Greetings, and welcome to Inspire Medical Systems’ First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Yedid with LifeSci Advisors. Thank you. You may begin..

Doug, thank you, 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 first quarter ended March 31, 2020. 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 regarding the impact of COVID-19 on our business operations, financial results and financial condition, investments in our business, our expectation that the vast majority of postponed Inspire therapy procedures will be rescheduled, full year 2020 financial and operational outlook, future positive insurance coverage of Inspire therapy and improvements in market access based on our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements.

See our filings with the Securities and Exchange Commission, including our 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, May 5, 2020.

And with that, it’s my pleasure to turn the call over to Tim Herbert, CEO.

Tim?.

Thank you, Bob, and thanks everyone for joining us today for this business update conference call. I trust everyone is staying safe and healthy, because you worked through this COVID-19 pandemic.

At Inspire, we remain focused on the safety and wellbeing of our employees, who continue to find innovative solutions to support Inspire therapy and patient needs even as we operate in a remote work environment. The good news is that we have restarted implants in Germany and in the United States.

In fact, we have already conducted implant the centers in three States and have been scheduled over the next couple of weeks in approximately 10 additional States.

It will take time to ramp up to where we were at the beginning of the year, but we have had a significant number of patients, who were either previously scheduled for the Inspire procedure and delayed or whoever received a prior authorization approval and have not yet been scheduled.

With respect to our first quarter results following an extremely strong January and February, the impact of the COVID-19 global health pandemic was fell through the postponement of substantially, all implant procedures beginning in the second week of March in both the U.S. and Europe.

A worldwide revenue in the first quarter of 2020 was $21.3 million, which was still an increase of 31% over the first quarter of 2019. Moreover, we have continued the prior authorization process to obtain approvals during the current period.

In addition, we continue to engage and educate physicians, and patients through our online platform using virtual health talks and telemedicine.

Finally, we also continue to engage patients through our refocused direct-to-consumer marketing strategies though our priorities really have shifted from radio and TV in larger markets affected by COVID-19 towards more digital and TV in smaller markets. We will expand on each of these shortly.

Given the rapidly-evolving environment and the uncertainty regarding when and how quickly activities will resume in hospitals, we communicated a few weeks ago that we have withdrawn previously announced full-year 2020 financial guidance.

At this day, we remain unable to accurately estimate the impact of the pandemic on our business and financial results. Now, turning to our operating results in the first quarter. We added 28 new U.S. implanting centers and ended the period with a total of 327.

To qualify as a new center, the criteria has always been when the state completes training have potential patients and is ready to proceed with Inspire procedures. As many of the new centers in process have also been put on hold due to the pandemic, the timing of them opening will vary state-by-state.

We will continue to identify new centers including ambulatory surgical centers or ASCs and focused on the training and contracting at these centers and we will complete the process once they are against scheduling surgical procedures.

Finally, recruiting additional ASCs will be a focus moving forward as the Inspire procedure is an outpatient procedure and as we will discuss shortly, the reimbursement within ASCs has improved. We believe ASCs may provide some additional capacity for the surgeons and many of our existing surgeons also have privileges at an ASC.

I’d also like to highlight a national purchase agreement we entered into with 150 hospitals system that operates in 20 States in the District of Columbia.

Inspire therapy is offered in only a couple of their facilities today and this agreement provides the potential for training many additional hospitals as well as several ASCs operated by their system. Moving on, we created nine new territories in the U.S., which brings our total to 82.

In addition, we added three regional managers and now, have a total of 17 at the end of the first quarter. These new centers and territory and regional managers will have a positive impact on our long-term growth and will drive continued growth in therapy adoption.

As we’ve previously discussed, in order to focus on growing utilization at existing centers, we continue to increase a number of field clinical representatives or FCRs available for case coverage to provide training and implant support to clinical professionals. We ended the first quarter with 28 FCRs up from 22 at the end of 2019.

We intend to continue targeting regions that could benefit from additional FCRs, and I tell Inspire procedures resume at a more normalized rate. We will limit the number of FCRs we hire in the near future.

Let’s switch gears to market access or reimbursement, where we continue to execute on our two key strategies, which are to expand the number of positive written coverage policies and concurrent with this process continue to obtain individual prior authorization. First of all, let me begin with the significant progress recently achieved with Medicare.

I am pleased to report that during the first quarter, five of the seven Medicare administrative contractors or MACs, issued their final local coverage determinations or LCDs, which are effective and cover patients in 37 States. Just recently, Wisconsin Physician Services announced that their draft LCD will be formally issued and effective on June 14.

That leaves just one MAC, Palmetto, which covers seven States in the Southwestern part of the U.S. to issue their policy and we expect this to happen in the near future. Once published, these seven MACs will essentially have issued national coverage for the Medicare-aged population.

There are approximately 40 million Medicare patients and an additional 20 million lives under commercial Medicare plan known as Medicare Advantage. In addition, we currently have 53 positive policies for Inspire therapy representing approximately 165 million covered lives.

As a point of reference, we had approximately 83 million covered lives at this time last year. We expect that our momentum with these positive coverage policies will continue throughout to 2020. Now that we have a significant number of positive coverage policies, our focus turns to standardizing indication across these policies.

For example, just today, we learned that UnitedHealthcare published an off scheduled update to our coverage policy raising the BMI limit from 32 to less than 35, which is consistent with the standardized Medicare BMI indication. Our market access team will continue to work towards standardizing policy – policies with other commercial health plans.

Turning to the prior authorization metrics. As I noted earlier, we continued to prepare and submit prior authorization throughout the quarter, as we’re able to work remotely with clinical sites and patients. As such, in the first quarter, our internal reimbursement team supported 929 prior authorization submissions.

This can compare favorably to the 722 submissions in the first quarter of 2019 and is down only modestly from the 988 submissions in the fourth quarter of last year before the impact of the pandemic. In terms of prior authorization approvals, 761 patients received approval in the first quarter.

This represents a substantial increase of over 71% compared to the 443 approvals in the first quarter of 2019 and despite the COVID-19 related disruption; it’s a slight increase from the 751 approvals in the fourth quarter of last year.

As a reminder, we will continue to report on these prior authorization metrics in 2020, but as we have said previously, our long-term goal is to reduce the burden of individual prior authorizations by working with commercial payers to develop positive coverage policies.

Thus, given the growing number of positive coverage policies at commercial health plans in addition to the progress achieved with Medicare, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. We did not intend to continue to report on them after this year.

With the first quarter results presented, let’s discuss how we are preparing for a more normalized operating environment. First, we have worked with all of the implanting centers to maintain a detailed list of all postponed cases and all approved cases that have not yet been scheduled.

Once the impact of COVID-19 on the healthcare system begins to subside, we are highly confident that our business has well-positioned for significant further growth. There are key – a number of key reasons for this.

First, for previously scheduled procedures, we expect the vast majority of these to be rescheduled as these patients – as these are patients, who are clearly committed to finding relief for the obstructive sleep apnea.

They have been through a sleep study, tried and failed CPAP, taking the time to learn about Inspire therapy and are committed to moving ahead with our implant. We firmly believe that most of these patients were returned to the schedule when it is possible to do so. Second, while some hospital in certain parts of the U.S.

like New York and New Jersey have been inundated with COVID-19 patients, many others have not. Therefore, the postponement of a significant number of surgical procedures has been highly detrimental to hospital revenues.

As such, we expect hospitals to be motivated to schedule more profitable surgical procedures as expeditiously as possible when they are able. Inspire therapy can certainly be considered a higher margin procedure for a hospital due to the reimbursement level for the implant procedure that is done on an outpatient basis.

As a reminder, the national average Medicare payment increased to 29,000 at the beginning of 2020. commercial reimbursement at centers is approximately 1.4 times the Medicare payment. Moreover, the average payment to surgeons for an inspire implant increased $450 following the finalization of the Medicare LCDs.

This increases further work to implant the sensing lead, which is the add-on code and previously did not carry any payment. The average Medicare reimbursement for the base code was approximately $600 to $800 and therefore, this $450 increase is significant for the ENTs.

The other major change that the COVID-19 pandemic has mandated is the use of virtual tools and telemedicine to safely connect patients to healthcare providers. As I’ve noted earlier, during this time, we have continued our patient outreach program, albeit in a new manner.

with stay-at-home orders, we limited spending on radio and focus more on digital communication including Google ads and Facebook. We leveraged the revised television campaign focused only on smaller markets and those not as significantly impacted by the pandemic.

We also utilized our website to focus on the use of virtual tools and highlighted in the position finder to identify, which physicians are able to use telemedicine. Another key change was converting previously in person community health talks to virtual health talks with the same effectiveness yet in a safe and convenient location.

We believe many of these tools will remain effective even after the pandemic. In the first quarter of 2020, the number of visitors to our website was approximately 1.5 million, which is an increase of 69% year-over-year. In addition, there were over 14,000 physician contacts established via the website representing an increase of 48% year-over-year.

However, as we’ve said previously, even with all the web traffic, we believe a relatively small percentage of patients reaching out to the healthcare providers end up with an inspire implant. Therefore, we initiated a call center concept called the Inspire Advisor Care Program.

As a reminder, the primary purpose of this program is to assist patients in connecting them with the appropriate healthcare provider based on their specific needs, which in turn should improve our overall conversion rate.

We are pleased with the results of the program in the initial two markets during the first quarter and have since expanded to an additional seven markets. Regarding our international activity, patient flow was steady and improved from fourth quarter levels at centers in Germany and the Netherlands.

In the Netherlands, implant activity resumed in the first quarter following the formation of the required oversight committee to review and approve inspire therapy cases. As in the U.S., all inspire procedures were suspended due to the pandemic.

But the encouraging news is that cases have resumed in Germany in April and we’re hopeful the number of scheduled cases will increase throughout the remainder of 2020. We continue to drive towards a reimbursement decision in Japan and remain actively engaged with the authorities there.

We remain confident in achieving a mutual agreeable solution and while again, delayed due to the pandemic – to the COVID-19 pandemic. We recently met with the Ministry of Labor, Health and Welfare to renew the documentation review. We also continue to achieve progress with regulatory authorities in Australia.

We expect to receive regulatory approval in that country in 2021 and are working to obtain reimbursement concurrently although we cannot assess the timing by the effects from the COVID-19.

Here in the United States, we were excited to recently announce that the FDA has approved an expanded age range for the inspire therapy to include 18 to 21-year-old patients as compared to the previous minimum age requirement for patients to be 22 years old.

Based on our discussions with the FDA, we believe that this is the initial step in the pediatric approval process with the potential for further expansion to lower age groups.

We will conduct additional research on the specific characteristics of OSA in the pediatric population including continuing the ongoing clinical study for adolescents with down syndrome.

Switching gears again, you will note that our R&D expenses increased year-over-year in the first quarter as we continue to invest in enhancing our technology platform. The inspire cloud project, our cloud-based patient management system continues to progress with the addition of many centers in the U.S. and Europe, who are using this tool.

We intend to launch the inspire apps on patients’ smartphones shortly, which will take the next step and involving patients in the managing the OSA as well as create interconnectivity through the inspire cloud. We also have active projects to improve the physician programmer and the patient remote control.

longer term, the design activity for fifth generation inspire neurostimulator is ongoing. As I have said previously, we anticipate that this will be a multiyear effort to develop the Inspire 5 device and gain regulatory approval.

We are actively conducting feasibility trials with several technology innovation, which will make the Inspire 5 neurostimulator state-of-the-art and expect that it will further improve the performance of the system, including simplifying the implant procedure.

Importantly, the strong long-term fundamentals of our company that I’ve just reviewed are well-supported by a solid balance sheet that was recently further strengthened by the successful equity financing, which generated $124.7 million of net proceeds and closed in mid-April.

We are appreciative of the support from all the investors that participated in this offering and intend to utilize this capital to continue executing on our growth strategy, which is primarily focused on the U.S. market and with the objective of first increasing patient flow at existing centers and second, training and opening new implanting centers.

In summary, despite the negative short-term impact from COVID-19, we are very encouraged about the direction of our business along with our focus on improving utilization and our conversion rate, further advancements and reimbursement including Medicare that builds upon a recent positive coverage decision, a growing body of clinical evidence and a robust R&D platform.

We are confident that we remain well-positioned for the long-term success. With that, I’d like to turn the call over to Rick for his detailed review of our financials.

Rick?.

Thanks, Tim. As Tim noted, we were extremely pleased with our financial performance in January and February prior to the outbreak of the COVID-19 virus in March. for the first quarter of 2020, total revenues were $21.3 million, a 31% increase over the $16.2 million generated in the first quarter of 2019. U.S.

revenue in the first quarter was $19.3 million, an increase of 34% over the $14.4 million in the first quarter of 2019. This increase was volume driven from both existing territories and the addition of new implanting centers. In the first quarter, European revenue increased 9% to $2.1 million. Our U.S.

average selling price in the first quarter was $24,000, compared to $23,400 in the prior-year period. The European ASC was 22,300 during the quarter, which was consistent to the first quarter of 2019. our gross margin in the first quarter was 84.6%, compared to 82.4% in the first quarter of 2019.

this notable improvement was primarily due to manufacturing efficiencies, which led to cost reductions with our third-party contractors. Despite the ongoing COVID-19 pandemic, we have not experienced a disruption in our supply chain and maintain sufficient levels of inventory.

Total operating expenses for the first quarter were $34.5 million, an increase of 56% as compared to $22.2 million in the first quarter of 2019. this planned expense increase – this planned increase was primarily due to the expansion of the U.S.

and European sales organizations as well as increased direct-to-patient marketing programs, continued product development effort and general corporate costs. In light of the ongoing uncertainties, we are taking a thoughtful approach to our spending, but expect operating expenses to increase as we continue to invest in these initiatives.

Our net loss for the first quarter was $16.1 million, compared to a net loss of $8.2 million in the first quarter of 2019. the diluted net loss per share for the first quarter of 2020 was $0.67 per share compared to $0.35 per share in the same period last year.

The loss of revenue in March due to the COVID-19 pandemic negatively impacted the net loss in the first quarter despite our improved gross margin. As of March 31, 2020, our cash and investment totaled $142 million compared to $156 million at December 31, 2019.

as Tim mentioned, on April 16, we completed a follow-on offering, in which we sold 2.3 million shares of our common stock and received net proceeds of $124.7 million. We view this financing in the current environment, which included several top-tier healthcare investors as validation of this significant long-term potential of our business.

As communicated on April 13, we have withdrawn our previously announced full-year 2020 financial guidance due to the rapidly evolving healthcare environment and continued uncertainties resulting from the impact of COVID-19. at this date, Inspire cannot predict the extent or duration of the impact on our financial results.

We will continue to evaluate the impact of the COVID-19 pandemic on our business and intend to provide additional information in the future. The weighted average number of shares outstanding for the first quarter was 24.2 million. We anticipate the weighted average number of shares for the second quarter will be approximately 26.3 million.

In summary, despite the recent impact of the COVID-19 outbreak, we are confident that the long-term fundamentals of our business remain solid. With our strong balance sheet, we are well positioned to continue executing our growth strategy and navigate through this challenging period. With that, we are concluded with our prepared remarks.

Doug, can you please open the call for questions?.

Thank you. [Operator Instructions] Our first question comes from the line of Jon Block with Stifel. Please proceed with your question..

Thanks, guys. Good afternoon. And Tim, for the recaptured cases of those that are deferred and I would certainly agree with you, but can you talk about any challenges from a capacity standpoint? In other words, hey, the patient wants to move forward, but you had previously alluded to some capacity challenges.

So, is there anything that you guys need to proactively do to just sort of help ensure that the backlog of patients moves through that pipeline effectively?.

That’s a great question, Jon. That is – that you really summarize a key challenge going forward. Good to hear your voice by the way. The – with the backlog, the patient says as sites start to come back online, a lot of the surgeons have just their own dedicated our time and it’s very competitive for them to find additional OR time.

So it’s – it is going to be a little bit of a challenge for the surgeons to find enough time to schedule the backlog of cases that they have.

So hence one of the avenues we’re looking at is some of these surgeons have access to ASCs and because that’s easier for us to open up the ASCs and that we don’t have to train the staff, right, because they’re already trained at inspire. We just need to work through the contracting process. So that’s one opportunity.

Other surgeons are looking for odd hours, of course, I think you’re going to start saying procedures occurring on Saturdays and even scheduling more than two cases on a given day. So, things will continue to evolve there, but that is our focus.

We are working right now in spending time reviewing with each of the regional managers, because most of them all have their centers coming back online and scheduling cases. And the challenge that they’re going to run into is how in a timely matter can they work through these backlogs. Now, let me highlight one other thing.

Also remember that the number of prior authorization submission started to slow down at the end of the first quarter and the reason is, because we have to do that sleep endoscopy procedure and those are also suspended. And so we also have to come back and start redoing the sleep endoscopies.

So, there’s a little bit of a time, where they can work through the backlog as it continue to build up new cases with the sleep endoscopy procedures. So, it’s something that our staff is so diligently working right now with the physicians..

Got it. Great color. Thanks for that.

And then I’ll pivot for the second question for pediatric, is there a way to size, I don’t know, that incremental market call is 18 to 21 year old and maybe, more importantly, part B of that question, it would be, if I remember correctly in early 2019, when you got some of the blues on board from a reimbursement perspective, what was really impressive is that several of the blues also at that time, went ahead and stamped the reimbursement for pediatric downs, if I remember correctly.

So, for pediatric 18 to 21 and I don’t think it’s specific to pediatric downs, do those reimbursement policies from the blues, are those still intact or do you have to go ahead and pioneer some incremental policies from those guys? Hopefully, that makes some sense..

Yes. that makes great sense. Again, I mean when we said what we’ve been saying all along as our focus is dealing with adoption of inspire therapy in the general population, and we did get the request here back to start the work with the pediatric and specifically, with the downs, but that’s a very small population.

So, when we started working with the FDA, we wanted a broader indication. The FDA agrees with that, but they wanted to go in a stepwise function. So, we started out with just lowering the age down to 18.

There are probably less than 20,000 patients from a prevalence standpoint in 18 to 21 with a level of AHI, maybe a thousand of those have Down syndrome to expand on that that could go down to a lower age would obviously increase that market considerably.

But then as far as the insurance companies go, we need to go back and as I mentioned earlier, standardizing policies and you saw United just went up to BMI 35.

We also need to go back to them and say, now the age group, 18 to 21 is approved by FDA, will you update the policy to go to 18, but as you mentioned that Blue Cross Blue Shield, most of those are in fact specific for Down syndrome, because those were prepared in the middle of 2019 and we will need to go back to them as well to get a more broader indication for the 2018 to 2021..

Okay, perfect. Thanks for your time, guys..

You bet, Jon. Thanks..

Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question..

Hi, thanks. It’s Lei Huang calling in for Larry and thanks for taking my question. I just want to start with what you said about procedures starting to come back in the U.S. and Germany.

Based on what you see now, can you provide color on how you think about Q3, Q4, should we expect some level of normalcy in those quarters or some sense of growth in the back half of the year?.

Yes. We see the procedures coming now, I mean back in that we have cases scheduled and 10 case right now. We believe that majority of the case states will be back operating by the end of the year. And we compare those – so we got that feedback, but we continue to expect wrong growth.

Once we get these centers opened up with a commitment to first work through the backlog, but we’ve been continuing to build the practices and bringing in more patients. So yes, we’re excited about the back half of the year.

Again, we haven’t really been able to celebrate Medicare, because we’re in the middle of the pandemic and all of those policies came online except for these final seven States that when we get through the pandemic, you’re going to see a greater impact from the Medicare and the physician payment has significantly increased as well.

So, there’s a lot of key things that are going to drive adoption of implants in the second half of the year..

Next question comes from the line of Chris Pasquale from Guggenheim. Please proceed with your question..

Thanks, Tim. Wondering how you think about the resumption of surgeries versus the resumption of sleep studies, DICE procedures, some of the other work that has to happen for patients to work their way through the funnel.

I’m curious whether we could run into a situation, where perhaps some of the submissions that were already approved, those patients that are getting treated, but there ends up being a gap in the funnel that could then hurt you down the road..

Yes. that’s a great, great perspective. I think we have a number of patients that have been delayed or suspended, and the new approvals from Q1 are going to carry us forward through Q2, Q3 and that allows us time to be restarting the DICE procedures at the same time.

the physicians have a significant backlog at DICE just as they do on the surgical procedures and then looking for improved ways to be able to do some of those sleep endoscopy procedures, including doing some of those that ASCs as well.

Sleep studies, I think the pandemic has really kind of reinforced the purpose of using home sleep studies and I think you’ll see a continued growth in HSTs.

But you’re also saying some of the sleep labs come back online, but I think it’s safe to say that most patients right now would really prefer to have HST at home, right then go into an overnight sleep lab, at least in the near future and really it’s the focus is going to be on disposable units. So, there’s some opportunities there as well.

But I think we’ll be able to get everybody back online and remember a lot of patients that call and have active sleep studies or a sleep study performed within a year. So, they don’t necessarily have to go back and have another sleep study as part of their diagnosis process..

That’s helpful, thanks. And just curious how much visibility you feel like you have into the surgical calendar at your customers. now, the things are starting to ramp back up.

What kind of visibility do you have as you look out here, being in early may on, on what the next 30 days to 60 days looks like?.

Chris, changes daily. It changes daily. We’re in Minnesota right now and the governance still kicking around, why don’t we can start doing procedures. The Mayo clinic has kind of put a date on a calendar, for which they can start scheduling. We also have the university of Minnesota here.

As I mentioned, 13 States have already scheduled cases either already performed or within the next couple of weeks and as we worked through every state, including New York, we are scheduling cases in may.

So, we as things progress, we get more and more clarity when the centers start to accept scheduling of the cases and then we need to work with the surgeons to get their priority to get their cases prioritized and scheduled. So, it’s going to be an ongoing challenge for the territory managers. They’ve been geared up for it.

They’ve been working over the last six weeks with the physicians to make sure they’re ready to schedule these cases. We kept everybody warm and ready to proceed..

Thanks..

Our next question comes from the line of Richard Newitter with SVB Leerink. please proceed with your question..

Hi. Thanks, guys for taking the question. I wanted to go back to the ASC commentary and it sounds like as you answered Jon’s question earlier about capacity is really going to have some backlog work down.

I was hoping you could give a little more context as to what’s involved in getting the current installed base or account base kind of migrated or more comfortable doing these procedures in ASC setting.

What has been the bottleneck, just in the reimbursement, which is now clearly there? Or is there something else? And if you could also just, I don’t know if you have it handy, but what the current percentage of cases that are performed in an ASC today or what percentage of implanters, let’s just say real high volume implanters are already doing it in an ASC setting, pre-COVID..

Fantastic. Thanks, rich. Let me back up and talk about the fundamentals that allow ASCs to really start doing procedures and the limitations that prevented them previously.

So last year, when we were dealing with the prior authorization process, a member would take a private practice physician three or any physician, three to four months to get a prior authorization approval while as we developed the policies in the 165 million covered lives and now with the LCDs from Medicare, the physicians can now focus on practicing medicine and not necessarily being an insurance agent.

So, when patients come in, they can immediately take them directly to the surgical center or to the OR. The second thing that helps the private practice is that Medicare was only paying for, on average half the cases, because they didn’t have policy.

So, you hear a lot of the academic centers would do Medicare, because the surgeons for the most part are on salary and they’re not as concerned about it. Private practice, they need to get paid for the work that they performed. And so now that the policies are in place, they can be assured of getting the $600 to $800 for the base code.

But now with the advent of the payment for the $450 for the sensor that has increased that payment 50%. So, they were sure to give that getting paid and the payment is 50% higher.

now, from the ASC facility payment as the national average Medicare payment went up for facilities, it also went up for ASCs and the national average Medicare payment for ASC is $24,000. now, our ASP is 23,830 or such. So, there’s not a lot of margin there.

But when you get to key cities and geography that ASC payment is higher and the commercial payment is more than the 1.4 and close. In fact, sometimes it’s closer to 1.8 times the Medicare, which makes it much more profitable to the ASC to be able to do a two-hour outpatient procedure. And at two hours, they can schedule three cases in a day.

So, there’s also the economic benefit and if the mix from commercial to Medicare stays close to what we have been running, which is about 60% commercial, 30% Medicare, 10% VA, that really is a good situation for the ASCs. And with the reduced burden of the physician, it’s a – it makes it more beneficial to streamline cases in the ASCs.

I’m going to keep going, because I think I know your thought on question was talking about the number of ASCs that we have. at the end of Q1, I think we only have 27 ASCs out of our total number of centers, which is 327.

So, it’s a very small percentage today, but I think that’s what you’re going to see the greater increase as we turn the attention to the ASCs to be able to do more and more procedures. And there are several centers such as KU that sometimes they’ve already been using their ASC to support increased capacity..

I wanted to go back to the sleep endoscopy, is there anything in the wake of coded and the fact that the respiratory disease maybe not so much from the patient side, but on the provider side, at ENTs, your customers, can you just send protocols or, I know that’s a procedure that hat might actually provoke some anxiety or potentially provoke some anxiety, if patients are under and they’re –they’re poking around someone’s upper airway, anything to be watchable there..

Absolutely, when there is a concern for the ENT is when it sort of enables scope and excite the tissue in the nasal pharynx. They can excite airborne pathogens including COVID. So, there’s a concern there.

So, what the ENT or the international state surgical society did is they got a group together and to grow guidelines and guidance for surgeons on how to operate and properly and safely conduct ASCs. There have been other instruments that have been to ease that process. But again, it comes down to making sure they do proper testing.

But even with the testing, the ENTs are going to use full PPE when they perform those procedures. And that’s – I don’t think it’s going to be a long-term challenge, but it’s going to be something that the ENTs need to be aware of as we start back up and they’ve already developed those guidelines..

Our next question comes from the line of Adam Maeder with Piper Jaffray. please proceed with your question..

Afternoon. It’s actually Matt on for Adam. Thanks for taking the questions. Just Tim, for starters, you talked about the pediatric opportunity that you guys have in front of you. Can you bundle that together with UNH lowering the BMI rate as well as getting, getting access to WPS, what that does for your market opportunity.

And then there’s been some questions around your market opportunity, size of anatomies, et cetera, that where this – the technology can actually be used.

Have you sharpened your principal on that? That second part of the question a little bit finer in response to that?.

Yes.

Well, let’s talk – let’s talk about that from the beginning when we laid out our TAM I made, we always talked about the two million patients, who are progressed – prescribed CPAP every year and that originates from a very solid source when we started talking about the SEC reports from ResMed and Respironics, and we can look at the number of prescribed devices.

And then literature clearly talks about the percent of the population that is compliant a month after being prescribed the CPAP. And then we have the data from the STAR clinical trial that showed the number of patients that we screened out using sleep endoscopy. And it is related to BMI.

So, in the clinical study, we screened at a BMI of 32 and less than 32 weeks screened out 28% of the population. We know that therapy can be effective as we go higher to a BMI of 35, but only if they don’t have complete concentric clap at the level of the soft palate.

But we also know that when you increase the BMI, the 32 to 35, you have a chance to have increased lateral wall collapsed. Therefore, you will screen out a higher percentage of patients estimated to be in the mid-30s percent, because of a concentra class. So, we can treat higher BMI as long as they have the proper anatomy.

So, when we look at BMI 35, that has a nice benefit when we get approvals from UnitedHealthcare. But here’s the point, the TAM is so large that the challenge is not finding patients, our challenges on the opposite side. It’s a ground up building of the number of centers and physicians that can handle the capacity to treat this population.

So, if you look at the penetration rates that we have today, it’s extremely small. So, as we continue to add more centers and build capacity, it really is a ground up build to be able to address the market.

So, the overall TAM doesn’t really play, but the key is it really shows the duration of time for us to continue to grow the adoption of the therapy enhance that was the reason we did a financing and also allows us to do significant increases in our investments and technology to make sure that we keep growing the performance, keep growing the adoption and keep tearing down the barriers for patients to be able to get the Inspire procedure and testimony to that is just look at the number of patients that come to our website on a quarterly basis and we need to continue to build our capacity to take care of those patients, who are looking for an alternative therapy..

That’s helpful. That dovetails into my next question, which is just on the on the hospital side of things, I know that’s a big focus that you guys have this year. You have to go through VACs, I would imagine in most cases for new hospital customers.

So, how receptive are hospitals at the moment to even go through this process? Should we expect a material slowdown in new center has either near-term or in subsequent quarters and then any updates on the commercial payer side, Anthem, Humana or Cigna? Thank you..

Fantastic. That’s a couple of good questions in there. As far as new hospitals start go, we have quite a backlog of centers in there that have already been through the VAC, the value add committee, where they look at the codes, what the reimbursement is and make sure it’s a procedure that they want to perform at their hospital.

And they’ve been through that. We’ve been through a lot of the training and we’re just about to open the centers, but we don’t count a center is being active until they are ready to proceed the implant. Well, with the pandemic, obviously, those cases are all suspended too.

So, right out of that, we have more case, more centers that are going to be able to open right away. I made mention to Ascension Health or the 150 hospital system that we signed a national contract with. We only have a couple of those centers active today.

And what happened is after two or three of those centers started doing inspire a couple other Ascension sites, what we want to do Inspire too. And that’s what led to developing a national contract. It’s the same thing that happened with Kaiser in 2019, where that’s what drives those national contracts.

And so we are now completely through the value committee with 150 of those hospitals that I can open 150 of them, but it certainly provides an avenue to get the first four or five of those open. But what’s unique there is Ascension also owns and operates a lot of ASCs.

And so that also provides a very quick avenue for us to be able to just do some training to get the ASCs going, especially in the areas, where we need to build capacity. And your last question, Matt, was….

The payers any updates?.

Oh, the payers, while United came out today, I mentioned that already. We continue to work. We pound with Cigna, Humana and Anthem are the three biggies. Anthem’s annual review, I think is August, September.

And so we keep sending them all the latest, greatest information, but with all the other peers in places, a lot of pressure for Anthem to do a positive review, especially where they’re underneath the Blue Cross Blue Shield umbrella and evidenced street the tech assessment group for Blues has already written a positive.

So, we expect that they’re going to write policy in the near future and we certainly are pushing them to write policy this year and I will see if they make us wait another year.

That being said, Anthem is approving cases, although they do take those – make those patients go to EMR for the most part, which is unfortunate, because it is that three month timeframe to getting approval..

Thank you..

Thanks, Matt..

Our next question comes from the line of Mike Ott with Oppenheimer. Please proceed with your question..

Good afternoon. Thanks for taking my question. Curious that you’ve been able to convert most of your in-person patient education sessions into the virtual events that you mentioned.

How’s the attendance if I could, if those virtual events? obviously, patients are distracted right now, but in theory there’s fewer capacity constraints, I think at the virtual event. Thanks..

Yes. that’s unfortunately, Mike all of our in-person community health talks had to be canceled for good reason, right? And those are always quite effective.

But what all of us have learned to be so effective with is Zoom meetings, right? And we’ve even had board calls and all of our team meetings are all on Zoom or Microsoft teams or whatever technology you like. It really is a nice tool for physicians to be able to communicate with patients and so the attendance can vary.

It can vary anywhere from 10 to 12 people attending a Zoom conference to more than 20. And what’s interesting enough is, after we do that at the virtual health talks, the first appointment with the physician does not need to be in-person, right. I can do telemedicine with you and I can understand your history.

And when were you diagnosed with sleep apnea, and tell me about the different types of CPAP masks that you use.

What’s your physical characteristics? What’s your lifestyle? What are their comorbidities? What’s your insurance company? And it could really help to get through the first educational session with a virtual health talk, get through the first appointment with telemedicine.

And then once we get through, instead of scheduling office visits, the patient so far down the road. So, I don’t have the exact number of virtual health talks that we have scheduled, but it’s quite a few. And if you go to our website on inspiresleep.com and just type in a few zip codes, you’ll be able to see that it’s readily accessible.

I’ll do attend, one of those and you don’t have to attend one of those in your hometown; in Chicago, you can go to Arizona, you can go to, I think we’ve been doing some in New York..

That’s great. Thanks so much, Tim. If I can squeeze in a follow-up.

If you’ve updated the total number of patients that have been implanted, I know it was recently over 7,800?.

8,200. Eight thousand two hundred..

Exactly..

Thank you so much for taking the call. Thanks..

Our next question comes from the line of Ravi Misra with Berenberg Capital Markets. Please proceed with your question..

Hi, thanks. How are you doing? I hope the connection’s okay. I hope you guys and your families are okay..

Thanks, Ravi..

Tim, I think we’re all trying to figure out kind of what kind of shape this rebound is, and I appreciate that data is low, but it sounds like what you’re saying is that that procedures and scheduling is coming back online. With regards to the backlog, I mean is a reasonable way to think about it.

You have these kind of 761 cases that have approval plus whatever assumption of cases that you didn’t get think, done – got done in 1Q as kind of a low hanging fruit so to speak over the next couple of quarters. And then as we work through the diagnostic process for new patients, you get kind of the volume growth to reaccelerate off of that.

And then maybe, secondly, I’m curious, as you get these operating rooms coming back online, just what procedures are you competing against? I assume maybe, to lack of your satisfaction, they’re not all Inspire procedures, but I’m just curious what other – what other surgeries do you think that the hospital is going to have to go for and how are you guys fighting to get your procedures done?.

Absolutely. Okay, Ravi. I’m going to make it a little bit more complex for that. It’s not quite exactly the way that we can take the approval from the first quarter, because a lot of the implants that we did and you can approximate that by looking – by the revenue and the ASP.

And the key is going to be the percent of the cases from Q4 the approvals that actually got scheduled on planet in Q1 and how many of those approvals in Q1 have not yet been performed in a nutshell, yes, that is the basis of the backlog. But there’s other cases that are awaiting days, there’s other cases that are getting their first deployment.

So, the backlog goes a lot deeper than that. But that’s a good way to approximate what our challenges as we come out of post-pandemic mode and trying to get these things scheduled. Okay. So, switch gears and start talking about competition at the OR.

Interesting enough in the second week of March, we actually did two cases at Long Island, Jewish and New York City. And the reason was is as ENT surgeon says, this is not an elected procedure. This is inspire with treating obstructive sleep apnea.

And so if you notice today we didn’t use the word elective and in a lot of the hospitals that we’re dealing with, we kind of cross that chasm, because of the quality of life dealing with sleep apnea, the risks, comorbidity, that it’s not necessarily called an elective procedure and that’s our several of the cases are being scheduled today and that helps the surgeons are a little bit with the competitive environment.

Then again, when you start talking about the ENT suite, a lot of our surgeons are oncologists, right? And so they deal with cancer. And that certainly, has a very high priority, especially if they’ve been putting off any of those cancer cases, those are going to take a priority.

The other good news on the other side of that is we’re a just a general operating room. We don’t have special equipment, right? We’re not in the robot suite.

We’re not requiring any equipment such that we can do our procedures in just a general outpatient suite and a lot of times hospitals have their outpatient surgical suite, where we can do our cases. So that provides for a little bit more capacity and with the severity of the disease, that gets us a little bit more priority.

And then unfortunately, financing does come into this and this is – Inspire is profitable to the hospital, because it generates a lot of revenue.

And so that gives us a little bit more priority going forward from that standpoint, it makes sense Ravi?.

I think, I think you were a little bit more – less diplomatic than I was asking the question. But I really appreciate the response. And just one more on the kind of financial incentives for the hospital. The – I’m just curious, you’ve got the add on code for the lead for the surgeon for you now.

Is that something that the private insurer has also been paying for? I’m just curious about the work you need to do there to work beyond the Medicare population on that. Thanks a lot..

Yes. Thanks, Ravi. The answer to that is yes. And so even today with UnitedHealthcare, they list that code in the policy and when they list those codes, those do get paid.

And we make sure that we educate the surgeons that when they’re dictating their surgical notes in the OR that they identify inspire procedure and they identify 64568 and they identify 0466T, to make sure they get all the appropriate CPT codes. So, when the coding people type it all up, they capture that and they can get paid for it.

So yes, we do have evidence that commercial payers have been paying for that additional work with the sensing lead..

Our next question comes from the line of Kyle Bauser with Dougherty & Company. Please proceed with your question..

Hi. Thanks for squeezing me in here and hope you’re doing well down the road here in Minneapolis. So, quickly on the competitive front, it started to excel out there doing a funding round. I know there’s out there.

What are you sort of seeing on regarding data and expected entrance into the market?.

Well, unfortunately from a competitive standpoint, they’re both in a clinical phase, where they need to do clinical implants to be able to collect data and unfortunately, with everybody else, all of their cases, it’s probably had to be suspended as well.

So, I bet they’re working diligently to try and get their clinical sites back up and running to be able to start collecting clinical information to be able to proceed towards regulatory approvals. We, on the other hand, have been able to spend as we talked about with our OpEx to be able to develop our next generation neurostimulator.

So, we’ve been pushing really hard to keep the advancement of that going. So maybe, we – maybe in a strange way, we can say that we picked up a little bit of time in developing our technology above our competitors’ ability to collect clinical research..

Sure. All right. Got it. And then just for clarification, so kind of following up on John and Matt’s question.

So, in regards to the expanded indication, is the plan to kind of continue to expand the label into the younger age range or you want to go added from the other direction and maybe, just go after the pediatric down syndrome market first and then unlock all the pediatrics beyond down syndrome? I mean, how have you been thinking about it?.

Well, again, I’m going to highlight that our focus is on the general adult population keep growing the adoption. But that being said, for indication expansion, we still want to pursue a general sleep apnea indication for the younger age patients.

As, just an example, if I started looking at patients ages 10 to 21 years old with an AHI of 15 or above, we’re talking about 50,000 patients and of those 50,000 patients, maybe 2,500 to 3,000 of those have down syndrome.

Now, it’s probably true that the adoption rate in the Down syndrome group would be higher, but that’s also a small number of patients that are really spread out. So, it’s an important indication so as to be able to provide an important therapy, inspire therapy for that population.

But I think it’s more important to be able to provide it in a general indication, not related specifically, to down syndrome. So, we worked extensively with the FDA. We traveled there to make sure that we understood where – how they were looking at it. We had the pediatric ENTs traveled to the FDA to make sure they understood.

What FDA is looking for and there is just a basis that that sleep apnea can resolve in pediatrics and we need to do just some more posts, a retrospective review of a pediatric population, not necessarily whip inspire to show some of those clarification. But so we’re going to do that research.

We’re going to continue with the Down syndrome trial and we’re going to continue to work with the FDA to expand that indication..

Okay, got it. Thanks for taking the questions..

All right. thank you, Kyle..

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks..

Thank you very much for joining the call today. As always, I’m grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve strong and consistent patient outcomes.

The Inspire’s team – the Inspire team’s commitment to patients remains unmatched and is the most important element to our success. I wish to thank all the employees as well as the healthcare teams for their valiant efforts during this pandemic and for the resiliency as we begin to reschedule patients have many sites in the U.S. and Europe.

For all of you on the call, we certainly appreciate your continued interest in and supportive Inspire, and look forward to providing you with further updates in the coming weeks and months. Please stay safe and healthy. Thank you very much..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..