Greetings and welcome to the Inspire Medical Systems, Inc. First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to hand the conference over to your host today, Mr. Bob Yedid. Thank you Bob, you may now begin.

Thank you all for participating in today’s call. Joining me are Tim Herbert, President and Chief Executive Officer and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the first quarter ended March 31, 2019. A copy of the press release is available on the company’s website. I’d like to remind you on the call that management will make forward-looking statements within the meaning of the Federal Securities laws. All forward-looking statements including our discussion of operating trends and our expectations of future financial performance including full year 2019 guidance and our expectations with regards to near and long-term growth potential of our business 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. See our filings with the Securities and Exchange Commission, including our quarter 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 May 7, 2019. And with those prepared remarks, it’s my pleasure to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob. And thanks everyone for joining us today and I am pleased to welcome you to our First Quarter 2019 Earnings Call. In the first quarter, we came out of the gate with a strong performance across all aspects of our business. I’ll provide you with the details around what is driving our continued progress. And our CFO, Rick Buchholz will follow with a detailed review of our first quarter financial results. Following this, we will open up the calls for all your questions. To begin, the team at Inspire and the healthcare providers that support Inspire therapy continue to be fully committed to delivering positive and consistent patient outcomes for those with untreated obstructive sleep apnea. This have been and will continue to be our mission at Inspire. And this will lead to continued growth and therapy adoption globally. Before we get to the operational results for the first quarter, I’d like to acknowledge several important milestones that we recently achieved. First, last week was the one year anniversary of Inspire becoming a public company. Second, last week was also the five year anniversary of the U.S. FDA approval to allow us to begin marketing Inspire therapy in the United States. And finally, a few weeks ago, we announced that the 5,000 patient had been treated with Inspire therapy since the inception of the program. Treating the 5,000 patient represents a significant accomplishment for Inspire and is the result of many years of dedicated efforts and persistence from our very talented team. We continue to obtain additional coverage policies, develop and launch new products, penetrate new markets and enhance our director-based initiatives all of which will put us in a position to maintain the significant momentum in our business as we move towards achieving our 10,000 procedure…

Thanks, Tim. We are extremely pleased with our financial performance in the first quarter of 2019. We continue to demonstrate significant top line growth, a strong indication of expanding market demand for Inspire therapy in the U.S. and Europe. For the first quarter of 2019, total revenues were $16.3 million, a 62% increase over the $10 million generated in the first quarter of 2018. U.S. revenue in the first quarter was $14.4 million an increase of 64% from the $8.7 million generated during the same period in 2018. This growth was due to continued market penetration in existing territories, the expansion of our U.S. sales reps into new territories, increased physician and patient awareness of our Inspire system and a greater number of prior authorization approvals. Our U.S. average selling price was 23,400 in the first quarter of 2019 which is roughly the same as the first quarter of 2018. In the first quarter, European revenue increased 46% to $1.9 million from $1.3 million in the first quarter of 2018. This increase was volume-driven primarily due to increased penetration in existing territories. The expansion of our European sales representative into new territories as well as the establishment of reimbursement in the Netherlands. During the first quarter, the European average selling price was 22,300 which was consistent with the first quarter of 2018. Our geographic mix of revenue in the quarter was 88% in the U.S. and 12% in Europe with a slightly lower revenue concentration in the U.S. market as compared with the fourth quarter of 2018. Our gross margin in the first quarter was 82.4% compared to 77.2% in the first quarter of 2018. The gross margin for the first quarter of 2018 was lower by 2.7% primarily due to an excess inventory charge of the previous generation of…

Thank you. [Operator Instructions] Your first question comes from Richard Newitter with Leerink Partners. Please go ahead.

Hi, thanks for the questions and congrats on a nice quarter, guys.

Thanks, Rich.

Tim Herbert One. I have a couple here. I wanted to start off maybe Tim or Rick for both of you. The guidance. You had a very good first quarter, it looks like you raised the guidance a little bit to reflect the outperformance there but you have a lot of tailwinds out in front of you from BlueCross BlueShield that really haven’t even begun to hit. I think a lot of these are going into effect, some of them May 1 of this year, so talk to us a little bit about how you’re contemplating the BlueCross BlueShield effect so to speak. How are these approvals materializing relative to your original plan, are they coming in about in line with the timing of when you would have expected to see them and how have you factored that into the outlook even beyond the 1Q outperformance which you really didn’t have much BlueCross BlueShield effect. Thanks.

Fantastic, Rich. Thank you very much. And we realize most companies do not adjust revenue guidance after just the first quarter but we reported strong revenue in the first quarter of $16.3 million, a 62% increase over the same quarter and we also added 20 new centers and added seven new territory managers which exceeded our target. But as you mentioned, with the 24 new positive coverage policies in the first quarter. As well as we noted in the improved prior authorization approval rates and the associated reduction in times. It will result in increase in implants and unit sales over the balance of 2019. There remains questions of implementation of these positive coverage policies once they’re published. And we’ll closely track the timing and be in a better position to report back on the implementation after the second quarter. We do think, we want to put out guidance. That we are comfortable with. And that we can achieve. And we’re not going to make an unvalidated assumptions in regard to the implementation of these new policies. But I also want to show optimism that I believe, we will continue to see additional policies both from the Blues as well as from other independent payers that will come online throughout 2019, giving us potential to get these implemented. Continue to improve the prior authorization approval rates and reduce the timing. And come back and revisit guidance as we proceed through the year.

Okay that’s helpful color. I mean, just summarizing, is it fair to say that for now you haven’t kind of gone out of your way with your upwardly revised outlook to incorporate the full benefit of all the – of all the plans that you’ve seen for the impact in 2019 and you’ll update that when you have some more information in 2Q, so for right now, you are still kind of providing of guidance with respect to what you’re seeing is the benefit from Aetna. And if there’s extra juice so to speak from BlueCross BlueShield that’s probably not reflected yet.

We’ll see that in the coming future. We need to kind of watch the metrics and watch the data as these policies are put in place and what effects they have on the approval rates and the time to approval and the timing of implants. And to be able to make sure we measure that correctly whether we move through the year.

Okay. And I think you quantified Aetna as a percentage of approvals in the last two quarters increasing but in the kind of low teens or the mid teens percentage of approvals. Can you give us roughly that metric for the first quarter and maybe talk to any – any changes in what you saw from the Aetna trend between 4Q and 1Q. Thanks.

No, I think the good news is that those trends remain consistent and we’re seeing those Aetna approvals in the – in the low teens and mid teens and that’s consistent with the number of covered lives that Aetna represents in the U.S. and it has had a strong impact certainly in reducing the time to approval. And we certainly expect that that will continue moving forward. And we’ll continue to see growth in the number of Aetna cases going forward.

Okay. One last one. Tim, you mentioned twice I think in your opening remarks that in addition to the Blues, you expect several other payers to come on board in 2019. What – are those smaller regional independent payers or potentially one of the – one of the bigger ones that you’ve had your sight set on. And then on that topic, can you talk about whatever discussions you’ve had with those bigger payers. Thanks.

Certainly. I think one example is Medical Mutual of Ohio is not a Blues plan. It’s a regional plan in Ohio while more so than beyond just Ohio. But it is a significant player and another independent payer that reviewed and wrote a positive coverage policy. The team continues to work with our contractors and our consultants and with all the large payers and I think, it’s – you’ll continue to see a cadence of the regional plans come through. But as we don’t have specifics obviously on what some of the larger payers are going to write their policies but we are in communication with everybody, making sure that all the latest information is available for them, for their reviews and we encourage them to do interim or mid-year reviews of all of the clinical evidence because as we have previously discussed that if we wait for just the annual reviews, it’s very difficult because they have such a magnitude of information to go through.

Thank you.

Thank you. Your next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Hi guys. It’s Adam Metaron on for Larry. Thanks for taking the questions. My first question just any update on the two different medical society guidelines and the potential inclusion of hypoglossal nerve stimulation. What else do the societies need for inclusion. And then I had a follow up.

Fantastic. The American Academy of Sleep Medicine actually just put out a recent document talking about guidelines. And they’ve actually have a team working on that. We do believe that the surgical guidelines are in later stages of preparation and should be starting the review process. This week, we have the International Sleep Surgical Society meeting in New York. And I think, we’ll be able to get an update on that. They have not published any dates for publication of those guidelines. But we do know that they are in process and that they are making good progress as – as well.

That’s helpful, thanks. And then for my follow up, just wanted to ask about maybe a competitive market update, Nyxoah received CE Mark approval in Europe recently. So how does their system compare to Inspire and how are you thinking about competitive share dynamics. Thanks for taking the questions, guys.

Absolutely. Thank you very much. Nyxoah is a new up and coming company. They have not put – published any data as of yet. We do believe they’ve completed a small feasibility study of just a few patients but the data hasn’t been released yet. So they have a little bit more work to do as far as clinical evidence. So their system is quite different than Inspire. I don’t think, we’ll get into that details on the call here, although we are encouraged that they did get CE Mark. They have completed a trial. Where we will await the data. And as I mentioned before, it’s a very significant market size and having other people investing and studying technology in this field is only a positive. So we’ll leave it to Nyxoah to continue with their data. ImThera was acquired by Livanova and again maybe this weekend, we’ll hear an update from them. But I think they are in the stage of planning to start another trial.

Thanks for the color.

Thank you.

Thank you. Your next question comes from Chris Pasquale with Guggenheim. Please go ahead.

Thanks and congrats on another great quarter, guys. Tim, I want to ask couple of questions about the – the Japanese launch, and the opportunity there. First, just the cadence of what you guys are trying to do as you roll out. What are you hoping to accomplish this year in terms of physician training or other metrics. And what’s the gating factor to start getting more aggressive with the commercial launch.

Yes, it’s great question. Thanks. We want to do it in a very controlled cadence, to use your term. The first step is of course the regulatory hurdles in getting cleared and getting all the products approved. Really, the second gating item is getting the reimbursement and what the Japan authorities or the PMDA, again that’s the FDA of Japan. What they have done from the outset is formed a medical advisory committee to help the introduction of Inspire into Japan to make sure it goes to the proper centers, the proper cadence and – and is provided to the correct patients. And they built this committee with three societies; sleep, ENT and cardiology because that’s where lot of the comorbidities of untreated sleep apnea fall. And that the group has done well. Their very first step going back through the previous question is to write and publish therapy guidelines on how Inspire will be used. And those guidelines have been drafted and they are in final review. The final stamp of approval comes from MLHW which is the reimbursement arm. And then what we expect to see, the next step after those guidelines is to work with the authorities to identify the reimbursement levels for Inspire therapy in the country. Once we have those established, the committee or the advisory board has already identified the top hospitals to start implanting. We’ve already discussed the training methodology which is going to be very consistent with what we do in the United States and in Europe and we’ll continue to progress towards a formal launch in 2020. But we do expect that the first implants will in fact happen later in the year in 2019.

And do you have a sense at this point what those guidelines say. Do you expect them to be similar to what we see with like an FDA label or are they more prescriptive, more restrictive about who’s going to get access to it.

It is prescriptive on who’s going to get access to it. And we believe they’re right in line with what the FDA approval is. And with the PMDA approval, again the Japanese regulatory approval is right in line with the FDA parameters. So we don’t expect any changes there. We’ve been in contact with the advisory committee. We provided significant amount of input for their review as far and including our training programs and we believe a lot of that has been well received by the authorities.

And then for my follow-up, just the pace of new center additions has picked up over the past couple of quarters and it seems like the timing of that coincided with the Aetna approval. Wondering if that’s just coincidence or whether you’re finding centers more receptive to starting an Inspire program now that that reimbursement bottleneck is starting to loosen up.

I’d like to think that that would help. I think more realistically, we’ve also been increasing the number of territory managers at the same rate as we’ve been opening up new centers and by doing that we’ve added or increased our capacity in the United States to handle additional centers. As we talked last quarter, we increased the number of regional managers to nine thereby providing capacity in entire organization to keep adding territory managers and be able to build and scale the business. And so I think what you’re seeing is more of us scaling the business more so than it does anybody getting too excited about one payer writing policy although that has a significant impact on the risk to physician fatigue from going through multiple appeal cycles. So it’s kind of little bit of a combination.

All right thanks.

Thank you, Chris.

Thank you. Our next question comes from Jon Block with Stifel. Please go ahead.

Thanks, guys. Good afternoon. Maybe two for me. First, Tim, can you talk about the onboarding process of the Blues, certainly you have many Blue reimbursement wins over call it the past three to four months, I guess where I’m going with this is, is each one unique or are you able to incorporate learnings. So in other words are you able to ramp that tenth Blue a lot quicker than you would the first couple.

Yes, we do learn in our implementation process what the stumbling blocks are. The difficult is each of these regions happens in a different region and there’s the local learning that they don’t have the same shared learning that we get working across all regions, across the country. Most of the indication parameters are consistent. There are variations such as some of them have AHI going down to 15. Some of them have AHI at 20. Some of them incorporate the pediatric indication. Some of them incorporate a upper limit. Some of them incorporate BMI. So there is a little bit of variation from each policy. Once we get these all in place and get these implemented, our job is then to be circling back to kind of standardize the Blues policies across the board to make sure that they cover the same – same patients from one region to the others. But as far as the Inspire team working with regional plans, we can work in regions and be able to talk about what – what trips up other region, so we can share the learnings from that standpoint. And so we should become quite efficient in implementing those new – new policies.

Okay got it. Very helpful. And then maybe just to shift gears but stay somewhat high level. Can you also Tim, talk about just how your direct to consumer marketing initiatives have evolved relative to call it six or 12 months ago. I mean, now you’re closing in hopefully soon 100 million covered lives. What are you doing differently or what are you thinking of doing differently with the ramp in covered lives and just still very deep pockets from a balance sheet perspective. Thanks for your time, guys.

Fantastic – absolutely. Jon, if you go back to our discussion several quarters ago, we talked about how we are reinventing our – some of our direct to patient marketing efforts inside the company and we brought on a new team that was really focused on data management and really understanding the consumer more so than just the classic medtech marketing. And this group has done an extensive market research late Q4 and into the first quarter and have identified the key market segments that are the most attractive to Inspire through our outreach programs. We are in the process now of reidentifying ourselves and rebuilding the website to improve the training, the information sharing with potential patients and improving the methods at which they can connect with healthcare providers. And we’re excited about this but we’re also being a little – we are holding back a little bit because we look forward to rolling this out aggressively in the second quarter and you’re going to see a lot more of this in Q2 and Q3 but we do stay on top of all the metrics that we’re seeing on the web. The increased web activity is a reflection of smaller interim changes we have made. It also the – the expansion of the number of centers and the expansion of the number of territories in turn also expands our outreach, so we’re obviously getting more hits just from increasing our capacity.

Perfect, thanks for your time.

Thank you. Our next question comes from Bob Hopkins with Bank of America. Please go ahead.

Hello, thanks very much. And can you hear me, okay?

Yes Bob, how are you?

Great, I’m good, good. Good afternoon.

Thank you.

Congrats on the progress. And I just wanted to ask one quick question. It’s kind of similar to some of the others that have been asked but just either quantitatively or qualitatively, can you give us a sense as to kind of your – your backlog in terms of sort of physicians interested in opening practices and just trying to get a sense for the kind of enthusiasm level for the clinical community, a little bit of an update there. I mean, obviously things are going well but just anything you can do to help us understand how that momentum is building, would be great?

Yeah that’s, you kind of nailed it right there, Bob. With – I mean, it goes back to the question about what has Aetna done to improve it. Well, it’s not just the Aetna, now it’s the Blues. Now it’s our added capacity, the number of territory managers and that certainly has excited the number of physicians who want to participate. We made a reference to the International Sleep Surgical Society meeting this coming weekend in New York and the number of physicians there all do sleep surgery and all want to be a part of – of the program. And so what’s important. Number one step, when we look for new center is to have a physician champion that’s excited about the therapy is willing to go through the steps to make sure that they recruit the necessary people in the center. A good sleep physician. Support from the hospital CFO. Support from the hospital staff to go through the trainings to be able to not only be successful with one or two patients but to really to build programs and have consistent patient focus – consistent patient flows is what’s so important about improving the learning of the entire staff which drives patient outcomes. So your answer to your question is simply, yes. We’ve had a significant increase in the number of centers that want to participate. And as we talked previously, this probably goes back almost one year or two year, our – when we started the IPO process, it can take six months for a new center to get up and running. And so we’re building that backlog but we’re also building our internal capacity to be able to support the development of the new centers. And you’ve seen the results of this. I think, we reported in the fourth quarter opening 22 centers and here in the first quarter, we are reporting 20 new centers. So we’re exceeding our targets. And we’ve been careful to make sure we also increase the number of territory managers that we’ve added to be able to think up. So we don’t get ahead of ourselves in any which direction. So we think the process – prospects going forward are quite high. We think the positive coverage policies will continue to grow and that reduces the burden of patients getting access to the therapy. And as I previously mentioned, kind of reduces the risk of physician fatigue from dealing with all the multiple appeal process to getting insurance approval.

That’s – that’s very helpful. And one other sort of follow up along those same lines is what are you hearing out in the field in terms of the average length of time to do one of these surgeries, is that improving over time? Again just trying to think of ways to sort of ease the – ease the burden and reduce friction in the system. What are you hearing in terms of as doctors get trained and as doctors get experienced, the time to do on these procedures, how rapidly is that coming down?

We think, we think on average, it’s about two hours and we’ve been showing clinical results and publish those that after a surgeon gets experienced doing several cases that they’re around the two hour time in a whole patient setting. I think that’s an appropriate amount of time. I think, there’s some surgeons that can do the procedures quicker than that. I think, it’s more important to get the procedure done correctly and consistently and from that standpoint, we don’t encourage doctors to go fast. We encourage doctors to be accurate. And if I can use the term precision medicine, now is the time to use that to make sure that they’re careful on where they place the electrodes on the nerve. Careful, how they place the pressure sensor, follow the proper procedure, so the patient has the highest probability of a strong outcome. And the battery life is 11 years without any recharge. So patients can have this therapy for a long time, so take your time upfront, two hours in the grand scheme of 11 years is minimal. So we don’t encourage physicians to run too fast. And we also don’t believe two hours is a overburden for the surgeons to do one of these cases.

Great. Thank you very much.

Thank you. Our next question comes from Kyle Bauser with Dougherty & Co. Please go ahead.

Hi, good evening. Great quarter, here. Can you hear me, okay?

Sure, can. Kyle, you are right down the street in Minneapolis.

That’s right. Thanks. So I know you’ve been working on various initiatives to track outcomes and patient satisfaction, whether that’s through the registry or the cloud patient management system. And you’ve mentioned one of the goals is to see what’s working at one center versus another. Just curious, I mean from what you can tell so far, if you look at some of the high performing hospitals with the best outcomes. Is there anything that’s been interesting to you that they’re doing differently perhaps in the surgery itself or the titration process or follow up protocol or anything?

That’s a really in-depth question. We have a session starting this week. Again I keep referring to the International Sleep Surgical Society. This is all the leading physicians that implant Inspire, converge in New York for this meeting this weekend. And it’s really a big opportunity for us to get them together and say, look, we know what’s working right. That’s all great. But what areas do we need to spend more time on. Where do we focus our attention on the surgical implant or the programming of the device or the patient selection. We also have our own internal metrics that we get to bring from the registry as you mentioned from our quality system and we get to bring that to the same meeting and have doctors look at that, and look for pathways to even make the therapy better than it is today because we never want to be satisfied where we’re at. We always want to strive to take it to the next level because as I mentioned, how many times, our mission is about strong patient outcomes because that’s what’s going to drive the therapy adoption long term. You also refer a little bit to our vision of what the cloud can be and our cloud-based patient management system. And the key is if we can collect data on the great majority of patients to be able to track what centers are doing best, what centers are having some challenges that are the teaching opportunity. We can only further improve the therapy. And so instead of kind of digging in, we’re getting the physicians involved upfront. They’re the ones that implant the therapy. They’re the ones that know best and they’re really open to partnering and they’re really be able to improve this. And we’re working from a product development standpoint, our training team, our field clinical research team to be able to collect the data and really build a program that continues to show either greater progress.

Great thanks for the color there. Right now, I know your focus is on academic and high volume centers, so achieving that Category I code for the Sensing Lead, isn’t all that pressing really but can you talk about how you build that application up over the coming quarters specifically. You know, sounds like since it wasn’t paying anything, no one was really coding that the CPT Category III code very much. So going forward, what do you think you’ll need to do sort of differently to get clinicians to actually code that to build a track record?

I think, a lot of the – most centers actually do code that – that key code if you will or the Category III code and so there is some track – traceability to it but as you mentioned for a hospital there is no additional payment and certainly for a surgeon today as a T code there’s no additional payment. So there’s not a lot of incentives for them to really get that code in place but once that converts to a Category I code, the Society will conduct a ruck survey to be able to collect data from the surgeons to determine how much work was involved. And from that they can develop the [indiscernible] is the relative value units to assess what the payment on that code should be. So even though they’re not coding it right now, it doesn’t really have effect long term because they can do a formal survey program once it’s converted to a Category I. The challenge for us is how do we get that to get to a – to convert that to a Category I. So we’re going to continue to talk about that again this weekend because a lot of the surgeons here are also the leading surgeons that are part of the AAO, American Academy of Otolaryngology that own those codes and they will be the ones that will be submitting it this year for another review at the – May meeting with the intent of getting that approved to go to a Category I code. So again, I don’t think it’s going to have an impact over the short period of time but you are correct, it’s on our horizon that we need to get that converted to a Category I, get the ruck survey conducted and get that property valued.

Got it. Okay, great. Thanks for taking the questions.

Thank you. Your next question comes from Ravi Misra with Berenberg Capital. Please go ahead.

Hi, great. Thanks for taking my questions. So I just had one, I guess on your comments on driving more patients to the centers. I was hoping, you could help – help me understand – help us understand kind of what’s the seasoning, if we, if we think about maybe the first hundred centers that you set up, how many cases are they doing? And do you set that as a guide for these new centers that are coming up or where can the cap be on this for what are your expectations on that? And then maybe secondly, congrats on all the reimbursement progress you’ve been making. I’m just curious. Kind of the Medicare population is still a relatively large one. Any thoughts and ideas on how to maybe approach an NCD going forward or in the future. Thanks.

Thank you, Ravi. The first question is one of my favorite subjects and what we actually do is we group all the centers in the year at which they were activated and we measure each group individually like the class of 2014, class of 2015, 2016, 2017, 2018. And we look at the progress year-over-year and what we’re showing that every class continues to grow year-over-year going forward. Even the class of 2014. And what’s important to note is the great majority of centers that started in 2014 still implant the product today. Now that’s pretty good. Now we do have some centers drop off for reasons such as the surgeon moves to a new center. They weren’t able to really get the program up and running and so they decided to not pursue it further or we decided that what it’s not in everybody’s best interests that that center continues. And so we do have just stop centers ourselves. So there’s multiple ways and that happen that happens very rarely. Now in the theme of continuous learning, the centers and how we train them in 2014 have continuously evolved over the years and we’ve learned what – what are the traps to be able to limit patients coming on board and being successful. And the key is making sure that you have a good physician champion. We talked about that earlier, making sure that we have a good solid identified team who can handle patient throughput. So when we do some patient outreach and we drive patients to a center that they’re able to accept the inbound and be able to handle that patient flow. And we’ve done much better with training that and implementing that in the later years such that when centers open up in the last…

Great. Thanks so much for those detailed responses.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Tim Herbert for closing remarks.

Thank you very much. Again, we remain quite pleased with the robust pace of growth we are demonstrating in our business while maintaining high quality and strong patient outcomes. As our financial operational results indicate market demand continues to grow for innovative and effective solution for patients with obstructive sleep apnea, who are unable to successfully sleep. As always, I am grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve strong and consistent patient outcomes. The Inspire team’s commitment to patients remain unmatched. Thank you all for joining the call today. We certainly appreciate your continued interest and support and inspire and look forward to providing you with further updates as we move forward in 2019.