------------------------------------------------------------- Okay. Yes. So Tim, I know this sounds dumb and it's late. So please forgive me. 1,233 submissions, 1,039 prior auth approvals in the quarter, so -- and 1,391 approximately implanted. Can you help us tie all of these together? And I guess... -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [53] -------------------------------------------------------------------------------- Well, they don't exactly math tie up because a lot of those -- well, let me answer that one, and then you follow-up. Those don't include Medicare, remember. Medicare don't prior authorize and Medicare is 30% of our implants. So that's one. Number two, they don't include VA or military, and they don't include Europe. And the other key to it, I got to be a little careful because some of those will carry over into the fourth quarter, depending upon when the approvals came in. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [54] -------------------------------------------------------------------------------- Right. I'll just have to think through this, Tim, because I just did the rough math and maybe Medicare is the missing piece, but I'm not sure I've connected the dots yet. Even since Q2 2018, the numbers are suggesting total submissions are roughly 7,870, total approvals are 5,805. So there is a delta here. Maybe I should take it offline because I haven't connected the dots. It still doesn't add up. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [55] -------------------------------------------------------------------------------- Now let's go through it. You've got to remember, you've got a 30% factor in there for Medicare. And that has changed. And remember, VAs, you go on historic here. Remember, VAs used to run at 10%. And then also remember, Europe used to run at 13%, 15%. So that you got a lot of moving targets in that you're trying to calculate. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [56] -------------------------------------------------------------------------------- Right. Okay. Fair enough. Rick, what was the DTC spend in the quarter? And Tim, finally -- and thanks for squeezing me in, what percent of patients in the quarter were already in the funnel versus pull-through de novo new patients, however you want to characterize them? Congrats on a great quarter. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [57] -------------------------------------------------------------------------------- Thanks, Suraj. Let me answer the last one and then have Rick answer the question on the DTC. I think we don't have the specific numbers, but as we talked about early on from Ravi's question as well, the -- we don't know there's a little bit of a bolus effect from the first group of patients that were carried over from COVID. But we also had a lot of new patients in the quarter based on, as you just talked about, with the number of submissions as well as the number of approvals in the quarter. So it was very strong from all fronts as far as those patients coming through. Rick, DTC? -------------------------------------------------------------------------------- Richard J. Buchholz, Inspire Medical Systems, Inc. - CFO [58] -------------------------------------------------------------------------------- Yes, DTC, in Q3, our spend was $6.8 million compared to $4.8 million in the third quarter of '19. -------------------------------------------------------------------------------- Timothy P. Herbert, Inspire Medical Systems, Inc. - CEO, President & Director [59] -------------------------------------------------------------------------------- So very good. So thanks very much. Hey, everybody. I just want to thank you all for joining the call today. I know it's late and appreciate you hanging in there. I remain grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve successful and consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the health care teams for their continued efforts as we return to a strong growth in our business in the U.S. and in Europe, especially in a post-COVID environment. For all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates in the coming weeks and months. Please, stay safe and healthy, and look forward to talking to you very near future. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.