Greetings and welcome to the Inspire Medical Systems Incorporated Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid from LifeSci Advisors. Please go ahead, sir.

Thank you, Jerry 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 of the company. Earlier today, Inspire released financial results for the second quarter ended June 30, 2019. A copy of the press release is available on the Company’s website. I would 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 expectations of future financial performance, including full year 2019 guidance and our expectations with regard 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 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. The conference call contains time sensitive information and states only as of the live broadcast today, August 6, 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. It is a pleasure to welcome you to our 2019 second quarter earnings call. I’m excited to report that the team’s efforts have again resulted in very strong results. I will 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 second quarter financial results. Following this, we’ll open up the call for your questions. As the reinforcement from prior calls, the team at Inspire and the health care providers that support Inspire therapy continue to be fully committed to delivering positive and consistent patient outcomes for those of untreated obstructive sleep apnea. This has been and will continue to be our mission at Inspire and we believe this will lead to continued growth in therapy adoption globally. Regarding our strong performance in the second quarter of 2019, we continue to execute on our balanced commercial growth strategy, which is primarily focused on the U.S. market and with the objective of first, increasing patient flow at existing centers, and second, training and opening new implanting centers. Let’s get into the 2019 second quarter results. Our worldwide revenue was $18.0 million, an increase of 65% compared to the second quarter of 2018. We added 19 new U.S. centers ending the period with a total of 245. Further, we added 6 territory managers ending the period with a total of 59. At the end of the second quarter a year ago, we had 168 centers and 36 territory managers. We expect that these new centers and territory managers will have a positive impact on our long-term growth and as such, we are reiterating our 2019 goal of opening 12 to 14 new centers per quarter and adding…

Thanks, Tim. We are extremely pleased with our financial performance in the second quarter and first half of 2019. With the expanding market demand, we are experiencing from Inspire therapy, we continue to demonstrate significant top-line growth. For the second quarter of 2019, total revenues were $18.0 million, a 65% increase over the $10.9 million generated in the second quarter of 2018. U.S. revenue in the second quarter was $15.8 million, an increase of 65% over the $9.5 million in the second quarter of last year. Our U.S. average selling price was $23,800 in the second quarter compared to $23,400 in the second quarter of 2018. The higher ASP was driven by adoption of our new sensing lead by implanting surgeons during the second quarter of 2019. In the second quarter, European revenue increased 62% to $2.3 million from $1.4 million in the second quarter of 2018. This increase was volume driven, primarily due to increased penetration in existing territories, the expansion of our European sales reps into new territories, as well as the growing adoption in the Netherlands. During the quarter, the European ASP was $21,900, which was comparable to the second quarter of 2018. Our geographic mix of revenue in the second quarter was 87% in the U.S. and 13% in Europe. Our gross margin in the second quarter was 82.8% compared to 80.8% in the second quarter of 2018. The improvement was primarily due to the introduction of the new sensing lead in the U.S. in February 2019. As we are able to achieve manufacturing efficiencies with both the new sensor and the stimulation leads, which share common materials and processors. Total operating expenses for the second quarter are $23.1 million, an increase of 60% from $14.5 million in the second quarter of 2018. This increase was…

[Operator Instructions] The first question is from Chris Pasquale, Guggenheim. Please go ahead, sir.

Thanks. Congratulations.

Thanks, Chris.

A couple of questions on the reimbursement landscape and some of the positive movement there, curious how many of the Blues plans at this point who have announced positive coverage have actually put that into action, how much of the benefit was that this quarter? Is that still something that you expect to have more of an impact in the back half of the year?

We think it’s going to be more in the back half of the year. We have seen the early experiences and hence that’s why you saw those approval rates take a jump up and the time to approval was significantly reduced. The primary reason for that is we have many of the Blues regional plans now approving at the pre-determination level or the initial submission in just a few days and that’s really driving the average down. The other side, though, as United is just being implemented right now though they still for the most are going through the external medical review. So, I think in the second quarter, we did see the initial benefits from the policies, but I think we’ll see more of that benefit in the second half.

Thanks. And that leads me into my second question, can you just remind us, I guess, each payer is different prior to the positive coverage going into place, how big an obstacle was getting approval at United, how long were they take previously just so can get a sense of how much things shift now that they have the coverage there?

That’s a great point. United had paid for many cases, around – about 300 and 350 cases have been through the United process prior to them writing policy. But the great majority of those would have to go all the way through the external medical reviewer or the third appeal process. So they would tend to be up at the higher range, up at the 90 days or over 100 days for an approval. Now, once we get this national policy in place and implemented that will immediately drive those down towards a pre-determination and we should be able to see those in very few days and certainly on the low end of the approval process. And it will also reduce the number of patients that drop out during the process, as you recall from the earlier discussions. So we think that’s really a positive step and we’re working very actively to get that in place.

Great. Thank you.

Thanks Greg

The next question is from Richard Newitter, SVP Leerink Partners. Please go ahead sir.

Hi, thanks. Congrats on a great quarter.

Thanks, Rich.

I wanted to just ask kind of piggybacking of Chris’ question, the guidance outlook and the UNH policy which really just came late – in the most recent quarter actually so what if anything is factored in from the potential friction reduction in the reimbursement process with that insurer in the back half? Is there anything baked into the guidance outlook or is your guidance outlook mostly just based on 2Q and what you’re expecting with Blue Cross Blue Shield?

Yes thanks on the question Rich. As we have stated before, it’s important that we give guidance that we have confidence in and comfort that we can achieve. We’re not going to make any unvalidated assumptions, such as implementation and immediate impact from the United. United has paid in the past, but as we just got done talking with the question from Chris, they would have to go through an extended appeal process. So until we get that up and running, we really haven’t implemented a lot of that into our numbers. But we’re encouraged by the long-term benefit from where that can go

So still it sounds like the benefits of that could be out in front, maybe even – as we move through the year into next year. And then one other one just on Japan thanks for the update there. I was just curious, if you have any insight as to when you might expect to hear on reimbursement and reimbursement levels? Do you – I appreciate you’re deferring or holding off on any commercial investment for now, but when do you think you’ll have an update there to green light or red light that?

Absolutely. We are working interactively with MHLW. It’s a lot of reviewing the clinical evidence and one impact it can have on society in Japan. We do have meeting set up throughout the summer and into the fall. And I would suspect later in the fall, we’ll get a good feeling for where that reimbursement will be heading. And the key is going to be, if we’re going to be in a position to still move this year; we know that physician societies are actively moving forward, we do have the regulatory approvals, but again it all comes down to the reimbursement level and that’s going to be something that we need to work directly with MLHW and make sure that it’s an appropriate reimbursement consistent with US and Europe. So, hopefully later this fall or even into the fourth quarter, we should learn that value.

Thanks.

Alright.

The next question is from Larry Biegelsen, Wells Fargo. Please go ahead sir.

Hey, guys. Thanks for taking the question. One on the LCD process, Tim, and one on the pediatric down indication, on the LCD process, Tim, could you talk about what the benefit is of positive local coverage decisions? And can you give us some color on the process? Is this a MAC by MAC process? And lastly, any color on the outcome of the CAC meeting that First Coast recently conducted?

Absolutely, thanks for that Larry. The new process that CMS put out lays out kind of a roadmap for the MACs, and again, there is about 9 regional MACs to be able to conduct reviews to prepare LCDs. Now, we believe many of the MACs are actually working in concert with each other to be able to have consistent LCDs, and we believe several of them – you mentioned the CAC meeting that was previously done. That was done by Novitas; Novitas is a Medicare carrier that manages numerous states probably the greatest number of states of any other MACs. They have been leading the review process, and we met with them earlier in the quarter, and then as you mentioned, they had a 4-hour CAC meeting – CAC being Clinical Advisory Committee whereas physicians provided input on the Inspire therapy the clinical evidence and the indication statements around the therapy. So we believe I listened into part of that CAC meeting. We believe it was positive, but then Novitas and the other MACs go in and they work independently preparing the draft LCDs. We believe that they will be coming out in the third quarter. There are several open meetings scheduled for later in the fall that if we are on those agendas that they should be presented in the relative near future. So again, we remain positive with these LCDs, but again, it’s the first time through this process. So we don’t want to make any assurances on that, but we think the feedback to date has been positive.

That’s helpful. And then the pediatric down indication, I don’t think I heard that in your prepared remarks, Tim. What’s the status there? Thanks for taking the questions.

Thank you, Larry. We continue to work interactively with the FDA on reviewing what evidence is available and the FDA also working with the Massachusetts Eye and Ear Infirmary, that’s actually running the trial with some of our support. So we’re going to do is, we’re going to kind of help them increase enrollment in the study and we did have a recent publication out on the second group of patients that shows the benefits continue to be very strong. So we’ll be able to report that later in the year as how we’re doing with enrolling that study, collecting additional data and again working interactively with the FDA. But again our priority right now is to really drive enrollment in the existing study and increase the number of centers participating in the study, thereby developing an established base for the day we get FDA approval.

Tim, just a follow-up on that, do you think you could get FDA approval in 2020 or is that too soon? Thanks for taking the questions

Okay, Larry, I think that’s pretty aggressive. They were in the third quarter right now. I would think that we would have to have more progress. So I do not believe will get approval in 2020 and that will go to – I’m sorry, in 2019, and that will be pushed into 2020.

Okay, thank you.

Goodbye.

The next question is from Jon Block, Stifel. Please go ahead sir.

Thanks. Hey guys. Good afternoon. First question is on sales reps. Tim, you added another 6; I believe roughly 40% of the total reps have actually joined the Company in the past 12 months. So can you talk to where you think they are with their goal of reaching full productivity? And then also with the sort of reimbursement landscape, the burden easing, is that helping sort of free up these reps and allowing them to do other things just as driving utilization at the centers? And then I have got a bit of follow up.

Absolutely. The first question is about maturity of the territory managers and sales reps after being hire and the time to get them to productive levels. Really, that’s a very – has variable, and it’s variable about the state of the territory at which they were hired. Now what we like to do is bring territory managers into territories that have at least 1 or 2 productive centers doing numerous implants already. Therefore, they can spend some other time driving patient flow through those existing centers while they work to open up new centers. In some territories, we don’t have that luxury and so when we bring a territory manager into a new territory, they really have to start from ground-up where they have to develop all new implanting centers so it is quite variable. I think the new reps have been very successful in getting up to speed with their existing centers and then they learned quite well about opening new centers. The burden being reduced in prior authorization, it serves so many people so well. The first part really is about the fatigue factor of physicians and centers to conduct prior authorizations and appeals and peer-to-peer phone calls with medical directors in an ongoing process that in itself limits the energy around bringing new patients into the process. The second, as we used to talk about the approval rates, there was such a high number of patients that would fatigue from the process and would also drop on. And so I think by improving the number of positive coverage policies, obviously, if we could ease some of the burden of the Medicare with some of the LCDs that will have a real positive effect on streamlining when a patient can come in, be diagnosed, work through their insurance, schedule implant and have their implant procedure completed. And I think that really is going to benefit the reps to help drive patient flow we also talked a little bit about changing our website to improve how patients can get through a website to be educated and get connected with a healthcare provider to really streamline the overall process.

Got it. Perfect And follow-up is also little bit of a long question, but if the implied procedures per quarter per hospital, if you will, Tim is only about 3 or 1 a month and I think that’s sort of 1 of the many variables that makes our story so compelling. But maybe if you can just touch on sort of what percent of your centers are below 3 per quarter, what percent are well above the 3 per quarter? And if you were to isolate those that are above average, what’s the common denominator? In other words, is it just time or age cohort or reimbursement or anything that you can point to? Thanks guys.

I want to say, yes. So there is 245 centers and when we look at those, we actually remember how we talk about by class, right. We kind of measure our centers by the year in which they were initiated and we have been able to show consistent growth at every class, the class of 2014, ‘15, ‘16, ‘17, ‘18, and now even the new centers in 2019. We want to show that they can grow year-over-year, meaning we’re increasing flow add centers and of course the key way to do that is to reduce the burden of prior authorizations and improving patient flow. We do still see growth in those centers that started in 2014, which is really impressive. The key to it is capacity, making sure that you have a really strong physician champion and then that champion if it’s ENT really have the time to be able to take care of numerous patients and when we run up towards the maximum capacity of that ENT surgeon, that we train a second surgeon at a site or even a third surgeon and that’s the best way to improve capacity at each of the individual centers. And then the second element that you’ve highlighted is time, they have to get used to educating in centers about having patients flow through. It’s not just the ENT surgeon who diagnosis and implants the patient. It’s also the sleep physician who help with the diagnosis, but also does a lot of the programming and it’s the technicians in the sleep lab, and it’s the process of having postoperative care, which is one of the key projects we have going this year, it’s called project improve where we’re really trying to standardize post-op care and how we work the patients in a very efficient way through the programming practice and be able to have very consistent patient outcomes. So it is about building capacity at centers. It is about having accepting centers so they can accept more and more pay inbound patients, but it’s also about time and experience and building consistent practice. So we have to be proficient at all of those elements.

Got it. Thanks guys.

The next question is from Kyle Bauser, Dougherty & Company. Please go ahead sir.

Hi, good evening. Great quarter here. My first question is, you are now in 245 centers, could you remind me in your assessment, how many addressable centers there are in the U.S. for the Inspire system and what percent of your current active centers are the large academic teaching universities?

Well, we know there is about 4,000 hospitals in the United States. We don’t want to expect that we will be implanting Inspire in all of those for any time in the near future, but the current addressable market is looking around in the key cities, and yes, having a presence in the key academics centers, but what we’re starting to see now is really a ramping of the large private centers or institutions. Kaiser has several hospitals. In California, we have a national contract there. One of the leading implanters is now happens to be, [indiscernible], where Sanford Health is one of the top implanters, but Sanford Health is a large healthcare system. They just open up a second center right there as well. So we’re really kind of migrating down from the academic centers, which are very important, but really open up the large private institutions, which is where we’re going to see a significant growth. I don’t know if we will actively be pursuing the smaller ambulatory surgical centers in the near future. We certainly have a handful of those, but in the immediate, we have well over a 1,000 to 1,500 targeted medical centers that we can continue to train and open, so we have quite a pipeline in front of us.

Got it. And I appreciate the comments on the new sensing lead. This is a little bit in the weeds here, but do you have an updated metric for the percent of customers that have converted to this and also from what we’ve been hearing this new lead should be able to shave off at least 15 minutes from the procedure? I mean, I’m just curious are you seeing this in the field or getting out of feedback on the new lead?

Yes, absolutely. I can safely say, we have 100% conversion globally. And we no longer are selling the old sensing leads. So that’s going to report. It’s good for operations. It’s good for the patients. It’s good for the surgeons. It’s good for the gross margin. So it’s a really win-win even for the manufacturing because, as Rick mentioned, we have shared manufacturing processes, so very, very strong. The new sensing lead actually streamlines the process; it reduces a lot of the suturing that the surgeon has to do on securing the sensor. So, that’s how they able to shave off a little bit of time during the operating procedure. It also has some targets that allows the surgeon on where they can handle the lead and we actually do that by some of the polyurethane is actually colored blue. In that way, it identifies where the surgeon can handle the lead and kind of really streamlines that process.

Okay, great. Thanks for taking the questions.

Thank you very much.

We have a question from Ravi Misra, Berenberg Capital Markets. Please go ahead sir.

Hi, good afternoon. Can you hear me, okay?

Yes, Ravi. How are you?

Hi, I’m good. Thanks for taking the question so, just wanted to piggyback on some of the capacity commentary and questions around that that you’ve been going through. I’m curious, what do you think is the upper limit kind of theoretically per center in terms of procedures that can be done. I know in the past you’ve said some of the higher volume guys are doing 50 or more just curious in terms of the annual capacity there. And then secondly, just one on the guidance, you beat consensus pretty nicely here in Q2 and then raise guide, but you’re still kind of bracketing the street for the back half of the year or to get to your kind of full year guidance, which would seem to me a little bit conservative. If you could just talk a little bit around some of the factors that are informing your outlook for the remainder of the year on the sales front that will be great?

Absolutely. Capacity, we have several centers, as we talked, can do 50, but there is no reason they can’t do 1, 2 cases a week per se to be well over 100 cases on an annual basis. I think the burden of prior authorization and even the Medicare has been successful. There is challenges with sometimes of a case payment is denied, you had to go through an appeal process. It does put a burden on the center and a little bit of a fatigue factor. So we can eliminate those fatigue factors, have multiple surgeons that can perform a procedure at a center and centers that have sufficient operating time – operating room time for the surgeons to be able to do cases. There is no reason why we can’t be well over 100 cases on annual basis both at academic centers, private centers and longer term, at ambulatory surgical centers. So I think we’re aware of the limitations of where the capacity is and it is up to us to really kind of knock those barriers down. And I think if you’re familiar with some of the other neural stem procedures and the volume that they’re able to do at many centers; it is our goal to only open up so many centers on a quarterly basis to be able to maintain strong patient outcomes and really focus on growing capacity at existing centers. That’s why I said even at centers in 2014 continue to grow. I think when you start looking at guidance, and as we mentioned, we want to put our guidance that we have confidence in and we are comfortable that those are numbers that we will achieve, when to get to the next quarter and even for the full year guidance. We have steadfast increased our guidance quarter-over-quarter including increase in the guidance even after the first quarter results, because we did have some success with Blue Cross Blue Shield. We don’t want to get over our skis, Ravi. We don’t want to make assumptions on United Healthcare and some of these other payers until we have evidence that they have been properly implemented and can be adequately built into our financial projections. So that’s why we’re putting our guidance, that we, again, our confidence in. It is a significant increase from where we were at the beginning of the year from where we were at the end of the first quarter and we have confidence going forward with those numbers.

And then if I could just snack one housekeeping question. What was the ASP again on the U.S. department – U.S. business this year – this quarter?

This quarter is $23,800.

Thank you.

There are no further questions at this time. I’d like to turn the conference back over to Mr. Tim Herbert for closing comments.

Thank you, Jerry. We remain quite pleased with the robust pace of growth we are demonstrating in our business while maintaining high quality and strong patient outcomes. Market demand continues to grow for our innovative and effective solution for patients with obstructive sleep apnea who are unable to successfully use CPAP, which in turn is driving our strong financial and operating results. Moreover, the timeline for reimbursement approvals is becoming shorter, as an increased number of commercial payers have issued their positive coverage decision. As always, I’m 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 remains unmatched. Thank you all for joining the call today. We certainly appreciate your continued interest in and support of Inspire, and look forward to providing you with further updates in the second half of 2019.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.