Inspire Medical Systems, Inc. (NYSE:INSP) Q4 2023 Earnings Call Transcript

Inspire Medical Systems, Inc. (NYSE:INSP) Q4 2023 Earnings Call Transcript February 6, 2024

Inspire Medical Systems, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Dilem, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Inspire Medical Systems Fourth Quarter and Full Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be question-and-answer session. I’ll now hand the call over to your first speaker to Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Ezgi Yagci: 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 3 and 12 months ended December 31, 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 2024 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-K, which we plan to file with the SEC on February 9, 2024, 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 of forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, February 6, 2024. With that, it is my pleasure to turn the call over to Tim Herbert.

Tim?

Tim Herbert: Thank you, Ezgi. And thanks, everyone, for joining our business update call for the fourth quarter of 2023. We are excited to report our first quarter with operating income and a very strong finish to the year. We know our focus and discipline on patient outcomes and ensuring that each patient has the best possible experience with Inspire therapy is the foundation of our business and we remain committed to this as our top priority. During today’s call, we will highlight many accomplishments from 2023 that demonstrate our ongoing focus on the patients, including improvements in access to the therapy, technology advancements and planned activities to broaden the population that can benefit from Inspire. We will also discuss our outlook for full year 2024.

We would like to take a moment to recognize two very special individuals, who recently announced the retirement from the Inspire Board following many years of service. Last week, we announced that Dr. Jerry Griffin, who after 16 years on the Inspire Board is planning to retire, following the conclusion of our 2024 Annual Meeting of Stockholders. Dr. Griffin is one of our original directors having joined the Board back in 2008 and has been an inspirational leader throughout our development and commercialization. To maintain the important medical influence on our Board, we recently announced that Myriam Curet, a medical doctor with extensive business and med tech industry experience was appointed to our Board of Directors. Secondly, and just yesterday, we announced the retirement of Marilyn Carlson Nelson from our Board of Directors.

Marilyn joined the Board as Chair in 2018, following the passing of husband, Dr. Glen Nelson, Inspire’s original Chair. Marilyn has had a profound impact on our business and team members during her time on the Board, and serve as a great leader and mentor to me and many others across the organization. In conjunction with Marilyn’s retirement, I am humbled and honored to be appointed Chair of the Inspire Board of Directors and look forward to this added role and continuing to lead Inspire for many years of growth ahead. Finally, the Board has appointed Gary Ellis to the role of Lead Director. Gary was appointed to the Inspire Board in 2019, following an extensive career as Chief Financial Officer of Medtronic. And he currently serves as the Chair of the Nominating and Corporate Governance Committee.

While we will miss Jerry and Marilyn, they will remain in the Inspire family and will always be just a phone call away, and we sincerely thank them for their contributions to Inspire. Back to our review of 2023. The year was filled with many important milestones and achievements. We are excited to announce that exiting the year, over 60,000 patients have been treated with Inspire therapy. We expanded indications and received FDA approval to provide Inspire to pediatric patients with Down syndrome to increase the upper limit of the Apnea Hypopnea Index from 65 to 100 events per hour and to increase the body mass index warning from 32 to 40. With that, let’s review our results. In the fourth quarter, we generated revenue of $192.5 million, representing a 40% increase compared to the fourth quarter of 2022.

Our growth continues to be driven by increased utilization at existing centers and is complemented by the activation of new centers. Fourth quarter US revenue totaled $189.4 million, a 41% increase over the same period last year. International revenue declined 16% to $3.1 million. As we previewed on our third quarter earnings call, during the fourth quarter, we depleted our supply of polyurethane-based leads in Europe, as we are still awaiting European Union Medical Device Regulation or EU MDR approval. We are working diligently to obtain EU MDR approval and as a contingency have received derogation authorization in the Netherlands and Belgium and more recently in Germany and Switzerland. This enables us to ship silicon-based leads in those countries while we continue to pursue EU MDR approval.

Given the strength we are seeing in our business, we are reaffirming our 2024 revenue guidance of $775 million to $785 million, which represents 24% to 26% year-over-year growth over 2023 revenue of $624.8 million. We are thrilled to report our first quarter with operating income, which totaled $9.3 million. Our net income for the fourth quarter was $14.8 million compared to $3.2 million in the prior year period, represented diluted net income per share of $0.49 compared to $0.10 per share in the fourth quarter of 2022. We will continue to focus on operating leverage in 2024 and beyond and plan to move towards steady profitability as we progress through the year. We will provide further guidance following our first quarter earnings. In the US, during the fourth quarter, we continued to increase our capacity to support the strong demand for Inspire therapy by adding 78 new implanting centers, ending the quarter with a total of 1,180 centers.

In 2024, we expect to activate 52 to 56 new centers per quarter. Regarding the US sales team, we created 13 new sales territories in the fourth quarter, bringing our total to 287. In 2024, we expect to add 12 to 14 sales territories per quarter. One of our keys to success is our ability to drive awareness of Inspire therapy through our direct kids to consumer programs. As such, we were excited to launch a new and approved inspiresleep.com website in December, which features increased education on Inspire therapy, including new physician testimonials. After initiating a direct digital scheduling program through our Advisor Care program in 2022, we expanded the program in 2023 to over 100 centers and we’ll continue focusing on this in 2024. We also continue to expand our patient nurturing program through an e-mail campaign to patients who have visited inspiresleep.com or called our ACP and expressed continued interest in Inspire therapy.

Switching over to market access. Our positive fourth quarter results reflect the strong patient demand for Inspire therapy and an increased number of prior authorization submissions, trends that we expect to continue in 2024. Further, we have onboarded a third-party vendor to assist our market access team with the prior authorization process, which increases our capacity to meet a strong and growing patient demand. The market access team has been actively engaging with payers on the clinical indication expansion approvals received this past year. The process involves our team providing payers with the necessary clinical information and requesting implementation into the payer’s coverage policies. We have already been successful with the implementation into numerous policies and expect further progress in 2024.

We continue to make investments in our clinical research, as evidenced by the PREDICTOR study. We completed enrollment of the second subset of 300 patients early in the first quarter and expect to publish results once the full data set has been analyzed. Once results are available, we will work with payers to update their policies to provide flexibility in assessing which patients are ready for Inspire. The PREDICTOR study is designed to assess, if and when an office-based assessment can effectively replace the long-standing drug-induced sleep endoscopy or DISE. This office procedure will significantly improve the patient experience and should unlock physician capacity to perform additional Inspire procedures. On the product development side, our pipeline remains robust.

The team is working diligently on our response to the FDA’s questions on the Inspire V PMA supplement. Recall, the Inspire V system incorporates sensing capability into the neurostimulator using an accelerometer and removes the need for the pressure sensing lead. We are completing system level and production qualification testing to submit to the FDA. With normal review time, we continue to expect approval in a limited market release in 2024, and we are targeting full commercial launch in 2025. Looking ahead to 2024, we will launch our new connected physician programmer in the US called the SleepSync programmer. This will allow physicians to access our programming screens from their own computers and eliminate the need for Inspire provided tablets as part of the physician programming system, paving the way for future remote patient programmer.

We continue to increase the adoption of our SleepSync digital platform and work on enhancements to streamline the patient experience from initial contact through long-term longitudinal management. In summary, we remain focused on patient outcomes and physician education to continue the adoption of Inspire therapy. We will continue to increase utilization at our existing centers while adding capacity by opening new centers. We remain excited about 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 reviews of our financials.

Rick Buchholz: Thank you, Tim, and good afternoon, everyone. Total revenue for the fourth quarter was $192.5 million, a 40% increase from the $137.9 million generated in the fourth quarter of 2022. US revenue in the fourth quarter was $189.4 million, an increase of 41% from the $134.3 million in the prior year period. The primary growth driver in the US was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers, our continuing direct-to-consumer marketing and a higher number of territory managers. Revenue outside the US was $3.1 million, which is a 16% decrease year-over-year. As Tim noted, this was due to the delay of the EU MDR approval that impeded our ability to ship silicon based leads in Europe during the fourth quarter.

The US average selling price in the fourth quarter was $25,000 compared to $24,900 in the prior year period. We expect the US ASP to remain steady at the current level. The ASP outside the US was $19,900 during the quarter compared to $20,400 in the fourth quarter of 2022. Gross margin in the fourth quarter was 85.4% compared to 83.9% in the prior year period. The year-over-year increase was driven by improved manufacturing yields and higher volumes. Total operating expenses for the fourth quarter were $155.2 million, an increase of 34% as compared to $116.1 million in the fourth 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.

Interest and dividend income totaled $5.9 million in the fourth quarter compared to $3.4 million in the prior year period. This higher income was driven by higher interest rates on our increased cash and investment balances compared to a year ago. Net income for the fourth quarter was $14.8 million compared to $3.2 million in the prior year period, representing diluted net income per share of $0.49 compared to $0.10 per share in the fourth quarter of 2022. The weighted average number of diluted shares outstanding for the fourth quarter was 30.2 million. We expect the first quarter weighted average shares outstanding to be approximately 29.6 million. Our total cash position increased by $18 million in 2023 and cash and investments were $470 million at year-end.

The 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. Looking ahead, we expect to generate positive cash flow for the full year 2024. For the full year 2023, revenue totaled $624.8 million or a 53% increase over $407.9 million. US revenue was $606.2 million or 54% year-over-year growth, while revenue outside the U.S. totaled $18.6 million, a 43% year-over-year growth. Moving on to 2024 guidance. With the strong trends we are seeing in our business, we continue to expect full year revenue to be in the range of $775 million to $785 million, representing an increase of 24% to 26% compared to full year 2023 revenue.

We 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 US centers and establish 12 to 14 new US sales territories per quarter in 2024. As a reminder, given the prevalence of high deductible health plans, we have historically seen seasonality in our business in the first quarter. Furthermore, the fourth quarter of 2023 was exceptionally strong based on the recovery from the third quarter. As such, we expect more pronounced seasonality in the first quarter of 2024 compared to historic levels. We expect our improved operating leverage will continue into 2024 and to be profitable for the second half of 2024. We will provide additional details during our first quarter earnings call. In conclusion, our strong performance and business momentum provide us with confidence in our outlook heading into 2024.

With that, our prepared remarks are concluded. Dilem, you may now open up the line for questions.

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] And I show our first question comes from the line of Adam Maeder from Piper Sandler. Please go ahead.

Adam Maeder: Hi, Tim and Rick, I hope you can hear me okay. And congrats on a nice finish to the year and great to see the leverage in the quarter. Maybe just to start on the guidance for 2024 for the $775 million to $785 million, can you just maybe go into a little bit more detail there? How are you thinking about utilization or same-store sales growth? What’s assumed in the guidance around label expansion, the Gen 5 launch? Just walk us through some of those puts and takes and then I have a follow-up. Thanks.

Tim Herbert: Sure. Hi. Adam, I think, number one, I think we’re seeing a trend that same-store sales or the increased utilization at existing centers is the primary driver of our growth in 2023 and we expect that to continue into 2024. We certainly are going to complement that with opening new centers, and we provided the guide on what we expect to open new centers as we get on to the first quarter. But again, we’re going to continue to focus on building ENT capacity and increasing the number of procedures done at existing centers.

Adam Maeder: And any comment, Tim, around the label expansion or the Gen 5 impact in those figures?

Tim Herbert: Sure. I don’t think that Gen 5 will have a big play because we’ll be doing a limited launch of our plan in 2024, and we’re planning for a full launch in 2025. So we’ll have time to talk about that further on. I do think the indication expansions will start to show in 2024, primarily with the high AHI and the pediatric population with Down Syndrome is getting some strong awareness right now. Remember, the high BMI is really driven by mechanism of action, and we use sleep endoscopy today to treat those patients that have tongue-based obstruction and a high BMI with patients who have lateral wall obstructions. That’s where we’re having trouble. In fact, that’s where we’re targeting some of those patients may benefit from a GLP-1.

Adam Maeder: That’s good color. Thank you. And I feel like I have to ask about the leverage this quarter, the positive operating income. I know there’s some seasonal variability to models, but Rick, any constructs or framework you can give to us as we think about 2024 and potential leverage this year. And I heard the commentary earlier, it sounds like that is a focus in 2024, and I think I heard the phrase move towards steady profitability over the course of the year. But I was hoping you could just flesh that out for us in a little bit more detail. Thanks again for getting the questions.

Rick Buchholz: Sure. Thanks, Adam. Yeah, our focus does remain on driving top line growth as we grow the therapy adoption. And we did demonstrate strengthening of our operating leverage in the model. We definitely saw that in the fourth quarter. And we expect to see that. We do have seasonality, which we can touch on later, I guess. But we do have seasonality in the first quarter. But we expect that leverage to improve, and that’s why we stated that we expect that we plan to be profitable for the second half of 2024.

Adam Maeder: Thank you.

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

Unidentified Analyst: Hi, this is Caroline [ph] on for Travis. Thanks for taking my question, and congrats on the quarter. I had a follow-up on the revenue guidance for 2024. If you could just talk about what’s baked into that guidance for the battery replacements that you expect to start coming through this year. So I’ll follow up on the first question. And then a second question here, I heard the reiteration of the limited market release in 2024 and then full launch in 2025 for Inspire V and I wanted to see if you could also give us an update on where you’re at with the submission to the FDA? Thank you.

Tim Herbert: Thank you. Battery replacement is still going to be limited in 2024. We will start to see some of the early commercial patients coming through. We are still seeing patients who participated in the STAR trial still coming through today. But the first year of commercialization was 2014 and add 10.5 years, 11 years, battery life, puts us at 2024 to 2025. So we’ll start to see that coming through in this coming year, but really won’t have a significant impact for a couple more years until we get to larger volumes, but it’s still very promising. As far as Inspire V submission, team is doing a great job. We’re going through just the final testing and documentation to be able to provide that information to the FDA, and we’re targeting the approval for later in the year to provide opportunity to do the limited launch later in 2024, and the team is working hard to be ready to do a full commercial launch in 2025.

Unidentified Analyst: Thank you.

Tim Herbert: Thank you.

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

Unidentified Analyst: Hi. This is actually Lilly [ph] on for Robbie. Thanks for taking the question. On the international business, how should we be thinking about that growing this year in light of some of the supply challenges? And is there a time line that we should be keeping in mind for when you can return to normal levels of revenue and supply?

Tim Herbert: Very good question. Thank you very much. We had our challenges with getting derogation approval, primarily in Germany in 2023. While that approval comes through the derogation does require us to do some labeling changes to identify that product being shipped in advance of EU MDR. So we are shipping product today in Germany, and that’s coming back up. But it’s probably going to take a couple of quarters to get them back to a steady state, but we are very promising movement, both with derogation in those countries we identified but also making progress getting the full EU MDR. And hopefully, we can get that done in the year to be able to provide silicon leads for the rest of Europe.