Inspire Medical Systems, Inc. (INSP) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inspire Medical Systems' Second Quarter 2021 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid, with LifeSci Advisors. Thank you, Bob. You may begin.

Thank you, Paul, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the three and six months ended June 30, 2021. A copy of the press release is available on the company's website. I'd like to remind you that on this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements including, without limitation, operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year and quarterly 2021 financial and operational outlook and improvements in market access are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC today, for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, August 3, 2021. And with those remarks, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim?

Thank you, Bob. And thanks everyone for joining the call today for our second quarter 2021 business update. In January 2021, the team worked through our normal seasonality, as well as the resurgence in COVID-19. And in February and March, the team Inspire delivered exceptional results providing the confidence for us to significantly increase our 2021 revenue guidance. As this momentum has continued, we remain focused on our commercial execution. Recently, we received clarity on the reimbursement front with the publishing of CMS’ proposed 2022 payment rules, which will be an overall positive for our business, especially when considering the impact of the FDA approved to incision implant procedure. More on these important developments shortly. Let's begin with a discussion on revenue, in the second quarter of 2021, we generated worldwide revenue of $53 million, which was an increase of 335% compared to the second quarter of 2020, which of course was impacted by COVID. This growth was driven by several factors including the increased capacity at new and existing centers, increasing patient demand for Inspire therapy, our ability to improve patients' access to care with their advisor care program, and finally, the positive reimbursement environment for Inspire therapy. With the availability of multiple vaccines, the impact from COVID was insignificant to our second quarter performance. Of course, most recently, the emergence of the Delta variant has led to an increase in COVID cases. And this has affected a small number of our centers primarily in the Southeast U.S. With that said, we continue to have confidence in the outlook for our business in 2021, due to our strong performance in the first-half of the year, the positive trends in implant activity, and the planned expansion in the number of implanting centers and new territory managers. As such, we are increasing our full year 2021 revenue guidance to a range of $210 million to $213 million, from our previous guidance of $192 million to $196 million. This guidance represents an increase of 82% to 85% over full year 2020 revenue of $115.4 million. As always, I would like to reiterate that our primary focus remains on the patients to ensure that each and every one has the best possible outcome from Inspire therapy. With that, let's jump into the details surrounding the second quarter, beginning with capacity. During the quarter we added 63 new U.S. implanting centers, ending the period with a total of 535. This was well above our prior guidance of adding 36 to 40 new centers. We continue to experience a growing demand for new centers and physicians, seeking to add Inspire therapy to their practices. As an example, in the second quarter, we executed a national pricing agreement with community health systems, a publicly held hospital system with 84 hospitals and 30 ambulatory surgical centers across 16 states. With this continued strong demand, we are increasing our guidance and now expect to open 48 to 52 new centers per quarter for the remainder of the year. This increase in new centers includes a growing number of ASCs, which have increased at a slightly higher rate than the addition of hospitals. ASCs which offer a more efficient care setting now make up 19% of our total U.S. centers. This compares to 16% at the end of 2020. We will continue to add both hospitals and ASCs and expect to see a growing percentage of Inspire procedures being performed in ASCs. Regarding the U.S. sales team, we created 13 new sales territories in the second quarter, bringing our total to 130. This is above our guidance of adding eight to nine new territories, and we expect to maintain a strong pace throughout the remainder of 2021. Therefore, we are increasing our guidance, and now expect to add 10 to 11 new territories per quarter during the second-half of the year. We also increased the number of field clinical representatives by adding 10, ending the second quarter with 61. Further, we remain dedicated to scaling, our sales management and training teams to optimize our ongoing expansion and focus on strong patient outcomes and center productivity. Regarding productivity, historically, about 50% of our growth has been from opening new centers, and about 50% was from increased procedures at existing centers. For the year 2020, however, this was skewed heavily to the growth from opening new centers driven by the pandemic limiting procedures at existing centers. As expected, we have experienced a significant rebound in the first-half of 2021, with a great majority of our growth coming from increased procedures at existing centers. However, we need to be careful comparing these results to the first-half of 2020, as again, that period was impacted by centers shutdowns following the onset of the pandemic. That said, we expect growth between new and existing centers to be more balanced throughout 2021. Our second key area of focus is to improve our ability to assist patients interested in Inspire therapy, by making a connection with a qualified healthcare provider. Our outreach programs continue to be very effective in generating interest in Inspire therapy, primarily through the Inspiresleep.com website. For the first-half of 2021, the number of visitors to our website was over 3.2 million, an increase of 21% year-over-year. In addition approximately 49,000 physician contacts were established via the website through the first six months of the year, representing a significant 77% year-over-year increase. This increase was largely driven by our refreshed outreach programs, including new TV commercials, which began airing in January, along with a substantial increase in participation and community health talks about inspire therapy. A very important aspect for improving a patient's experience with Inspire is to continue to broaden our call center concept, the Inspire Advisor Care Program, or ACP. We ended 2020 with approximately 180 of our centers utilizing the ACP, answering about 25% of calls to physicians. Today, we have about 400 centers on the ACP, receiving almost 60% of the calls. Just yesterday, we launched the second version of our ACP, which included changing to a new vendor. This vendor provides improved scalability, patient communication and data tracking. Our plan is to continue to expand the ACP to most of our centers by year-end. This will enable the great majority of patient calls be answered through the ACP. Our initial experience is that the ACP provides a more efficient pathway for patients to learn about Inspire therapy, and make an appointment with a qualified healthcare provider. With that, I'd now like to reiterate the importance of our two incision implant procedure, which received regulatory approval in the U.S. in March 2021. Importantly, this procedure eliminates the need for a third incision, which significantly reduces the average procedure time for Inspire therapy, while providing additional therapy benefits. The FDA and European approvals were supported by a clinical study comparing the two incision approach to the original three incision procedure. The results show consistency in the safety and efficacy of the therapy, and reduce surgical time to just under 100 minutes on average, which was a 26 minute reduction. In the real-world clinical setting, we have seen even greater reductions in procedure times. From a practical standpoint, this savings and procedure time may allow surgeons to add another Inspire procedure in a single day. As previously, most surgeons would typically limit scheduling to two cases per day. In the United States, surgeon training for the two incision procedure has been completed, and 99% of all cases, now utilize this approach. There's a good transition to reimbursement and coding. As many of you know, Inspire therapy now has a dedicated CPT Code 645X1 that cannot be utilized by competitors and will ensure reliable reimbursement. The new code will formally take effect on January 1, 2022. And in the last few weeks, CMS announced the proposed 2022 payment rules for physicians, as well as for hospitals and ASCs. First, in regards to the proposed physician payment, back in early 2020 Medicare reimburse physician $635 per Inspire procedure via the existing CPT category one code 64568, which was originally developed for vagal nerve stimulation. Then, in June and July of 2020, the Medicare Local Carrier or MACs issued local coverage determinations, providing coverage for Medicare payments, and then these LCD has provided for an additional payment of approximately $400 for placement of the pressure sensor. However, Medicare would often provide only partial payment or not at all, depending upon the site of service. Therefore, the new dedicated CPT code will resolve these issues that physicians commonly experience regarding payment. The proposed physician payment, if approved, would value the Inspire procedure at $870 as a national average Medicare payment, with reasonable adjustments, the range of Medicare payments will be between $800 and $1,050. We will work with CMS during the common period to potentially improve the rate at which RV use are reimbursed. But we are pleased with the proposed physician payment, as CMS accepted the recommendation from the Rec Committee, which conducted a survey of surgeons experience with the Inspire procedure to specifically measure the amount of work required. Further, a new category one code was also approved for the drug induced sleep endoscopy procedure. This payment will increase from $68 in 2021 to $114 in 2022, a 67% increase. Regarding facility payments, the positive news is that the new CPT code continues to map to the same level five neuro ambulatory procedure code or APC. The CMS proposed payment for this APC increased by 3% for a national average Medicare payment of just over $30,000. For ASCs, we believe the recently announced draft facility reimbursement was calculated by CMS without the reference to the extensive claims data that exists for Inspire therapy procedures. Specifically, there is no history with the use of the new code 645X1, as all prior reimbursement procedures were coded using the prior base code 64568. We intend to meet with CMS at the August panel review, provide all the claims data on the procedures that took place in hospitals as well as in ASCs. Our goal is to ensure that the final reimbursement level for Inspire procedures in ASCs is appropriately established. For reference, the 2022 national average payment proposed for the original base code 64568 reflects an increase to just under $25,000. On the commercial insurance policy front, as of May 20 Anthem is now providing coverage of Inspire therapy. Importantly, Anthem was providing approval through the prior authorization process and conducted a mid-cycle review of the Inspire technology, resulting in this positive coverage policy serving 42 million. Anthem is the last large carrier to issue coverage of Inspire therapy, and inclusive of Medicare brings our total to approximately 260 million covered lives in the United States. Moving on, Europe also had a very strong quarter driven by increased procedure volumes, particularly in Germany and the Netherlands. We expect growth of Inspire to continue in Europe, especially as there has been very limited impact from COVID recently. As a reminder, effective January 1 2021, Inspire therapy is now integrated into the German hospital reimbursement system with a formal DRG, which represents another positive indicator for a European business. Further, we will be adding additional centers in the Netherlands after positive changes in the reimbursement policy in that country. In Japan, the formal listing of Inspire therapy in the Japan national health insurance payment listing occurred as expected in June. Moreover, our exclusive distribution agreement with Japan Lifeline, a leader in the distribution of innovative medical technology in that country is off to a strong start. Even with a difficult COVID situation in Japan, we continue the large planning and are holding joint marketing and regulatory committee meetings with JLL. We are prepared for the first physician training course and continue to plan for the first device implants by year-end, and intend to commence formal commercial efforts in Japan beginning in 2022. Switching gears to R&D, similar to the past three quarters, we increased our R&D expenses year-over-year, as we continue to invest in enhancing our technology platform. The Inspire Cloud, our cloud-based patient management system continues to expand with the addition of a substantial number of centers in the U.S. and in Europe, who are using the tool. Further, the second version of the Inspire sleep app was released for use on patients' smartphones. This app interfaces with Inspire Cloud and allows physicians to collect clinical data from patients directly. The next step is connectivity with the Inspire device and to this end during the second quarter, we submitted to the FDA, the new Bluetooth enabled patient remote. This new remote will collect data from the implanted system, which will then be uploaded to Inspire Cloud via patient smartphone. We are targeting a commercial launch of the new patient remote following FDA approval later in 2021. Longer-term, the design work for our fifth generation Inspire neurostimulator continues to progress. Once approved, we expect Inspire V to be commercially available late in 2023. The Inspire V device will utilize existing form factor with plans to maintain the average 11-year battery life, without the need for recharging. The Inspire V neurostimulator will provide several enhancements, and most notably will eliminate the pressure sensing need. All sensing will be inside the neurostimulator using an accelerometer to measure the respiratory waveforms. Over the years, we have demonstrated the benefits of closed loop stimulation, and shifting this enhanced sensing capability internal to the pulse generator will make Inspire V, the state of the art neurostimulator. In summary, we continue to experience significant momentum in all key aspects of our business. Implant trends remain highly positive, recent reimbursement updates will have a beneficial impact on our business. And the positive coverage decision from Anthem was an important recent achievement. Also, our enhanced outreach efforts are facilitating additional connections between patients and qualified physicians. Moreover, we continue to be well-positioned to assist patients as they progress on their Inspire therapy journey, including longer-term through our investment in the development of multiple innovative technologies. To reiterate, our core focus for 2021 is to continue to increase utilization at our existing centers, as well as to increase capacity by training new centers. An important aspect of this anticipated increases in utilization and capacity is the continued expansion of our ACP. We also intend to achieve further advancements and reimbursement that build upon our recent positive coverage decisions, and leverage the new two incision procedure continue our efforts to strengthen the growing body of clinical evidence in support of Inspire therapy, and invest in the continued development of a robust R&D platform. We remain extremely excited about our future prospects, and are confident that we have the appropriate strategy in place to drive long-term shareholder value. With that, I'd like to turn the call over to Rick for his review of our financials.

Thanks, Tim. As Tim noted, the Inspire team delivered an excellent first-half of the year. Total revenue for the second quarter of 2021 was $53 million, a 335% increase from the $12.2 million generated in the second quarter of 2020. U.S. revenue in the second quarter was $49.4 million, an increase of 349% from the $11 million generated in the prior year period. In the second quarter, European revenue increased 201% to $3.6 million. The growth in the U.S. reflects a number of factors, including the significant impact of COVID in the second quarter of 2020. a larger number of implanting centers, broad commercial policy coverage, 100% Medicare coverage that went effective in June 2020, and an increase in the number of territory managers. The U.S. average selling price in the second quarter was 23,900, which was consistent with the prior year period. The European ASP was 23,400 during the quarter, compared to 22,200 in the second quarter of 2020. The higher European ASP was driven by favorable changes in foreign currency exchange rates. Gross margin in the second quarter improved to 85.8% compared to 84% in the prior year period, due to manufacturing efficiencies and higher sales volume. We now expect our full year gross margin to be in the range of 85% to 86%, up from our previous guidance of 84% to 85%. Total operating expenses for the second quarter were $58 million, an increase of 75% as compared to $33 million in the second quarter of 2020. This increase was due to the expansion of our sales organization, increased direct to consumer marketing programs, continued product development efforts and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to achieve continued growth and investments in key commercial and development initiatives. Our net loss for the second quarter was $13.1 million, which is a 43% improvement compared to the $23.1 million net loss in the prior year period. The net loss per share for the second quarter was $0.48, compared to a net loss of $0.88 per share in the second quarter of 2020. The weighted average number of shares outstanding for the second quarter was 27.2 million. We anticipate that the weighted average number of shares for the third quarter will be approximately 27.3 million. Moving to the balance sheet, as of June 30, 2021, our cash and investments totaled $217.8 million. This strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volume at existing centers, and training and opening new implanting centers. With that said, our strong performance and implant trends provide us with confidence in our outlook for the remainder of the year. Therefore, we are increasing our full year 2021 revenue guidance to a range of $210 million to $213 million from our previous guidance of $192 million to $196 million. This revised guidance represents 82% to 85% growth over full year 2020 revenue. In summary, we have significant and we believe sustainable momentum throughout our business, and we remain well-positioned to achieve long-term growth. We're extremely pleased with our first-half performance and are excited to continue executing on our growth strategy. With that, our prepared remarks are concluded. Paul, can you please open up the call to questions? Are you there, Paul? Paul is coming back, hold on.

Thank you. [Operator Instructions] Hi, I apologize for the technical issue one moment and we will pull up the question. We will now be conducting our question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Robbie Marcus with JP Morgan. Please proceed with your question.

Oh, great. Thanks for taking the question. And congrats on a really nice quarter. Two questions from me. First, the beat was really substantial, not just I believe a record quarter, but up pretty substantially quarter-over-quarter. You touched on this in the script, but I think it'd be helpful to kind of dive into the drivers. Is it more coming from doctors educating patients? Is it direct to consumer? Is it new and existing docs doing more procedures? I know, it's probably a little column A and column B. But, the beat was so substantial and the guidance raise above the beat, so I'd love to just get a sense of where you see some of the most growth and where you still see some of the biggest opportunity?

Absolutely, and that's a great question. And the answer is simple, it's all of the above. In that we have a significant demand from physicians and centers to open new centers. As we mentioned, opening 63 new centers in the quarter is significant. And each of those centers when they open, they have a line of patients that are waiting for therapy. But we also highlighted in the script, that the majority of that growth came from existing centers, growing over last year's procedures, albeit, last year's procedures were affected by the pandemic and the shutdowns. But having those centers come back and growing, the utilization really had a big impact. But you have to add to that the improved reimbursement environment, the additional Medicare policies really taking effect post-COVID. Anthem starting to have an impact, although, it usually takes a little bit more time for Anthem to work through that process, as well as the two-incision and going to 99% of the procedures with two-incisions growing. So across the board, just a strong impact, we've also have significantly grown our field force our field clinical rep to support implant procedures. And so really, the focus is driving utilization. And then if I can just add, the advisor care program is really having a strong impact. And with that, we increased our DTC spend and are getting a greater demand as we highlighted with web hits and patients reaching out to the call center.

Great. Maybe a quick follow-up here, reimbursement was obviously a topic during the quarter and you touched on it. But it seems like there's two issues. One is the physician fee came in a little lower than expected, and some of the outpatient rates probably more incorrect than anything else. So, one on this physician rates, do you think the rate they came in will hinder utilization at all, with obviously, the better -- the higher the rate, the better. But what can you do there to maybe improve that in the final? And then same question for the outpatient code, what steps are you taking to try and get a better rate and correct them on their logic going into the final code? Thanks.

Sure. I think the physician reimbursement rate is fine. Obviously, everybody wants it to be higher than it is. But the rep did a survey and they surveyed all the physicians, we believe there was a little bit of a blend with two-incision and there so it is part of the process, and has it came in with an accurate number. And CMS accepted that number to then two-RV use. And another challenge is the payment rate for which physicians are getting paid RV use was also proposed to be reduced. And we're going to make sure we work to try and increase that and elevate that physician payment a little bit higher. But the fact the matter is the payment that they have right now is higher than what they were getting at the beginning of the year in 2020. And it was only for that temporary payment of the pressure sensor code that got them to a higher level. So the payment level is high, especially the fact that 99% of the procedures are now being done with two-incision, and getting that procedure done down close to 90 minutes, really can drive that reimbursement rate between $8.50 and $10 a minute, which is right in line with all other procedures that ENTs do. So, we're happy with the physician payment. As far as the ASC payment. I think you're right. We just need to work with CMS so they can capture the historic data on the claims of Inspire therapy. But when they go to do the historic look up, they use 645X1. But that code didn't exist even as a category three. So they weren't able to capture that data. And we believe when we sit down and work with them, and we have our consultants in Washington putting the data together and we will present at the August meeting, or will at least ask to present and expect that we'll be able to provide that data and allow CMS to do the proper calculation to get that procedure code, where it would be properly reimbursed. And just as an example, the old base code actually had a proposed increase at ASCs to just under $25,000.

Great. Congrats on a good quarter. Thanks.

Thanks, Robbie. Go ahead, Paul.

Yeah. If folks can hear me, I think we're going to try to take the next question, Chris Pasquale for Guggenheim. Chris, go ahead.

Thank you. Our next question comes from Chris Pasquale with Guggenheim. Please proceed with your question.

Great. Thanks. You guys hear me okay?

Yeah, we can, Chris. How are you?

Good, Tim. And congrats on a really remarkable quarter. The pace of center expansion is particularly impressive. And the updated guidance suggests that the momentum there is going to persist for a little while. I'd love your updated view on the sustainability of this pace, and how much runway you think you have, as you look at the universe of centers who should really be performing this procedure in the U.S.?

Absolutely. I think that the demand from physicians and from centers to participate with Inspire is really growing. And so we really stepped up our training team, and our site activation teams to be able to capture this demand and provide more outlets for patients to receive Inspire. We think we're still at the very early stages. I think, a while ago, we just talked about 4,000 hospitals, and probably an equal number of 4,000 ambulatory surgical centers available, and that's targeting about a third of those are getting close to 2,400. And now we are just crossing over 500 active centers right now. So we're still very, very early in the pipeline. And we highlighted in the script, though, that Rick and the team signed another national contract with CHS to open up another avenue. And so, we're really making good progress there. We see that momentum continuing forward. That's why we significantly increased that guidance for opening new centers going forward. But we, also remember, like to keep a ratio of the number of centers managed by our territory managers. So hence, we are increasing the rate at which we are recruiting and retaining new territory managers, and the same ripple effect there means we need to continue to bolster our sales management team, and continue monitoring the training team. So it's a scaling of the entire business. And it's pretty exciting to be able to do that, while still supporting real strong patient outcomes.

That's helpful. Thanks. So you kind of led me into my next question, which was about that new national pricing agreement and the impact that that could have. Just put it into context for us, did you have any presence at those centers prior to putting this agreement into place? And now that you have it, how quickly do you think you can expand into that whole network?

Hey, Chris, this is Rick. CHS publicly held hospital system, that 84 hospitals and another 30 ASCs, we were not previously in any of those locations. And so, what that does is really an essence goes through the value analysis committee at a high level for all 114 locations. So when we go to those different locations, we find an interested physician, surgeons, fleet doctor, and then get the patient flow started. So that will allow us to get into those centers. We may not get into all of them. Similar to our other ASC national agreements that we entered into USPI, there's nearly 400 centers there. We’re in a couple of dozen so far in USPI. There's also FCA that we entered into last year has over 230 locations. We're still early in the penetration of that. In addition to ASCs, we're also focusing on other hospitals systems, such as ascension, where we entered into agreement a year ago, and they have 150 locations plus 30 ACSs. So that gives us confidence in the ability to raise our guidance, and the number of new center additions to 48 to 52 on a quarterly basis for the rest of 2021.

Thanks, Rick.

Thanks, Chris.

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Please proceed with your question.

Good afternoon, guys. Thanks for taking the question. I'll just stick to one question. But I just wanted to focus Tim on the Philips recall of its CPAP devices. I mean, just given the large numbers here, 4 million worldwide, 2.5 million U.S. it seems like a potential opportunity. So, my question is, are you seeing any benefit from this yet in terms of traffic to your website, any other leading indicators? And I know it's impossible to quantify any potential benefit at this point. But would you be surprised if there was no benefit from this this year or next year? Love to hear your thoughts on that. And thanks for taking the question.

Thanks, Larry. We certainly didn't want to market against that. I know Philips is working that the best they can. It's an unfortunate situation for those patients with not being able to use those CPAP devices, and the inability to get new devices to them. We have been in communication with all of our centers. So they're obviously well aware of the situation and we're certainly -- they're available for patients, if they want to move on from CPAP rather than wait for a new one. So yes, I'm sure we'll have a positive impact because of this recall. In the meantime, we're doing what we can to grow awareness of the brand, make sure people are aware of Inspire. We have increased outreach program as educational to get people more to the website. We talked about a significant increase in the web hits in the first-half of the year. But that's also been increase here in the second quarter, again, probably a balance between driven by people with a search, but as well as our increased direct to consumer activities. So we're staying on top of it, we're well aware of the situation, we make sure all of our centers are on top of it to communicate with patients to be able to take care of them, if they desire. But thanks for bringing that up. That's a great question.

I'll leave it there, Tim. Congrats on the quarter. Thank you.

Thank you, Larry.

Thank you. Our next question comes from Bob Hopkins with…

Hey, this is Brad Bowers on for Bob. Can you hear me?

Yes.

All right. Great. Thanks for taking our questions here. So just to start off here, I want to know if you'd be able to share any data points or anecdotes or anything in the way of the doctors that are actually doing the third procedure within the day, just kind of wanted to see if that's actually getting uptake, sort of as expected. And whether or not the physician update would impact that as well?

I think it's starting, but I think the momentum in that phase is still yet to evolve. And what we're talking about is, most centers right now routinely just block two procedures, because they're used to the old time of two hours, maybe three hours, if it gets complicated so if it takes six hours, you can't really schedule that third case. And we need them to see the data on the two procedure and get comfortable at their own center, that they can add a third case. In some cases, they can add a fourth case. And so we're really at the early stages of that even with the successful quarter, that is still yet to be come. 99% of the procedures being done with the two-incision, and now we're being able to show the administrators the data sets, the effectiveness and we mentioned the real-world experience is even coming in a little bit better than the clinical study. So, we think this is something that we'll talk about more in the future as we really start to evolve, to go into more of the three plus incisions per day, and that really is going to be a key mechanism for us being able to add capacity in the future.

Okay. Appreciate that. And then if I can just one follow-up. And I don't mean to belabor this, because I think you've covered it pretty well. But just wanted to key in back on the ASC update, and you said something to answer the question that you were asking to present and there is this data. So you're going to be presented the claims data, assuming you do get that, but just wanted to make sure that you are confident in getting the update and that the data that you have is going to be sufficient to get the update, and that you are going to be able to get in front of the panel. And appreciate, answering these questions.

Absolutely, thanks very much. The number of implants, we’re up over 16,000 implants now worldwide or historically, the majority of those by far in the United States. And so there is a very extensive amount of reimbursement data or claims data out there. And then if you remember, we always estimate that Medicare is about 25% of our implant procedures. So there's an extensive amount of data and ASCs have also been very active for a period of time. So we have enough data to be above the threshold for CMS to use and that go to that default 31% discount rate. So we have asked, we're going to ask to make sure we're part of the meeting. We certainly have sufficient data to support a proper calculation with a proper discount from the hospital payment. And there's already evidence to show that, that the old base code was proposed to receive increase that just under 25,000. So we're going to do everything we can to make sure that we get that information pulled together and have CMS weigh in on that. Paul, are you there?

Yes, I'm here. Our next question will come from Amit Hazan with Goldman Sachs. Please proceed with your question.

Hi, it's Bill. Can you guys hear me okay?

Yeah, absolutely. How are you?

I'm doing good. Thanks. If we look at guidance, I appreciate some conservatism. And then you mentioned some early impacts being seen from Delta. If we look at the guidance to half implied is a bit of a slowdown from the first-half and then in the second quarter specifically. I was hoping you can discuss sort of the 3Q versus 4Q dynamics and how delta is playing into that. And maybe any comment on vacations, physician vacations, casuals, it's increasingly come up in some of our other earnings calls? Thanks.

Well, people work very hard, and especially during COVID, and we want everybody to take a vacation, and be restful and move forward. We don't believe that that vacations are going to have a significant impact on our business. That's, I think part of the process, and vacations are always part of the process, we build that in. As far as COVID, we stayed aggressive with setting our progress, we do expect sequential quarterly growth, from Q2 to Q3 to Q4. Typically what we see in any year. But we're going to watch COVID. I think this time around, hospitals are being a little bit more protective, and they're not looking for the full shutdown. Again, remember, outpatient procedures, so they're not looking to really shut down revenue generating procedures at hospitals. They went through that last year, and I think people are looking for workarounds to keep procedures moving forward. We also have more flexibility in additional centers, to be able to move a lot of those procedures to ambulatory surgical centers, who are just better equipped to work around research. And so we're not being a little bit careful, but we're not expecting a significant impact from the Delta variant, but we're going to continue to watch it closely.

Okay. Thanks a lot. And kind of following on that same line of questioning, if we just put aside the constraints on facilities that may come about, can you talk about patient risk conversion in the environment of delta? And maybe what you've learned from the last year and how patients kind of operate in this environment? And how that plays into your two half expectations? Thanks.

I think that has a lot to do with the results of Q2. I think as we all suspect I think people are done with COVID. And people want to get back and get their healthcare taken care of, we have good momentum going. And we're going to see that momentum carry forward. And people are comfortable being able to have these procedures done. And if we can provide alternative sources either through our ASC or through the hospital center of a hospital or a branch hospital to protect them, we will certainly work and find alternatives there. But I don't think we're going to see a very significant slowdown and the fear factor from patients and COVID anymore.

Okay. Thanks for the comments.

You bet. Thank you.

Thank you. Our next question comes from Richard Newitter with SVB Leerink. Please proceed with your question.

Thank you, and congrats on a great quarter. I just wanted to follow up on the reimbursement specifically on the ASC side. It sounds like you guys have a good case to make in front of CMS here and you're confident that they'll make it. But just curious that if for some reason that weren't to go your way, it might be helpful, just to get a sense for what pivots you would have or what their ultimate impact would be given, it sounds like ASCs are important part of the growth strategy going forward? And maybe if you can specifically can comment on two things. One, what a private payers pay as a multiple of Medicare usually in a ASC setting if you had to switch Medicare based patients, which is the minority into the outpatient, but what doctors theoretically, under the proposed rates still be able to make a decent profit and be incentivized to keep doing the procedures in the ASC setting for at least the private pay, that’s question one.

Okay, no problem. I think, like I said, we have extensive data with procedure being done in ASCs, and we're going to put our best foot forward, and we have confidence that we're going to be able to establish proper reimbursement. If it doesn't happen, and you know them, there's always a chance of that, it just carries into the following year. And we continue to battle because ASCs are an important step, and we will continue to work with CMS in the future to be able to get the proper reimbursement at ASCs. And so even if we don't establish proper reimbursement, this go around, we'll certainly keep pushing that for following years and move forward. In the end, what this is saying, in that the hospital reimbursement for Medicare increased, yet, they put a default calculation for ASCs, it just doesn't make a lot of sense. And what that means is Medicare patients would be locked out from ASCs and that certainly is not CMS’s intention. So when we're able to provide that data, we're confident that they will make the proper calculation. Commercial payers are privately contracted with ASCs for their payment rates. USPI, as an example, Rick mentioned before, along with there is an association of ASCs, they are engaged with us in this process. They go through this every year with CMS payments, and they're going to be pushing very hard to make sure that the proper reimbursement is established. That being said, they all contract independently with the commercial payers. They've already established rates for a lot of Inspire procedures, because we've been reimbursed for many years now. We believe those rates will remain consistent, and don't think there's a real motivation from commercial payers to be able to really reduce those based on calculation from CMS that doesn't reflect history. So, we think commercial cases will continue to be done in ASCs. And that means the Medicare cases going to have to move back to the hospitals and we have certainly will have capacity to handle that. But again, I think by the October, November timeframe, we'll be able to fix this.

Okay. That's really helpful. So I mean, it's not ideal, but it sounds like even if there were a delay, or one year delay to get the criteria in place, it would really only be a minority of your cases that would have to be migrated to the hospital outpatient, you'd still be able to do probably most of your commercial cases in the ASC, because it privately contracted with commercial insurers. Is that the message?

Correct. Yes, absolutely. Okay, number one, there's no changes for the rest of the year because we're on the existing code, right. All this takes effect January 1, so we have time to work with CMS and the committee to be able to establish the proper reimbursement for January 1. Number two, most of the surgeons that we have, have privileges both at the ASC as well as a hospital. So it's not difficult for them to move the Medicare patients to a hospital. And the Medicare payment in hospitals increased over 30,000, so it's a profitable procedure for hospitals to handle the Medicare cases. So no, I don't think it's going to have an impact. I think that we have to deal with it. We're going to work with it. We're going to work with CMS, but we're going to get it resolved so we can continue to offer therapy for patients.

Great. Thanks. So if I could just squeeze one more intense, it was a really healthy guidance raise, significantly more than just the 2Q beat, the outlook went up. I'm just curious, you have some COVID maybe headwinds contemplated in that as the bad guy. I'm just curious, what's contemplated in there, if anything from Anthem pickup, and the Anthem contributions is that decision really begins to impact the business?

No, good point. Well, so Anthem, they wrote policy in the middle of the quarter, and it doesn't give us a lot of time to be able to implement that down to the regional level and make an impact with it. So you'll see more of the Anthem patients, let me back up, any Anthem patient who was in the prior authorization process, either at prior authorization first appeal, second appeal or external medical review, we worked with Anthem and we’re able to pull all those patients out of the system and restart them back in prior authorization, whereas they can get a quick approval, and then get scheduled. So I think you'll see more of that, as we kind of move into the third quarter, maybe some of the fourth quarter. So that will start to come through. So that certainly is a positive. But I think the whole Medicare policies have really taken effect, and we're finding good ways to help patients out even with a COVID Delta research.

Okay. Thank you.

Thanks, Rich.

Thank you. Our next question comes from Michael Polark with Baird. Please proceed with your question.

Hey, good evening. A question maybe for Rick, if you said it, Rick, I missed it. But OpEx expectations for the back-half that's question one. And then zooming out, the breakeven point used to be considered $250 million in revenue, give or take. Last quarter, I heard for prioritizing growth will get back to curious for your latest thinking on what sort of revenue level supports EBIT breakeven, give or take?

Yeah. Thanks for the question, Mike. So your first question regarding OpEx, we do not provide guidance on OpEx. But you can see where historically, we continue to increase our investments across all facets of our business. We've increased the number of territories we're adding, we're increasing the number of centers. And so with that, we continue to invest in adding sales management field clinical reps. And so we want to focus on continued strong patient outcomes and improving center productivity by adding and increasing the sales organization. We're also investing in R&D initiatives, as Tim mentioned, with Inspire V the app in the cloud. And with that stronger inner connectivity, we believe that will also improve outcomes. From a breakeven standpoint, we understand and are fully aware that profitability is important. But we are really mainly focused on growing the market for our therapy since we have no competition for the next several years. Tim mentioned earlier that we are still very early in the penetration of potential procedures, and number of implanting centers. So we're really concentrated on our commercialization and investments for our further growth. And an example that is the market development, the patient outreach in our DTC efforts, because we see with increased brand awareness leads to increased website visits and doctor appointments. So that's also why we're expanding our call center to assist with increased appointments. So, to your point, we're going to continue to make these deliberate investments for our growth. And with our current cash on hand, our 85% gross margin and our market opportunity, we're going to focus on driving years of continued growth. And we're currently not optimizing our operations to produce a net income at this time, but instead, we plan to continue to invest aggressively in our growth drivers that we talked about earlier on the call.

Thanks for the color. One quick follow-up, on this new call center call vendor, Tim, you mentioned you're transitioning vendors there. What exactly is happening and operationally how complex or not complex is this change?

Well, it was the original center we had was up in Winnipeg, Canada, they were a great start good company. Really kind of get us off the ground. We learned a lot by going through the debug. But as we started to add a lot of centers, we knew we needed to increase the scalability or the capacity and so we went with a new vendors down in Austin, very strong company, good history. And we launched it yesterday. And we really look forward to moving forward, we're going to use a lot of our internal IT systems to help that integrate more closely with Inspire Cloud and put together all encompassing patient management system. So, it sounds a little bit more complex than it is, but the transition to the new vendor happened over the last three, four months. And they train the trainers probably three weeks ago and launched it yesterday. And I already got word that they're taking calls and things are going well. And we're looking at really expanding that going forward.

Thanks so much.

Thanks, Mike.

Thank you. Our next question comes from Adam Maeder with Piper Sandler. Please proceed with your question.

Hi, Tim. Hi, Rick. Thanks for taking the questions and congrats on a great quarter. One on reimbursement and one on OUS, just on the reimbursement side, actually, on the physician fee this time. I think I heard the comments that CMS did take into consideration the two-incision procedure, at least to some extent in the $870 proposed amount for next year. Now that we're closer to 99% of Inspire implants being done through the two-incision approach, do you think there's any potential for that rate to be compressed some? Or, do you think that's a pretty firm floor that you have, and any revision is likely to the upside and then I’d one follow up?

I think for right now, I think that's going to be move forward towards approval. I think recommended RV use was accepted by CMS just reduced two RV use on the work element. They accepted the office administration and the malpractice part of it 100%. So I think that's probably not going to really be contested. I think that's in a really good spot. I think, CMS also has a lot of other things that they have to deal with between now and October. So that's going to move forward. We don't see the data from the Rec, we obviously are not part of that. It's an arm's length research by the rec committee, so we don't see the data. But we do know that the two-incision was developed by ENT procedures in some of our larger volume centers. So when they completed the survey, it's natural that they had been doing two-incisions so that that data was captured by them, and part of the rec recommendation. So we think it's a stable reimbursement for the foreseeable future.

That's helpful color, Tim, and good to hear. Thanks for that. And then just for the follow-up on international. I know it's a relatively small part of the business today, but a nice quarter. Outside the U.S., I think you talked about Germany and Netherlands is kind of the key geographies there. Maybe talk a little bit about what you're seeing in the field. And, additionally kind of where you'll take the therapy in the future in terms of other European marketplaces. I think you've talked about Australia in the past, obviously, we've spent a good amount of time talking about Japan. But just want to get a better sense for kind of the OUS roadmap over the next couple of quarters. Thanks so much.

Absolutely. Thanks, Adam. While the key focus continues to remain that we make investments in the countries after we have established reimbursement. That is exactly the case in Germany, where we have 90% of our European employees are in Germany, and it's growing very, very strong. We have a very strong foothold in Germany. It's really well performing team over there. The second group is in the Netherlands, where we have an ability to expand because of the reimbursement changes there. And so we have opportunity to open up additional centers. And right now we're limited to just two centers in the Netherlands and just a few cases allowed in each center per quarter. So that's going to expand. We have done formal reimbursement submissions in Belgium and in France, and they will be in review in the near future. We do have good reimbursement in Switzerland that's growing. In Austria, we are starting a new initiative in the Nordic Region to start increasing reimbursement retention there. And we continue to work with the UK to start implants in that area. So Europe is very important. We're starting to really grow in Europe and we'll keep pushing that forward. Australia, we have resubmitted the reimbursement, it's going to come up for our next review, I think in August, but again, until we get reimbursement locked in Australia, and it is a very long process to do that. We do have regulatory approval in Australia in hand. And just like Japan, it takes time to work through to get the reimbursement. So we expect that in the near future, but it's going to take probably another year to be able to get all that reimbursement locked in in Australia, but we're continuing to pursue that. Japan we already talked about. And we are also looking about a broader Asia Pac strategy, and we're kind of working that strategically and developing that plan.

Very helpful. Thank you.

Thanks, Adam.

Thank you. Our next question comes from Ravi Misra with Berenberg. Please proceed with your question.

Hi, Tim. Hi, Rick. Thanks for taking the question. Just two questions, one, kind of maybe on the near-term guide and how to kind of consider how you came up with that, in respect to the comments on the two-incision procedure? Should we think about kind of the growth being led here, you're returning a 50/50? But in the near-term, is the new center opening growth going to kind of outweigh the throughput from the physician move to the two-incision procedure? I guess, how long is that going to take? And what have you factored into guidance when it comes to the extra procedures that that may entail? And, I guess tied to that is as the procedure gets more simple, and as your funnel seems to be broadening, I guess given from your web visits that you're talking about, any kind of change to the hit rate, or the kind of doctor's visits that just either call centers going to be gathering for you or what we've seen now versus maybe a year ago? Thanks, guys.

No problem. Ravi, it's multifactorial, but let's kind of walk through this a little bit, because in composite is where the benefits lie. So opening the new centers, we think new centers and growing capacity at existing centers will balance out. The problem is you can't really calculate that based on 2020, because the existing centers really only had an eight month year, right. So you'd have to prorate it to kind of think through that. But we do go back and look at utilization, and utilization at the older original site actually is higher than the new sites. But the new sites grow utilization quicker than the older existing sites. I say that carefully, but what that means is we have improved our ability to select sites, to get all the physicians in the entire team engaged, to go through their training process and get their utilization up higher. But it takes -- they can get to the higher rate in a sooner period of time than the older centers. But the older centers continue to grow as well. So that really is a strong positive. I think from the Advisor Care Program, we're improving a patient's chance. And having a patient call at center directly, we knew that up to half of the phone calls were never being answered. And even by opening up the call center today, we know one of the challenges is getting the centers to answer the phone call when we call to make an appointment. And that's one of the things that we need to continue to debug, as we open up a new center is that communication link. So the call center, driving patients to the call center and having the call center work with them to get an appointment and a timely appointment is really going to have a significant impact going forward. And that I think is going to have a dramatic impact. And then finally, people are aware and the brand our direct to consumer is not about just driving patients, it's about building brand awareness. And we are starting to see a return on that brand awareness, not just with patients come to the website, which has significantly grown, but also with hospitals and physicians wanting Inspire as part of their practice.

I'll leave it at that. Thank you.

Thanks, Ravi.

Thank you. Our next question comes from Suraj Kalia with Oppenheimer. Please proceed with your question.

Good afternoon, Tim, Rick. Can you hear me all right?

Yes, Suraj. How are you?

Perfect. Hey, congrats on the quarter. So Tim, thanks for your commentary. And I just want to drill down on two points, if I could. Forgive me put throwing a lot of numbers at you, but I just want to make sure I understand the math. So it looks like 2061 U.S. implants were done in the quarter at 535 centers. And my specific question, I want to tie it to your comment about 50% of growth came from new centers, obviously the remaining from existing centers. So Tim, if I do the delta, it's about 1,600 implants, right year-over-year. Is the way to think about it as 800 implants came from new centers versus 800 from existing? What I'm really trying to get at, at the end of the day is just look at utilization rate, because overall, the math still suggests to us it's a little over three implants per center, per quarter. Maybe you could tie…

We're about 1.3.

Sorry, I kept my loss here for a second.

Okay. Go ahead, keep going.

I was just curious, if you could help us understand the utilization metrics per center. Because, for us, the math is still suggesting it's roughly a little over three implants per center, per quarter. Even you’ve guided implied guide for U.S. suggest that. So just help us understand your commentary about utilization rate, picking up new centers? If you can just kind of tie it for us together, that would be greatly appreciated?

Okay. I'm going to try and peel those two things apart. So the growth rate is kind of tricky, because we're dealing with the second quarter of 2020, which was the middle of the pandemic shutdown. So it's kind of hard to do the 50/50. We think, only because centers in the second quarter were shut down, they didn't do many implants hands, it appears the growth is more from growth of capacity at existing centers, rather than new centers. But we know that's not necessarily true, because we opened up 63 new centers, right. So we've got to be a little careful on how you do that calculation in the model for that. We believe going forward, we want to balance the growth in existing centers to be 50% of the growth, and new centers being 50% contributing as well. So that means that if we're opening up 63 centers with the implants that they do, we're going to have to really grow capacity at existing centers. And that's exactly the intention, and exactly what the call center and two-incision provide us the opportunity to do. Now, the key on the new centers is you got to remember that those 63 centers open up literally spread between the first day of the quarter and the last day of the quarter. And so they're going to range on a limited number of implants during the quarter to maybe if they started early in the quarter, they can't get above the three, but for the most part, new centers opening in a quarter really, they don't have the time to really get above that calculation that you had of about three implants per center on average over during the quarter. So, I think they start to hit their stride after they're active for several quarters in it, and really, the utilization rates are driven by the existing centers. And so it's always a little bit of a fight to keep growing the utilization at existing centers, but it always gets diluted by opening the new centers as well. Both, very positive events.

Tim, fair enough. I get your point. But the calculation methodology is the same that we are using, and it hasn't budged. And I guess maybe I could just tie in my second question just trying to understand…

No, Suraj, it budged a lot, because the number of centers we have opened is dramatically increased.

No, I was talking about the utilization rates.

But that is affected by the number of centers that we opened.

Okay. So if your current utilization, let's say is little over three per center per quarter, and the DTC spend per patient, at least the math is roughly around 5,000, plus or minus, per patient. How do you all measure the ROI? So now with the two-incision, should we start seeing an uptick in the number of implants per center per quarter or a drop in the DTC purpose? How do you see it? Or how should we start thinking about the next few quarters, any color would be greatly appreciated? Thank you.

Very good, Suraj. Thanks very much. DTC really has a multi factorial function as well. And it is building brand awareness. But it is about bringing patients to the website and educating them and connecting them with a physician in their area. And we do think we're going to start to see a good return and leverage on the direct to consumer activity. And we're getting better at it. And so we think that is really kind of key moving forward. But we're going to continue to add new centers and really be able to grow utilization at existing centers. So it’s a combination of two, by growing utilization, we'll be able to get a better yield, by getting more patients through the system by being more efficient with the advisor care program, we'll be able to see a return on that direct to consumer. And our comfort level with the direct to consumer is the basis for which we've been increasing the level of spend. But thank you very much for the question. And that's a very important part of our process moving forward. Hi, Paul, I think that is all the questions. But I want to thank everyone for joining the call today. As always grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve successful and consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts, as we've remained focused on further expanding our business in the U.S., Europe and now Japan. For all of you on the call, we appreciate your continued interest and support for Inspire, and look forward to providing you with further updates throughout the second-half of the year. Please stay safe and healthy. And thank you once again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.