Inspire Medical Systems, Inc. (INSP) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Inspire Medical Systems fourth quarter and fiscal year 2019 earnings conference call. [Operator instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr. Bob Yedid with LifeSci Advisors. Thank you. You may begin.

Thank you, Devin, and thank you all for participating in today's call. Joining me are Tim Herbert, president and chief executive officer; Rick Buchholz, chief financial officer. Earlier today, Inspire released financial results for the fourth quarter and full year ended December 31, 2019. 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 our discussion of operating trends and our expectations of future financial performance, including full-year 2020 guidance and our expectations regarding near and long-term growth potential of our business are based on 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 annual report on Form 10-K 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, February 25, 2020. And with that, it's my pleasure now to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob, and thanks, everyone, for joining us today. I'd like to welcome you to our fourth-quarter and full-year 2019 earnings call. I am extremely pleased to report that we have concluded the year with very strong results, completing a highly successful 2019 for Inspire. I'll provide you with the details around what continues to drive our consistent progress, and Rick will follow with a detailed review of our fourth-quarter and full-year 2019 financial results. Following this, we'll open up the call for your questions. As I do each quarter, I'd like to begin by restating our most important goal, which is that the team in Inspire and the healthcare providers who prescribe and support Inspire therapy continue to be fully committed to delivering positive and consistent patient outcomes for those with untreated obstructive sleep apnea. This has been and will remain our core mission at Inspire and we believe that this will lead to continued growth in therapy adoption globally. Regarding our strong performance in the fourth quarter and full-year 2019, we continue to execute on our balanced commercial growth strategy, which is primarily focused on the U.S. market 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 fourth-quarter results. Our worldwide revenue was $26.9 million, an increase of 62%, compared to the $16.6 million in the fourth quarter of 2018. Our total revenue for the year was $82.1 million, which is a 62% increase over the $50.6 million generated in the full-year 2018. Rick will get into more of the specifics in a few minutes. I would like to highlight that we are providing our 2020 revenue guidance of between $115 million to $119 million. This significant increase in revenue is made possible through the progress we have made with reimbursement, as well as our focus on increased capacity, utilization, and improved conversion of patients seeking therapy. Starting with capacity, during the fourth quarter, we added 33 new U.S. implant centers, ending the period with a total of 299. Further, we created seven new territories in the U.S., bringing our total to 73. We had previously talked about the design of our U.S. sales team. And during the third-quarter call, we highlighted the hiring of four area vice president. We took another step forward in the fourth quarter by increasing the number of regional managers ending 2019 with 14. These new centers and territory and regional managers will have a positive impact on our long-term growth. And with the continued growth in therapy adoption, we are looking to accelerate the initiation of new centers, as well as increasing the cadence at which we are recruiting new territory managers. As such, in 2020, we are increasing our guidance and expect to open between 20 and 24 new centers per quarter. Further, to keep pace, we are also increasing our guidance for field support, and we'll be adding six to seven new territories per quarter throughout 2020. As you recall, in 2019, we guided to a cadence of four to five territories per quarter. As always, we will do this in a controlled manner, ensuring that we hire the right people and open centers in a methodical, well-disciplined approach. For 2020, we made a strategic decision to add an incentive for our territory managers to increase utilization in existing centers versus spending a significant amount of their time, identifying and developing new implanting centers. We already made progress in the fourth quarter, and we'll continue to focus on improving patient flow at existing centers in 2020. As evidenced to the fact, we can also report that each class of implanting center, a class being centers opened in a specific year from 2014 to 2018, have shown year-over-year growth every year, including 2019. With the territory managers adding focus to increase utilization, we must also keep recruiting additional centers in order to grow capacity. This new role of identifying and developing potential centers will now be assigned to four newly appointed area business managers, all four of which have been recruited and were in their position for the start of 2020. To further our focus on growing utilization at existing centers, we need to support these centers with training and implant support. For this activity, we have increased the number of field clinical representatives available for case coverage, ending 2019 with 22, and we will continue to target regions that could benefit from additional FCRs and plan to increase the number of FCRs in 2020. Beyond improving utilization, our other key focus area is improving our conversion rate. We intend to accomplish this objective through several tactics, including leveraging our rebranded website at inspiresleep.com, which launched in July of 2019. In 2019, the total number of visitors to our website was approximately 4.5 million, which is an increase of 95% over 2018. In addition, 519,000 physician searches were conducted, an increase of 22%. Moreover, there were 42,500 physician contacts established via the website, representing an increase of 47%. Yes, with all this traffic, we believe a relatively small percent of patients reaching out to healthcare providers end up with an Inspire system. We continually work with centers to improve their ability to properly manage the inbound request from patients but to specifically address some logistic challenges of handling the patient requests. Inspire will start testing a call center concept in just a couple of regions. We have titled this the Inspire Adviser Care program. The primary purpose of this program is to connect patients with the appropriate healthcare provider based on their specific needs, which, in turn, should improve our overall conversion rate. We have found that many patients' calls to implanting centers simply do not get answer and messages may not be returned or the patient is not available when the return their call. In other cases, patients may not be prepared for an Inspire evaluation as they may not have a current sleep study or may not have had one at all. Therefore, some patients may best be directed to a sleep physician first for a new sleep study, while others would be best served going directly into an implanting surgeon. We will begin testing this advisor care program early in the second quarter of 2020, and assuming success, expect to expand the program throughout the year. We also plan to continue expanding our direct-to-patient strategy and growing the number of potential patients visiting our inspiresleep.com website and helping them become more aware and educated on the benefits of Inspire therapy. We remain focused on broadening these efforts to correspond with the growing number of U.S. implanting centers. In addition to the inspiresleep.com website and evaluating the use of a call center, we continue to expand our TV advertising initiatives. We are currently airing commercials in nine markets. We are continuously measuring the effectiveness of TV advertising and intend to selectively expand our TV advertising initiatives further in 2020. The marketing team will also continue their existing outreach programs, as well as targeting local markets with radio, Facebook, Google ad placements. So let's switch gears to market access or reimbursement, where we continue to execute on our two key strategies, which are to expand the number of positive written coverage policies, and concurrent with this process, continue to obtain individual prior authorizations. First off, let me begin with the significant progress recently achieved with Medicare where all seven Medicare Administrative Contractors or MACs have now published draft local coverage determination or LCDs. Moreover, five of the MACs recently announced following the standard public comment periods and formal review meetings, the effective release dates for their final policies of either March 15 or April 1. One other MAC, Palmetto, serving several states in the southeast, is expected to announce their final release date in the near future. The remaining MAC, Wisconsin Physician Services or WPS, they cover six states, published their draft policy and conducted their public review meeting, a couple of weeks ago. It will take several months to complete the review period. We expect this move to final LCD in 2020. The important point is all seven of the coverage policies or LCDs are consistent in terms of patients' inclusion criteria for therapy and physician qualifications. Once all seven final LCDs are issued, Inspire will have 100% Medicare coverage across the United States, which includes approximately 40 million Medicare patients and an additional 20 million with commercial Medicare or Medicare Advantage. In addition, we continue to experience substantial growth in positive coverage policies, specifically, we currently have 52 positive coverage policies for Inspire therapy, representing approximately 165 million covered lives. This includes 29 of 36 Blue Cross Blue Shield plans, as well as seven previously unannounced plans. During 2019, we added 40 plans, representing 136 million covered lives. As important to reference, we ended 2018 with 25 million covered lives, and we had approximately 45 million covered lives on this date back in 2019. We continue to work with all the remaining payers in the U.S. who have not yet written coverage to encourage them to conduct in-depth reviews of all the published literature documenting the clinical evidence of Inspire therapy. We expect that our momentum with these positive coverage policies will continue throughout 2020. Turning to the prior authorization metrics, let's review how the new positive coverage policies have improved these metrics. In the fourth quarter of 2019, our internal reimbursement team supported 988 prior authorization submissions. This compares favorably to the 639 submissions in the fourth quarter of 2018 and has also a substantial increase from the 812 submissions in the third quarter of 2019. Much of this increase is the result of the reduced reimbursement hurdles, specifically, the time to gain commercial insurance approvals but also as a result of our enhanced patient outreach program, including TV ads. In terms of prior authorization approvals, 751 patients received an approval in the fourth quarter of 2019. This represents a substantial increase compared to the 395 approvals in the fourth quarter of 2018 and is also a solid increase from the 672 approvals in the third quarter of 2019. Regarding prior authorization success metrics, we ended 2019 with an overall approval rate of 78%. And for those patients that completed the entire appeals process, the approval rate was about 91%. As a comparison and to highlight the positive effect of the new coverage policies, the overall approval rate in 2018 was 59% and 77% for those patients completing the entire appeals process. Importantly, in 2020, we will continue to report on these prior authorization metrics. But as we have said previously, our long-term goal is to reduce the burden of individual prior authorizations by working with commercial payers to develop positive coverage policies. Thus, given the growing number of positive coverage policies at commercial health plans, in addition, to the progress achieved with Medicare, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. We do not intend to continue to report on them after this year. Regarding our international activity. I discussed on our last call that the increase in patient flow at several of our key centers in Germany and the Netherlands resulted in additional attention from the commercial payers. And as we said, could happen, impacted implants in a few centers in the fourth quarter. In Germany, this was addressed with the new law that took effect at the beginning of the year that basically prevents insurance companies from not reimbursing therapies with the NUB designation. Most of the effective centers, which are in the southern part of Germany have already begun implanting in 2020. In the Netherlands, there is a physician oversight committee that was required to recruit new members late in 2009, thereby stopping case reviews in the fourth quarter. The recruitment for the committee is complete, and the committee is, again, reviewing and approving Inspire cases, and there have already been several implants in 2020. We continue to drive toward a reimbursement decision in Japan and remain actively engaged with the authorities to work to a decision on the reimbursement of Inspire therapy in that country. We remain confident in achieving a mutually agreeable solution that could allow us to perform the first Inspire implants in 2020. We are also making progress with the regulatory authorities in Australia. We expect to receive regulatory approval in that country within the next 12 months, and we are working on reimbursement concurrently. Here in the United States, we are focused on adding the pediatric population to our label for Inspire therapy. We recently met with the FDA to discuss the most appropriate path forward. Following the FDA meeting, we are confident that the pediatric approval could be received this year. It was a busy year for the further development of Inspire Clinical Science. Of primary note, in 2019, we surpassed 100 peer-reviewed publications since the inception of the company. The key publications in 2019 focused on real-world and long-term evidence, including the Adhere 500 and Adhere 1,000 patient papers, the three-year follow-up of the German post-market study and a meta-analysis showing consistent benefit across multiple studies of Inspire therapy. We also addressed several specific populations, including a paper on the Medicare population, which was key to the positive movement in coverage for this group, an update on the study of adolescents with Down syndrome and a cost-effectiveness model in Europe. There are also comparison studies published of Inspire therapy compared against CPAP, as well as versus robotic tongue-reduction surgery. The team remains committed to understanding the science and applying this knowledge to the continued improvement of Inspire therapy. Inspire has set the bar high for what quality of evidence is acceptable for approval and subsequent adoption, and we will work diligently to improve the already strong results. As a new announcement, a testimonial to the strength and quality of the Inspire clinical evidence, the Veterans Affairs and Department of Defense, last week, released their updated clinical guidelines for obstructive sleep apnea. For the first time, Inspire therapy is a recommended therapy for those patients who are unable to gain benefit from CPAP. This is significant as the most common sleep surgery, UPPP, uvulopalatopharyngoplasty, is not a recommended therapy primarily due to the limited clinical evidence. Switching gears again, Inspire's product development team continues to work to improve the patient experience, while maintaining and enhancing therapy outcomes. This is a very important initiative for the company, and we continue to make significant investments to further advance our technology. The Inspire cloud project, our cloud-based patient management system continues to progress with the addition of many centers in the U.S. and in Europe, who are using this tool. In the very near future, we will announce the launch of the Inspire app on patient's smartphones, which will take the next step in involving the patients in managing their OSA, as well as create interconnectivity through Inspire Cloud. We also have active projects to improve the physician programmer and the patient remote control. Longer term, the design activity for our fifth-generation Inspire neurostimulator is ongoing. As if I have said previously, we anticipate that this will be a multiyear effort to develop the Inspire 5 device and gain regulatory approval. We are actively conducting feasibility trials with several technology innovation, which will make the Inspire 5 neurostimulator state-of-the-art and will significantly improve the performance, including simplification of the Inspire procedure. In summary, we are thrilled about the direction of our business. To reiterate what I have said before, our primary goal is to generate the highest therapy outcomes possible for patients. We continue to execute a focused growth strategy, and at first, increasing penetration at existing centers; and second, expanding the number of implanting centers, as well as adding territory managers. Along with our focus on improving utilization and our conversion rate, further advancements in reimbursement, including Medicare, that build upon our recent positive coverage decisions, a growing body of clinical evidence and a robust R&D platform, we are confident that we remain well-positioned for long-term success. With that, I'd like to turn the call over to Rick for his review of our financials. Rick?

Thank you, Tim. We are extremely pleased with our financial performance in the fourth quarter of 2019. With the expanding market demand we are experiencing for Inspire therapy, we continue to demonstrate significant top-line growth. For the fourth quarter of 2019, total revenues were $26.9 million, a 62% increase over the $16.6 million generated in the fourth quarter of 2018. For the full-year 2019, our total revenue was $82.1 million, a 62% increase over the $50.6 million of revenue generated in the full-year 2018. U.S. revenue in the fourth quarter was $24.9 million, an increase of 68% over the $14.8 million in the fourth quarter last year. This increase was both volume-driven from existing territories, as well as the addition of new implanting centers. The U.S. revenue for the full-year 2019 was $73.7 million, an increase of 66% over 2018. In the fourth quarter, European revenue increased 14% to $2 million from $1.8 million in the fourth quarter of 2018. European revenue in the full-year 2019 was $8.4 million, an increase of 35% over 2018. Our U.S. average selling price in the fourth quarter was $23,800, compared to $23,300 in the prior-year period. We expect the U.S. ASP will remain at approximately $23,800 for the foreseeable future. During the quarter, the European ASP was $22,400, compared to $21,500 in the fourth quarter of 2018. Our gross margin in the fourth quarter was 84.2%, compared to 80.7% in the fourth 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 simulation leads, which share common materials and processes. Total operating expenses for the fourth quarter were $32 million, an increase of 75% as compared to $18.3 million in the fourth quarter of 2018. This increase was primarily due to investments in the expansion of our sales organization, as Tim highlighted, as well as increased direct-to-patient marketing programs, continued product development efforts and general corporate costs. Our net loss for the fourth quarter was $9.1 million, compared to a net loss of $4.8 million in the fourth quarter of 2018. The diluted net loss per share for the fourth quarter of 2019 was $0.38 per share, compared to $0.22 per share in the same period last year. At December 31, 2019, our cash and investments totaled $156 million, compared to $188 million at December 31, 2018. With our strong cash position, we do not have any current plans to raise additional capital. Turning to guidance, we expect full-year 2020 revenue to be in the range of $115 million to $119 million, representing growth of 40% to 45% over full-year 2019 revenue of $82.1 million. Historically and similar to other elective procedures, we have experienced some seasonality in our business and expect this trend to continue. In the U.S., we have noticed higher procedure volumes in the fourth quarter as patients with high deductible health plans seek to schedule a procedure prior to their deductibles resetting at the start of the year. We do expect that there may be some seasonality in our business during the first quarter of the year, although in the past, this seasonality has been masked by our growth of the addition of new territory managers and implanting centers, as well as the underlying adoption of Inspire therapy. Turning to gross margin guidance, we expect the gross margin for the full-year 2020 will be in the range of 82% to 84%. The weighted average number of shares outstanding for the fourth quarter was 24.1 million. We anticipate the weighted average number of shares for the first quarter of 2020 will be approximately $24.3 million. In summary, we ended the year with significant momentum and are pleased with our strong financial performance in 2019. We are confident that our balanced growth strategy positions us well to continue delivering strong results. With that, Devin, could you please open up the call for questions.

Absolutely. [Operator instructions] Our first question comes from the line of Richard Newitter with SVB Leerink. Please proceed with the question.

Hi. Thanks for taking the questions guys, and congrats on a great quarter. I have a couple here. Maybe just to start with the guidance, I'm curious if you guys have specifically contemplated any of the kind of positive developments, specifically with Medicare likely coming on board. And moving past the first quarter, of course, to what extent is that contemplated in the guide and/or any other potential insurers falling your way? Or is this pretty much achievable with just what you have in place, and obviously, you and Rich, came onboard in the second half last year?

Well, with the guide, we certainly put forward a significant growth going into 2020, and that's going to require a significant work from all the territory managers, the entire sales and marketing organization, as well as the whole Inspire team. We have the Medicare policies, five of the seven becoming formal March 15 and April 1. We have the sixth one in Palmetto is still a little bit of an unknown. And the good news is Wisconsin Physician Services, the last six, did, in fact, publish their first draft. So we don't really have a lot of -- we slightly count on an uptick of Medicare, but we don't build in a lot of risk-based on the unknown. So when we put our guidance forward, we really want numbers that we're going to be confident in achieving. And if we can have some success with Medicare, that should be able to help us really achieve that.

OK. That's helpful. And then just two more Medicare. The BMI and HI kind of criteria, can you just remind us how that all stacks up to where some of the other insurers have been coming in? Is it consistent, or is it a little bit higher, at least on the BMI side? And then Rick or Tim, the Medicare population, just broadly, that has sleep apnea or is on CPAP, just remind us what that is relative to private insurance and how much does this open up the flood gate for you guys.

Absolutely. Thanks. Thanks for bringing that up. As far as Medicare, they did a real detailed review of the clinical evidence, as well as the history of implanting patients even in the Medicare population. Their BMI is different. Remember, the FDA does not have a BMI requirement in the FDA indication, but many of the insurance companies started their policies out with a BMI equal or less than 32. When Medicare came out with their new policies, and again, all the policies are consistent, they raised the BMI to 35, so that's really good news for those patients. And we expect that the commercial policies will, in turn, follow that lead. From an AHI standpoint, they do have the minimum AHI of 15, but I don't believe they have an upper limit. They do have the upper limit of 65, so the range is 50 to 65, which is exactly the FDA indication, which is great. That's super. As far as the population, we know that there's 40 million Medicare patients out there. It's hard to estimate how many of those are specifically on CPAP or candidates. But if you go with the standard literature saying, basically, 4% of the female population, 8% of the male population that would be about 4.8 million to 5 million Medicare patients with moderate to severe obstructive sleep apnea is just a rough guess.

Our next question comes from the line of Chris Pasquale with Guggenheim Partners. Please proceed with the question.

Thanks, and congrats on a great finish to the year, guys. Tim, I wanted to start with the sales force changes. So you're incentivizing the territory managers to focus on same-store growth but accelerating the pace of new center adds. And I appreciate that you have some dedicated resources focused specifically on identifying new sites, but can you talk about how easy a process that is? What your visibility is? I mean, it has 33 in the quarter, was certainly kind of eye-opening, and you're talking about 80 to 100 basically for next year. So do you know where you need to go? How much of a lift is it to get these new sites up and running?

Absolutely. Thanks. It takes time to get center is still up and running. And let me give you two examples. A new hospital system that has no experience with Inspire, we have to go through the whole value-add committee, we have to train all the whole system, which is great and important thing to do, but it takes a little bit of time. Those could take anywhere still from four to six months to be able to initiate those centers and have them implanting the product and take care of patients. We're getting to the point now we are also in the large healthcare systems, such as Kaiser, such as Advocates, such as several others that we are just opening an additional center or an additional hospital. Therefore, we don't have to go through the front-end value-add committees, and we can really focus on just the training of the staff and getting them ready for patient flow. Those we can get done quite quickly in two to three months. And so it varies a little bit, but we do have line of sight for centers in the pipeline, and so we have confidence early in the year. And then the new four area of business manager, somebody termed them as hunters. They are hunting for new centers. We'll really be able to step in to start driving the new centers for the second half of the year.

That's helpful. And do you have updated thoughts on what the universe of sites looks like for this therapy, who the appropriate centers are and how far along in the process of penetrating that group you are at this point?

Well, as we said, we just ended the year with 299 centers. There's 4,000 whatever hospitals in the United States. I don't think we will ever get to a point when we're at all of those. But if we assume we could get to 1,000 hospitals, that shows we're just scratching the surface at that level of facility. But we have a handful of ambulatory surgical centers as well today. And as things evolve with the reimbursement and physician reimbursement, I think you'll continue to see an uptick in ambulatory surgical centers, which even further increases the number of centers. So I believe we're very, very low on the penetration scale as for the number of centers that will be offering Inspire therapy.

Our next question comes from the line of Larry with Wells Fargo.

Hi. Thanks. It's Blake calling in for Larry. I just want to find out -- I'll start with going back to the revenue guidance. And to be clear, you assumed Medicare uptick in your 2020 guidance, but it sounds like you're not assuming additional private payers picking up coverage in that guidance.

We don't kind of -- yes, we don't have a line of -- yes, the answer is correct. We do expect Medicare to increase and be a better participant in revenue. As an example, Florida. Florida, remember, we have the negative Medicare policy, and really, until the end of 2019, we haven't done Medicare cases in Florida since 2015, since they had that negative policy. With the formal policy coming out, I think you will see an uptick in Medicare, which is exciting. We don't want to take any risk on Anthem. Anthem, we believe, is doing reviews. They're the last big hitter out there with 40-plus million covered lives. And we know that they're reviewing it. And we certainly expect that we will obtain coverage, but we just cannot predict when that will happen. So no, we have not included that in our assessment. Patients with Anthem still can get the therapy. They can still get approved, but they have to go through the prior authorization process. There are several other smaller plans. Well, they're not that small, Florida Blue, Blue Cross Blue Shield, Minnesota, Cigna, Humana. So we still have a ways to go, and we don't take risks on when those companies will be running their policies.

Got it. But would you -- even though it's not in your guidance, is it realistic for you to expect at least a couple of these would issue positive coverage this year?

Yes, let me talk about that for a second. If a payer has Medicare Advantage policy, the Medicare Advantage, their commercial Medicare is governed, Medicare and commercial Medicare. The Medicare Advantage policies have to respect the government, Medicare or the policies that the MACs put out. The good thing is also the MACs are very consistent policies that sets a very consistent criteria for Medicare management of Inspire patients across the U.S. And so therefore, that will help push some of those payers like because they certainly have to respect the Medicare Advantage part of their business, and we believe that will continue to help them great policy on the commercial side.

Great. That's helpful. And then just moving on to spending. And I know you don't give spending guidance, but it sounds like you're obviously continuing to add more feet on the ground. You have a call center that you're exploring. And then obviously, there's TV ads, which sounds like you're looking to expand in 2020. Any color you can provide on how we should think about the incremental costs in 2020?

No. We're going to continue to increase our marketing spend, as you highlighted there. We kind of put our guidance on what we want to do for increasing our U.S. sales team, and we will continue to invest in our product development, as well as our clinical research. And yes, we're putting out guidance on overall spend, though.

Okay, fair enough. And if I can just ask one more, actually. You mentioned the guideline from BA and Department of Defense, which is positive. What do you think that does for medical society guidelines? Should we expect any sort of impact or movement there in 2020?

We know the American Association of Sleep Medicine or AASM is, in fact, working on their guidelines. I'd like to optimistically expect that they will come out every year, although that is a slow process. And the last time they have updated their guidelines is 2008, so we continue to push them very hard. I would certainly love to see them come out with updated guidelines in 2020, and I will certainly pass that note along to them, but we'll see if they actually get it done or not.

Our next question comes from the line of Travis Steed with Bank of America. Please proceed with the question.

Congratulations on a great quarter. I just wanted to touch on the focus on increasing utilization. It's been around one procedure a month for a while now. And just kind of curious on what the main limiting factors there on increasing utilization are and where that could go over time, some of your high-volume centers are doing today.

I think, reimbursement, Rob, there's several factors to this. But the No. 1 factor is the burden of reimbursement. And Travis, you've been with us for a long time and been tracking. You remember the time it takes to get a prior authorization approval that has been still reduced from over 100 days. I think the median is like 25 days at the end of 2019. And so to expect physicians to really invest a lot and putting a lot of patients in the prior authorization pipeline where they can't do the procedure and generate revenue for three, four months, that's asking a lot. And now with the positive policies, they can get approvals in just a few days. And so when they diagnose a patient and they find that the patient is a good candidate, they can go ahead and say, this schedule, your surgery. And while we're waiting for the surgical, they will go ahead and get your insurance approval. So first is burden of reimbursement. The second step comes down to a Medicare payment. Now Medicare, for the most part, pays the centers, but Medicare before policy was pretty strict on physician payments. And I know a couple of physicians that quoted that they only get paid for 50% of their Medicare cases. Well, if they only get paid, what the average payment can be a $600 to $1,000 for Medicare theory only getting 50% of their case is paid for, that means, again, $500 on average. We can only expect those physicians to do so many Medicare cases. With the policies in place, they now have assurance that they will, in fact, get paid. And so that reduces the revenue risk for both hospitals and the surgeons. And if I can take it one step further, we have an initiative working with CMS. Now that Medicare has the positive policies, we can work with the MACs, as well as with CMS, to get payment for -- remember that Category 3 code, that 04660. We can now request payment for that, thereby increasing the surgeon payment, and so it makes it a little bit better for their time spent. So several factors are going to keep driving increased utilization. And then on top of that is we need to look at the capacity at individual centers. And if there's challenges with not enough time or if the surgeon just simply doesn't have enough time because they do other things during the day as well, we can train another second or even a third surgeon at sites. And if you look at most of the top implanting centers, they do have multiple surgeons capable of doing the procedure.

All right. That's helpful color. Just would also love some comments on some of the DTC advertising you're doing, how you're measuring the return on investment. And are you thinking about accelerating that investment? And also on the peds Down syndrome opportunity, just can you remind us what the size of that opportunity is?

Got it. Start with direct-to-consumer, so we really watch the TV closely. As we talked about before, we have three TV markets in the third quarter. We upped that to six markets in the fourth quarter. And now we just reported, we bought that to nine markets, different markets. We rotate the markets at which we're running the ads, and we see an immediate increase in web activity. Now what we want to do is take the next step on that. And in time, we're going to be looking to make sure that we can track the return on investment. But the acquisition cost is not that significant with the TV, based on the number of inbound that we get. We continue with the radio that's been our most effective to date, as well as Facebook and Google ads, so we'll continue to push that. But we track it really closely, and we think it's been quite beneficial to date. As far as the pediatric goes, we're working with the FDA. Right now, we're a study in pediatric population with Down syndrome. That's a relatively small population, and it's pretty spread out, so we want to work with the FDA to see if we can get an indication for the entire pediatric population. And if that doesn't work, we'll tighten up the inclusion criteria. And we submitted everything back to the FDA. It's back in the FDA's court right now. They're working on it. They are active with us. They're asking us questions. And we should know back in the next one to two months where we stand with that, but we think it looks pretty positive.

Our final question comes from the line of Jon Block with Stifel. Please proceed with the question.

Hi, guys. This is Tom on for John. Thanks for taking my questions. I guess to start with Japan, the expectation of a limited launch this year. What are the next steps once that begins? And then are there any sort of objectives or targets you have in mind there as we enter 2021?

Yeah. Let me start at the beginning here. So we have full regulatory approval of all the latest products, so that's really good news. Four physician societies are full support and have written letters of recommendation to the MLHW, Ministry of Health, Labor and Welfare, which is the reimbursement arm of the Japanese government. They have pressure to be able to move forward and get the reimbursement level set, but we expect that the reimbursement level should be equal to the average global price in the United States and in Europe. And we've let them know that. And so we're working with them to get to that point. I think what we're looking for until we know what that reimbursement number is, we're not making significant implants and or significant -- sorry, significant investments in Japan. We have not entered into an agreement with any distributor. We may use some hybrid between a direct approach, along with support from another distributor. We do work with the physician society, so we know the first, probably, 10 hospitals that we will want to go to and the surgeons who will be doing the procedures in those cases. We are working with the sleep society, so we have not set our goals on that until we know what the reimbursement level will be. We didn't talk anything about China today. We're careful about supply. We think we're pretty comfortable from that standpoint. Although a lot of the people in the MLHW, Japan is concerned about the virus, and we've lost many of our reviewers to the concern of the virus. Remember, Japan has the Olympics coming up, and so they are spending an extensive amount of time on that. So we do have another meeting the first week of March with the MLHW. We hope to be moving that forward at that time. And we remain very optimistic because we think it's either the second largest or the third largest market between the United States and Germany, and we really are excited to kind of get started with them, but we are going to take it in the same cadence, whereas we're going to make sure we protect the same positive outcomes that we have, both in the United States and Europe, as we move forward.

Got it. That's really helpful. And then, Rick, one for you. With U.S. growing faster than international and having a little bit better of a gross margin profile, can you just talk about that in context of 2020 gross margin guidance being roughly flat, I think, versus 2019?

Yes. Historically, we do not do annual price increases, and so we really only adjust our pricing. We have a technological breakthrough that's why we're providing guidance on our ASP of being really consistent with what we're incurring there. Our margins were 84% in the fourth quarter. Again, we don't want to make any unvalidated assumptions as we move forward. But we think the gross margins are strong between 82% and 84%, and that's what we're comfortable in guiding that right now. The U.S. is growing faster, and we're investing most of our dollars, obviously, in the U.S. market. But with the standard pricing we get, we still feel really comfortable with the 82% to 84% margin.

Great. Thanks.

We have reached the end of our question-and-answer session, and I would like to turn the call back over to Mr. Tim Herbert for any closing remarks.

Thank you very much. We remain focused on maintaining a healthy growth rate for a business and while always driving for high-quality and strong patient outcomes. Currently, market demand continues to expand 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, an increasing number of commercial plans continue to issue positive coverage decisions, and the Medicare LCDs, once finalized, should meaningfully benefit our business this year. As always, I'm grateful to the growing team of dedicated Inspire employees for their enthusiasm and continued motivation to achieve strong and consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. 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 coming months. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.