Tim Herbert - President, Chief Executive Officer Rick Buchholz - Chief Financial Officer Megan Rowekamp - Director of Financial Reporting

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems, Q4 and Full Year 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Megan Rowekamp, Director of Financial Reporting at Inspire, you may begin the conference.

Thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today we released financial results for the three and 12 months ended December 31, 2021. A copy of the press release is available on our website. On this call management will make forward-looking statements within the meaning of the Federal Securities Laws. All forward-looking statements, including without limitation, those relating to our operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full-year 2022 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. SEDAR filings with the Securities and Exchange Commission including our Annual Report on Form 10-K, which we anticipate filing with the SEC within the next couple of weeks for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by laws 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 08, 2022. And with that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Megan, and thanks everyone for joining the call today for our fourth quarter and full year 2021 business update. I am pleased to report today that the Inspire team once again delivered extremely strong results in the fourth quarter as we continue to focus on commercial execution and leveraging the increased number of hospitals and ambulatory surgical centers offering Inspire Therapy. This increased capacity continued to provide important flexibility during the quarter due to the regional challenges driven by the COVID resurgence. In addition, our improved process of connecting patients with healthcare providers through our Advisor Care Program is consistently increasing the number of patient appointments for Inspire Therapy. In the fourth quarter, revenue was again very strong. As we generated worldwide revenue of $78.4 million, which was an increase of 70% compared to the fourth quarter of 2020. For the full year we generated worldwide revenue of $233.4 million, which was an increase of 102% compared to 2020. The outbreak from the Omicron variant had a moderate impact on our business late in the fourth quarter, importantly as was the case with the Delta Variant in the third quarter, because our centers are geographically distributed across the country and not overly concentrated in any one particular area, the impact on our business was localized and therefore minimized. Another important factor in managing COVID in these areas was our ability to work with implanting centers to shift some procedures to regional hospitals and ASCs, which were less affected by COVID and staffing issues. We are proud of our field teams and the healthcare providers grit and resiliency in keeping Inspire cases moving and thereby ensuring patients are able to receive their therapy. As Inspire is an outpatient procedure in the United States, it does not impact the availability…

Thanks Tim. As Tim noted, the Inspire team delivered a strong fourth quarter and full year 2021. Total revenue for the fourth quarter of 2021 was $78.4 million a 70% increase from the $46 million generated in the fourth quarter of 2020. U.S. revenue in the fourth quarter was $75.6 million, an increase of 77% from the $42.7 million generated in the prior year period. The growth in the U.S. reflects a number of factors, including a larger number of implanting centers, broad policy coverage, and an increasing number of territory managers and other sales and clinical team members. In the fourth quarter, revenue from outside the U.S. decreased 13% to $2.8 million. The average selling price in the fourth quarter in the U.S. was $23,900, which was consistent with the prior year period. The ASP for the rest of the world was $22,700 during the quarter, compared to $23,600 in the fourth quarter of 2020. The lower ASP was primarily driven by exchange rates and the initial sales of distributed products in Japan, which occur at a transfer price lower than the ASP for products sold directly. Gross margin in the fourth quarter improved to 85.8% compared to 84.4% in the prior year period due to manufacturing efficiencies and higher sales volume. Total operating expenses for the fourth quarter were $69.1 million, an increase of 50% as compared to the fourth 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 drive continued growth and to make investments in key commercial and development initiatives. Our net loss for the fourth quarter improved to $2.4 million compared to the $7.5 million net…

Yes, sir. [Operator Instructions] Our first question comes from Robbie Marcus of J.P. Morgan. Your line is open.

Oh great! And I already say congratulations on the quarter a month ago, but I'll add it again, especially on a really nice guidance here.

Thank you, Robbie.

So Tim, you touched on – you gave us the metrics for web traffic in the fourth quarter and you made some promising comments on how the national campaign is going so far. But I was wondering if you could give us any qualitative or quantitative commentary on what it's been like in the first quarter in terms of increased versus normal levels. And do you think that the increases are coming just from the advertising or do you think maybe some of the market recalls are helping you as well.

Well I think the – you know it's probably a combination. I think the advertising is driving most of the activity, because we’ve gotten to national level. We are now reaching areas that had not previously had, direct-to-consumer advertising or running from the TV ads. And these are – we now have Inspire centers across the U.S., so we're able to reach into those centers and so most of the activity is really coming from those pockets or centers that just did not have any prior exposure. So we are pretty confident that the advertising is driving the web activity. Now that being said, certainly within those communities are patients who are dealing with the recall effort, and I'm sure they are motivated to get to the website, get educated and make enquires. So it is the combination of the two I'm sure.

Great! And then Rick, I didn't hear it in the script, but we’ve got great sales growth. How should we think about the spending in 2022 to support that? Thanks a lot.

Sure, we’re still early, in the early innings of our commercial rollout and so we're still heavily investing in our operating expenses. We're continuing to invest in adding territory managers aggressively, as well adding centers. In addition we see a return on investment with our DTC spend, so we've increased that. So that increased about 80% in 2021. From an overall dollar perspective we will continue to make those investments in DTC, but the growth will slow. Operating expenses grew 50% in the fourth quarter over the prior year. We're going to continue to make those investments. We know profitability is important. We have shown some leverage in our business in the fourth quarter compared to a year ago, but we are going to continue to make those investments and so we want to make those investments that will drive years of future revenue growth rather than optimizing our P&L, so.

Great! Thanks a lot. I appreciate it.

Thanks Robbie.

Thank you. Our next question comes from Danielle Antalffy of SVB Leerink. Your line is open.

Hey! Thank you so much. Good afternoon guys. Thanks so much for taking the questions. Congrats on a really great end to the year. I had a question, they are both kind of on guidance. Well I guess the first question really Rick, is how to think about the cadence through the year and particularly Q1. I appreciate you're not going to give quarterly guidance, but even just directionally you know, you're been so early in the launch and then layer COVID on top of it. Seasonality has tested the site for on our end, you know what the impact of seasonality is. Looking back last year, again there was COVID muddying the waters, but I think you were only down about 12% or so sequentially. Consensus has you down almost 20% sequentially this first quarter versus the just reported Q4. Just wondering if you could talk a little bit about qualitatively how to think about that, and maybe the cadence through the year and just one quick follow up.

Sure, right. We only provide annual guidance and our guidance strategy has not changed at all. We are watching the first quarter really closely, because of the Omicron variant, because it did impact Q4 and we are seeing some impact in the beginning of the first quarter. Also we do have seasonality. So despite that, we have provided guidance on an annual basis that we're comfortable with and with this aggressive guidance, it does represent 36% to 40% growth over our 2021 revenue. But again, we're watching omicron closely. I know very recently case numbers have gone down, but we did have a – we had a big impact in January and so we are tracking that closely, but on an overall basis we feel, obviously feel comfortable with our guidance put forth.

Okay, that's fair. And then on total guidance for the year, just curious about what’s reflected in that from a COVID perspective and maybe more importantly from a hospital – you know from a not hospital staffing, sorry, but like a staffing perspective as we move through the year you know, trying to get our hands around what the impact or what the recovery, I'm sorry, could look like given the staffing issues that a lot of these healthcare system and ASC’s are dealing with, so. What's reflected as we think about a recovery at the low end or the high end of the range, and thanks so much.

You bet Danielle, good to talk to you. Well, we're tracking like everybody COVID and we see the anticipation that COVID is really kind of settling down. Now we've been able to operate pretty successfully in a COVID environment already. Obviously we’re going to be a little bit careful at the beginning of the year as we set the full year guidance to make sure that we have the pure confidence coming out of the guidance into the first quarter, second quarter and then throughout the rest of the year. We’ll continue to be aggressive in opening centers and scaling the sales team, the field team and increasing our trainee team as well. So we're planning that we will be able to stay on top of COVID as we have in the past, and – but be a little bit careful as we kind of set up in the beginning of the year here.

I appreciate that. Thank you.

You bet.

Thank you. Our next question is from Chris Pasquale of Guggenheim. Your line is open.

Thanks. Good afternoon guys. I wanted to start with the new center start guidance. So the 52 to 56 per quarter, I’m assuming that's a gross number and then we should net out the 25 to 30 that you're going to kind of call in the second quarter, is that right?

Yes, it’s correct. We set guidance to open 52 to 56 new centers, absolutely, and then as an overall, we’ll take out that 25 to 30 centers who really haven't been contributing case load anyways, right. So we're just allowing the team to really focus those centers that have been able to really take care of the patients.

Yes, and that really plays right into my next question, which is how productive those centers you are stepping away from have been. Do you have a rough sense of how many cases those centers might have done in 2021?

Well, I think that's kind of the start of it. For the most, one of the first things we look for is those centers that really haven’t had activity over the last year and as we look in over the last couple of years, and then we can see if they have already been removed from our website, and then we’d go and talk to the center to see who is involved at the center. In a lot of cases the surgeon has moved away and gone to a different location or there's different aspects to it, but for the most part they haven't contributed a lot of cases or helped a lot of patients over the last year.

Okay, that's helpful. And then just lastly for me, I thought the announcement on Singapore and Hong Kong was interesting. Is that a sort of first step towards looking at mainland China or is that an entirely different ball game and it's still going to take you quite a while to expand in to? Thanks.

Yeah, it’s a yes to both. I mean it is first certainly an expansion in the Asia market and Singapore and Hong Kong, it's really focused on just a couple of hospitals in each of those locations that are very prominent institutions. But it also does kind of open the door to start building on our pathway into China, which as you know is a significant project on its own, so. But yes, we're excited to open up these two new territories, but it also puts us – has Inspire with a greater presence in the area and allow us to really start looking at a broader expansion, including South Korea as well.

Thank you. Onto our next question, we have Adam Maeder of Piper Sandler. Your line is open.

Hey guys! Congrats on the nice finish to the year and thanks for taking the questions here. I wanted to start with one on direct-to-consumer advertising and some of the encouraging trends that you're seeing to start 2022. I guess it would be helpful just if you could level set us on kind of where the conversion rate is today, you know from DTC spend and website traffic and you know where do you think that kind of hit rate can go in the future and where are the key levers there, and then I had a follow-up.

Fantastic! Well, we kind of mentioned in the script a little bit, that we realized a lot of the contacts from the community health talk, they are really kind of more educational and the patients are able to get the information they need and process and usually come back and go through the Advisor Care Program. Therefore we are really focusing on the contact with the Advisor Care Program and starting to characterize what is our conversion rates with those. Don't have the precise numbers yet, but we do think we're getting into the – we're getting out of the high single digits and into maybe 10 to low teens in percent, but we also think that is the key opportunity. And it’s being able to make sure we find techniques to help patients get an appointment with the center and we are starting to use email a little bit more, some texting approach. We also are working with patients to remind them to attend their appointments and to follow up with them to make sure that they had received the proper information that they were looking for. So there's a lot of techniques that we can use to the whole process of educating them and getting them through the system and to be able to have an implant. So our goal is to get that to the middle teens if not even higher, because that's really the ability for us to really start to grow the adoption of the therapy.

That's really helpful Tim, I appreciate the color. And then just for the follow-up, maybe I'll ask about the progress that you're making from an ASC side of things. I think I heard in the prepared remarks 22% of your U.S. centers are now ASC’s. Can you give us a flavor for kind of volume mix between hospital out-patient and ASC today, kind of where that sits? And I'm just curious if you have kind of any data that you can share around utilization trends between those two different sites of care, you know the ASC showing some kind of encouraging throughput trends. Thanks for taking my questions.

Absolutely! So while the ASC’s make up 22% of the centers today, they are still new and up and coming, therefore they are not quite making up 22% of our implants to-date. It’s still trailing behind there and that still – that can be a little bit of a trailing factor, but that will catch up. We're going to keep opening up more ASC’s, so it’s going to be chasing each other along the way. Interesting enough, when we start looking at centers, not just ASC’s, but also hospital and those opened in the last several years tend to have a higher utilization, and that's a lot because of the training that we're doing and setting expectations of doing a certain number of cases per month. And also you got to remember the new centers; they don't have the old education of the struggles of obtaining prior authorizations. They are entering the world of Inspire with a solid reimbursement where we can get approvals in just a few days, and they can be assured that they are getting proper payment levels, and so they don't have that bias to be able to open up more OR times and OR slots and commit more of their practices. So I think in general, centers opened up in the last few years will have a higher utilization, but I do think as we get further down the pathway, yes, I think ASC’s really have the ability to even accelerate that further.

Great! Thanks Tim.

Thanks Adam.

Thank you. Next we have Larry Biegelsen of Wells Fargo. Your line is open.

Hey Tim! Hey Rick! Thanks for taking the question. So two for me; first, just a short term question. Tim, I understand January was tough, but as cases come down, you know what are you seeing and how much visibility do you have on scheduling and I'm curious what you're seeing there and I have one follow up.

Well, we certainly see the schedule; we have access to it; we know COVID was again, or the Omicron was a regional impact again. But this time it's not just hospital beds, it's really the staff and omicron spreads so quickly, that we actually had patients. And as we have mentioned in the notes, now we are dealing with employees too that they are unable to cover cases. So we are moving people across different territories to be able to cover cases, we're able to do that. But I do think that as we come out of January, just like in 2021, we're able to kind of hit our stride again in February and March. So same phenomenon with our seasonality, but just again like in 2021, just impacted by the COVID resurge, but we're encouraged by what all of us are witnessing with a reduction of COVID cases which is certainly welcome.

Thanks for that. And just on the Philips recall, Tim are you guys able to track Inspire patients that were subject to the Philips recall and if so, what are you seeing and did you bake anything into the ‘22 guidance for that. Thanks for taking the question.

Thanks Larry. I think we certainly know that we have a benefit from the recall. We certainly know that patients are coming to the website and talking to doctors and looking to find an alternative, because they simply don't have the ability to use their Sleep App. We can't get them approved through the insurance company. It's difficult for us to accurately quantify that. We do get some indications from the Advisor Care Program. We certainly get indications from the prior authorization work that we do and we submit to United Healthcare and the commercial payers that these are patients coming from Phillips, but we don't really have a overall impact. Certainly yourself and others have reported on subjective measures, when you speak with physicians and they talk about how they feel, how many cases they see on a weekly basis. So we know it does have an impact. Again, we just have a difficult time to accurately quantify it, but we do kind of build in just overall flow when we set our guidance.

Got it! Thank you guys.

Thank you.

Thank you. Up next we have Amit Hazan of Goldman Sachs. Your line is open.

Hey! Thanks. Its Phil on for Amit. A lot of the questions have been asked, but I thought maybe try to drill and just a little bit to clarify things. In your prepared remarks you talked about staffing and COVID related issues kind of in conjunction with each other, almost as though they were a similar issue. I'm wondering if there's staffing issues beyond sort of COVID disruption that are contemplated in your ‘22 guidance, and if not, what gives you confidence that staffing shortages we are seeing across the rest of healthcare aren’t going to impact Inspire at the same level?

Sure, thanks Phil. I think that we have a little bit better line of sight scheduling cases, and so when we talked about the fourth quarter in your conference, we talked about how we are able to schedule cases about three to four weeks out. So right after thanksgiving, we were really scheduling cases into the last week of December, which is always the most competitive week for OR time in the U.S. But having a little bit of forward look on it, to schedule those cases gives us a little bit of an advantage to not be too impacted by the staffing challenges. At the end of the year and early in January the staffing affected how much OR time could be open and if the staff was focused on working on the floor where the COVID cases were, and that's always the challenge that we have to deal with. But having a little advance notice gives us a little bit of edge to be able to get those cases scheduled. Certainly less impacted in the ASCs and less the specific staff and a specific surgeon test positive themselves, that obviously affects staffing. But we think that’s short term. We don't think it's going to really have a significant impact as we move through the first quarter here.

Okay, that's great extra color. And then I know that you guys have a little bit of a unique situation on the gross margin line, which is another strong 85%, 86% and things really improve throughout the year. I'm wondering if there's a kind of a risk that the inflationary environment that we have going on here could potentially impact numbers at some point down the road, with that relationship you have on the contract manufacturing site. Thanks.

I think that we have some significant technology advancements coming down the road, with well the new Bluetooth remote was approved, the new Physician Program was in the works, full body MRI and then especially the fifth generation Inspired Neural Stimulator. We did have a new cold set in place and so it does provide the proper reimbursement for hospital ASCs and now even physicians. So I don’t think we are going to have any kind of compression issues on price. I think it might be in the U.S., might have a little bit more of an opportunity over the mid-term that it is a risk of compression. Q –Phil Coover : Okay. Thanks a lot Tim.

You bet, Phil. Thank you.

Thank you. Next we have Jon Block of Stifel. Your line is open.

Great! Thanks guys. Good evening. I don’t know if I’m beating this up a little bit – hey Tim! But just the first question I guess is specific to the cadence or a different way of attacking it. So if I look at 2021, what you – it was about 17% to 18% of full year revenues again for 2021 and you know other years you always have the seasonality to be clear, but other years it was like 19%, 19% plus and you keep on referring back him Tim to this seems like a similar playbook to what you experience in 2021, right, a pretty rough January but then fining your footing in Feb and March. So when we think that about cadence, is that the way to weight it if you would or for it shake out as for 1Q ’22 to fall a lot closer to the ‘21 playbook on full year weighting versus what we saw in the prior three or four years.

Well obviously we're pretty early in the quarter right, but January certainly stacked up close to ‘21 with a combination of seasonality as well as another COVID research, right, so that's why we kind of described that a little bit, just to make sure people are aware of that. But again, pretty early in the quarter, but we still want to stay kind of aggressive with our overall annual guidance. I guess I'll leave it at that.

Okay, fair enough. And then maybe just to shift gears. I mean you talked about the utilization drivers ASC and ACP, Advisory Cary Program. I might be mistaken, but you know I think back to coverage and I thought for some coverage policies in the past you talk about going back to some of the payers and trying to get you know a BMI revised down, ‘hey it was 35. Can you get down to 32?’ Is that still in the cards? Has that all been Tim do you think a gaining factor to growth and if so where are you with some of those initiatives?

Yes, actually little bit of the opposite. Some of the payers actually came out with a limitation of BMI 32, we are trying to get them up to 35.

Sorry. I meant the other way. My apologies.

Yeah, I know that. No, it’s okay. And Medicare really helped all of that. So when all those local coverage determination came out, and Medicare came out and set the bar add BMI 35, all of the commercial payers like United and Aetna and Anthem, all their Medicare Advantage Programs have to match that, so they have to honor the 35 and United as an example, they just came back and added, increased from 32 to 35 on their commercial policies as well. We'll continue to work through that. Today we're really focused on the logistics of implementing the new code and you can imagine that every single center and every single software package and every payer has to convert over to the new CPT code. So today we're just focused on the brick and mortar of just giving the new code in place, make sure everybody is billing the new code and working through that logistic. Once we get that done, that will be done in the next month, we’ll kind of get back to the policy work and really working to standardize all the policies across the board. So I don't think it really is a limiting factor to growth. Simply that we just have so many patients enquiring about Inspire and our conversion rates are still growing, but we have so much opportunity that in itself I don't think the policies really are a key driver. One element, you brought this up, I'll talk about it. We will be talking to the FDA. The label that we have with the FDA does have an upper limit of AHI 65 and we have been collecting data over the years. Most insurance companies policies do not have an upper limit, including the Medicare policies. So we are going to be working with the FDA to see if can do an indication expansion to help those patients with a higher AHI, so they are not considered off label. But so there's a lot of work there we are doing to continue to expand expansion, as well as continue to standardize policies across the board.

Perfect! All good. Thanks guys.

You bet John. Thank you.

Thank you. And we have Suraj Kalia of Oppenheimer and Company. Your line is open.

Good afternoon, Tim, Rick. Can you help me alright?

Yes Suraj, how are you?

Hope everyone is safe and healthy. Hey, so Tim let me address that FY ‘22 guide from a different angle.

Okay.

The guidance implies, even if I remove the 25 non-performing sites, forgive me if I got them, the communication wrong. But the 25 sites, I remove that, you would be exiting FY ‘22 give or take 870, 875 sites. If I remove all U.S. approximate contribution, the math is implying roughly a utilization of about 3.6 implants per quarter per center, which seems to be a step down. Are there other new centers, “low volume” centers? Are there some other mitigating factors? Maybe if you could tie the FY ’22 annual guide; from a utilization perspective, any color would be great.

Yeah. okay. Two things, the easy answer to that is look at the number of centers we opened in Q3 and Q4 and we opened I think 81 here and 72 in the third quarter. So we have 153 centers in the last two quarters, and the key with them is they are so – such a short window to be able to operate in. If you took them all in average, they could only operate for three months, and so they would never be at the overall utilization. So you almost have to kind of remove those other 153 centers from your numbers, because we're seeing actually a step up in utilization and that’s like the key driver. Remember the 100 – all the centers that opened in 2021 are considered new centers and the 60% of our growth was coming from existing centers that were open in the prior year. So you're on the right path, on track with your math, but got to be a little careful on the centers that we opened late in the year, because they are just – they are not contributing to utilization yet. They need a little bit more time, and to be able to do more cases over the calendar year.

Yeah Tim, I'll take it offline. The methodology is the same throughout, but anyway I'll take it offline and we can go with the math. Hey Tim! On the new site, in the U.S. what do you characterize as the pool of new sites and specific for FY’22, forgive me if I missed this. How do you look upon new stores versus same store or old stores. Thank you for taking my questions.

Sure Suraj. The – as a rule, when we talk about same store sales, any center that was opened in ‘21 or before is considered an existing center and the news stores or the new centers are those that are opened in the current calendar year. I know that causes a little bit of a challenge, because there's a lot of center that opened in 2021 that will not have a full year of performance and they may have as little as five days, because they opened up late in December to do their first procedure. But that's how we do it, because we always characterize our centers by class, the class of 2014 which was our initial year, ‘15, ‘16, ’17, ’18, all the way through. And so when we do the measurement of contribution of growth, we only use those centers that are in the current calendar year, are used to contribute to the growth. Very good. Alright Suraj. Thank you very much.

Thanks. I’m seeing no further questions in the queue, I will turn the conference back over to Tim Herbert for closing remarks.

Thank you all for joining the call today. As always, I am 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 the patient remains unmatched and is the most important element of our success. I wish to thank all of our employees, as well as the healthcare teams for their continued efforts as we remain 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 of Inspire and look forward to providing you with further updates in the year ahead. Please stay safe and healthy.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day!