Greetings, and welcome to the Inspire Medical Systems Incorporated Second Quarter 2020 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead, sir..

Thank you, operator, and thank you all for participating in today's call. Joining me today 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, 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, operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2020 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 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, Tuesday, August 4, 2020.

And with that, I'll now turn the call over to Tim Herbert.

Tim?.

Thank you, Paul. And thanks, everyone, for joining the call today for our second quarter of 2020 business update. I'd like to begin by emphasizing how very proud I am of the Inspire team, and how they stuck together through all of the challenges experienced during the second quarter, resulting in a strong close.

More importantly, we are now in a very strong position to continue the ramp in the second half of the year. As expected, the impact of the COVID-19 global health pandemic was felt throughout the second quarter, with the postponement of a significant number of implant procedures in both, the U.S. and in Europe.

Even with these delayed cases for the second quarter, our worldwide revenue was $12.2 million, which was a decrease of 32% as compared to the second quarter of 2019.

We realized that COVID will be with us for some time but our recent experiences have shown that health care providers have adapted and identified safe methods to continue to treat patients. In fact, with the recent surge in COVID cases, we have had only a few centers suspend Inspire procedures.

As such, implant activity has significantly increased over the last couple of months. To put this in perspective, at the end of April, only 2% of our centers were conducting implant procedures. At the end of May, this number increased to 24%.

By the end of June, 51% of our centers were conducting implants; and while the data is early, it suggests more than 60% have implanted in July and we are working with all centers to get them scheduling cases. We do know the great majority of centers are conducting office visits once again.

This encouraging trend provides us with confidence in the outlook for our business for the remainder of the year. Therefore, we are now able to provide new full year 2020 revenue guidance between $88 million and $92 million.

Of course, as you know, the operating environment for surgical procedures continues to evolve as COVID persists and even spiked in some regions. So while we are confident in our guidance, we will continue to monitor the impact of the pandemic. Rick will get into specifics later.

But we're also reiterating our guidance and gross margins, as well as the key operating metrics of opening new centers and territories. Let's discuss what's driving a positive outlook for the business. At the core is the quick ramp of centers performing Inspire implants, as well as many patients in the process of receiving Inspire therapy.

During the pandemic period, the team remained focused and very active with health care providers to ensure that facilities and patients were prepared once cases were able to be scheduled. We previously discussed how we are concentrating on four distinct patient groups.

The first group are those patients whose cases had to be postponed due to COVID, and we are achieving excellent success in rescheduling these procedures. The second group of patients had completed their work-ups and obtained insurance approval, but were not able to schedule their implant. And again, we are now successfully scheduling these cases.

The third group of patients were unable to complete the final assessment required for insurance prior authorization, which is the drug-induced sleep endoscopy. As you recall, all sleep endoscopy procedures were also postponed.

The positive news is that all centers performing Inspire implants are also performing the sleep endoscopy procedures, and therefore continuing to build the practices.

The final group of patients are those new to Inspire therapy and whose initial contact with their health care providers was through newly adopted virtual tools, such as community health tech at Zoom or Microsoft Teams, and their initial requirements were using telemedicine.

The key focus of the Inspire team was to ensure that once we started implanting at centers that the ramp could continue without facing any gap or slowdown of procedures due to not appropriately building the pipeline during the pandemic. What we're experiencing is that our patients are clearly committed to addressing their obstructive sleep apnea.

They have been through a sleep study, try but unable to benefit from CPAP. Taking the time to learn about Inspire therapy, worked with their physician to ensure they're a good candidate, obtained insurance approval and are now committed to moving ahead with the Inspire procedure.

As we review some of the key initiatives from the second quarter, what was most critical for us was to stay active and educating new patients. Creating this awareness was largely due to the direct to consumer activities we continued during the quarter.

With stay at home orders in place, we initially limited spending on radio and focused more on digital communication including Google ads and Facebook. We leveraged a revised television campaign, focusing on smaller markets that were not as significantly impacted by the pandemic.

During the latter half of the second quarter, we resumed radio and TV initiatives in a larger market as the impact of COVID lessened in those areas. We're also utilizing our website and virtual tools to help patients connect with physicians, and in many cases, through the use of telemedicine.

In the first half of 2020, the number of visitors to our website was 2.6 million, which is a robust increase of 45% year-over-year. In addition, over 28,000 physician contacts were established via the website representing an increase of 47% year-over-year.

Moreover, in order to increase the percentage of patients reaching out to health care providers, resulting in an Inspire implant, we continue to expand our call center concept called the Inspire Advisory Care Program.

As we said before previously, the primary purpose of the advisory care program is to assist patients in connecting with the appropriate health care provider based on their specific needs, which in turn should improve our overall conversion rate.

We have seen positive results from the advisor care program to date so we expanded it to include 77 centers and expect to continue expanding the program throughout the year. We also recently launched the Inspire Sleep App, which in combination with our Inspire Cloud is the basis of our digital patient management system.

This system will continuously be enhanced and the first version of the app allows patients to learn about Inspire therapy and connects them with an Inspire trained physician.

This past week, we launched the second version of the app, which interacts with Inspire Cloud and enables the collection of clinical data such as patient quality of life and satisfaction questionnaires. So it is clear that the patient interest in Inspire therapy remains high, even during this COVID period.

Beyond this, hospitals and physicians have lost significant revenues due to the pandemic and are motivated to schedule patients and get implants moving again. The good news here is that Inspire therapy is considered a high emergent procedure for hospitals due to the reimbursement levels for the outpatient procedure.

As we previously discussed, the national average Medicare payment increased to $29,000 at the beginning of 2020 and commercial reimbursement is approximately 1.4x the Medicare payment. The proposed 2021 outpatient payments were released today, with a proposed increase of $850 to this code if approved, which should be released in October.

Moreover, as I said on our last call, the average payment to surgeons for an Inspire implant increased by about $450 following the finalization of the Medicare policies or local coverage determinations or LCDs. This increase is for the work to implant the sensing lead, which is the add on code 0466T and previously did not carry any payment.

The average Medicare reimbursement for the base code of 64568 was approximately $600 to $800 and therefore, this increase of $450 is significant for the surgeons. The proposed 2021 rule reduces the base code surgeon payment by just $48 if approved.

Let's stay with market access or reimbursement where we continue to execute on our two key strategies, which are to expand the number of positive written coverage policies and concurrent with this process continue to obtain individual prior authorizations.

First, the major accomplishment in the second quarter was the significant progress we achieved with Medicare. I am pleased to report that all seven of the Medicare administrative contractors or MACs have now issued and implemented their final LCDs and Inspire has 100% Medicare coverage in all 50 states.

There are approximately 40 million Medicare patients and an additional 20 million lives under commercially sponsored Medicare plans, known as Medicare Advantage. The inclusion criteria in the LCDs are very consistent across the U.S. and provide some impactful changes, such as increasing the BMI limit from 32 up to 35.

In addition, we currently have 56 positive policies from commercial healthcare plans, representing approximately 182 million covered lives. As a point of reference, we had approximately 125 million covered lives at this time last year. We continue to expect that a momentum with these positive coverage policies will continue throughout 2020.

The most recent positive coverage decision was received from Cigna which provides health insurance coverage for approximately 16 million members in the U.S. In the second quarter, our internal reimbursement team supported 566 prior authorization submissions.

This compares to 735 submissions in the second quarter of 2019 and 929 submissions in the first quarter of this year. When the sleep endoscopy procedures were suspended back in March, this slowed the number of patients able to submit for an insurance pre-approval.

As we mentioned, these patients are against scheduling their endoscopies and we have already experienced an uptick in prior authorization submissions. The news regarding prior authorization approvals is also positive. The approval rate has dramatically increased due to the large number of commercial insurance policies.

In fact, 541 patients received an approval in the second quarter, which represents a modest 7% decrease compared to the 579 approvals in the second quarter of 2019. Along with the increased approval rate, the median time for an insurance approval is now down to approximately 11 days from 25 days in 2019.

Given our improved reimbursement environments, these metrics will likely become less meaningful in evaluating the overall progress of our business going forward. As we previously stated, we did not intend to continue to report on them after this year. In the second quarter, we added 16 new U.S. implanting centers.

The number of new centers was limited as we were not able to schedule implant procedures and therefore have several sites that will start in the second half of the year. Further, during the pandemic period, we took the time to retrain all implanting centers and review the current state of these centers.

The process resulted in the deactivation of 15 centers for reasons such as surgeons relocating, as well as where the location no longer has an active and effective team to manage an Inspire therapy program.

Even though this is a relatively small number of centers, we believe this action allows the sales, marketing and clinical teams to focus their efforts on centers that will have attractive returns for our business. Therefore, with 16 new centers and 15 deactivated centers, we ended the period with a total of 328 centers in the U.S.

We will continue to identify new centers, including ambulatory surgical centers or ASCs, and focus on training and contracting at these centers. As a reminder, recruiting additional ASCs will remain a focus moving forward as Inspire in an outpatient procedure and as I said earlier, the reimbursement within ASC has improved.

Moving on, we created nine new territories during the quarter, which brings our total to 91 territories in the U.S. Importantly, we did not slow our cadence of hiring territory managers to ensure we are in a strong position once cases were able to resume.

These new centers and territories will have beneficial impact on our long-term growth and will drive continued growth in therapy adoption. Regarding our international activity, patient flow was steady in Europe and continue to improve throughout the second quarter similar to the U.S. and specifically in Germany and the Netherlands.

We expect that the number of scheduled cases in Europe will continue to increase throughout the remainder of the year. In Japan, we are driving towards the reimbursement decision and remain actively engaged with the authorities there.

We continue to meet with the Ministry of Labor, Health and Welfare to finalize the documentation process and expect to have a reimbursement decision in Japan this year, and plan for limited commercial launch in 2021. 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. In the second quarter, the FDA approved an expanded age range for Inspire therapy to include 18 to 21-year-old patients.

Several commercial payers have already revised the policies to reflect this pediatric indication, and we expect that others will follow suit throughout 2020. We will continue conducting additional research on the specific characteristics of OSA in the pediatric population, including our ongoing clinical study for adolescents with down syndrome.

Switching gears again, similar to the first quarter, our R&D expenses increased year-over-year in the second 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 in Europe for using the tool.

As I noted earlier, we recently launched the Inspire app on patient smartphones as an educational tool, and the second version released this week interfaces with the Inspire cloud.

These are just the first steps in establishing interconnectivity between the patient and their healthcare provider with a long-term plan to improve outcomes by tracking patient activity and adherence, and monitoring for any issues with device use. We also have active projects to improve the physician programmer and the patient remote control.

Longer term, the design activity for our fifth generation Inspire neurostimulator continues. As I have said previously, we anticipate that this will be a multi-year effort to develop the Inspire 5 device and obtain regulatory approval.

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

In summary, we are aggressively focused on continuing to advance our business, implant activity is increasing, and we are well positioned to assist patients as they progress on their Inspire therapy journey.

We remain focused on improving utilization and our conversion rate, achieving further advancements in reimbursement that build upon our recent positive coverage decisions, growing the body of clinical evidence and evidence in support of Inspire therapy, and the continued development of a robust R&D platform.

We are extremely excited about our future prospects, and are confident that we continue to be well positioned for long-term success. With that, I'd like to turn the call over to Rick for his detailed review of our financials..

Thanks, Tim. As Tim noted, despite the ongoing COVID pandemic and its impact on our second quarter financial results, we are excited about the outlook of our business for the remainder of 2020 and beyond.

Focusing on the results of the second quarter of 2020, total revenues were $12.2 million, a 32% decrease from the $18 million generated in the second quarter of 2019. U.S. revenue in the second quarter was $11 million, a decrease of 30% from the $15.8 million in the prior year period.

In the second quarter, European revenue decreased 47% to $1.2 million. Our U.S. average selling price in the second quarter was $23,800, which was consistent with the prior year period. The European AFC was $22,200 during the quarter, as compared to $21,900 in the second quarter of 2019.

Our gross margin in the second quarter was 84% compared to 82.8% in the prior year period. This modest improvement was primarily due to manufacturing efficiencies, which led to cost reductions with our third-party contractors.

Despite the ongoing COVID pandemic, we have not experienced a disruption in our supply chain, and we maintain sufficient levels of inventory. Total operating expenses for the second quarter were $33 million, an increase of 43% as compared to $23.1 million in the second quarter of 2019, this increase 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 efforts, and general corporate costs. The operating expenses of $33 million in the second quarter were sequentially down by $1.5 million from $34.5 million in the first quarter of 2020.

In light of the ongoing uncertainties, we continue to take a thoughtful approach to our spending, but expect operating expenses to increase as we return to growth and remain focused on investing in our commercial and development initiatives. Our net loss for the second quarter was $23.1 million, compared to $7.7 million in the second quarter of 2019.

The diluted net loss per share for the second quarter of 2020 was $0.88 per share, compared to $0.32 per share in the same period last year. The decrease in revenue in the second quarter due to the pandemic negatively impacted the net loss in the second quarter, despite our improved gross margin.

Importantly, we continue to operate from a position of financial strength. We completed a successful equity financing in April, which generated $124.7 million of net proceeds. So, we have a strong balance sheet, which enables us to execute 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. As of June 30, 2020, our cash and investments totaled $242.6 million. The weighted average number of shares outstanding for the second quarter was $26.3 million.

We anticipate that the weighted average number of shares for the third quarter will be approximately $26.8 million. As Tim mentioned, while we are not yet operating a normal pre-COVID healthcare environment, implant activity has increased over the last several weeks.

With that said, we are providing new full-year 2020 revenue guidance of between $88 million and $92 million, which represents 7% to 12% growth from full-year 2019. We continue to expect full-year 2020 gross margin guidance between 82% and 84%.

Furthermore, we reiterate our guidance to open 20 to 24 new centers per quarter and add six to seven new territories per quarter. Our guidance is based on our current outlook.

However, the operating environment for surgical procedures continues to evolve as the pandemic persists, and this could have an impact on our ability to achieve these projections. In summary, despite the impact of COVID on our business, we are confident that we are well positioned for sustained success.

With our strong balance sheet, we are aggressively executing our growth strategy and advancing our business. With that, our prepared remarks are concluded.

Jerry, could you please open up the call for questions?.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question is from Ahmed [ph], Goldman Sachs. Please go ahead, sir..

Thanks. And hey. Good afternoon.

Let's actually start with the guidance and see if we can get you to comment a little bit about how you're seeing the sequential cadence, and whether -- if we kind of take a linear approach to this, it looks like we would get something like maybe flattish growth in the third quarter and then up to 25% plus range in the fourth quarter.

If you agree with that, is that the right way to think about the guidance? And then it'd be really helpful if you talk to your confidence in that skew in the fourth quarter in particular, and what you're seeing in either backlog or new patient generation as you talk to generally that gives you the confidence that this is the right range..

Thank you very much. As you soften the numbers by monthly, the number of centers that are becoming active, jumping up from 25% to 50%, to up to 60% in July, we continue to see that wrapping. And it is a combination of working through the backlog of existing patients that had to have their cases postponed.

But as we mentioned, we really worked hard to make sure we built practices in the pipeline. So, we didn't have what we're calling an air gap or a lag once we started to ramp those procedures. So, I think the way you're describing guidance is directionally correct.

We want to continue to keep getting closer to normal in Q3 and really be able to help a lot of people when we get into the fourth quarter. And so, I think that we have good confidence in the guidance and directionally in the way that you're describing that as well. It's going to be a process to work through Q3 into Q4..

I guess -- and as my follow-up, maybe focus on the South, just as kind of a learning experience for you as we've seen infections rise in many of these southern states where you're active, and what you're learning from that. It's obviously very different than what we saw in March, April.

But are you confident in what you're seeing and the ability of these facilities to continue procedures? Or just would love to get color on that specific region, where we're seeing infections at high level today..

Absolutely. Well, I have the honor of spending time with each of our regional managers and area vice presidents at the end of every quarter to kind of get a good feeling for where they are with their region and what confidence they have. And specifically, we've met with Texas, and Arizona, and Florida.

And so, Florida is one of the areas that is postponing cases, particularly in Miami, and starting up the Eastern Coast. But we're continuing implants in Orlando and Jacksonville. But we're monitoring that closely. South Carolina has challenge in that one region right there, that they're seeing some challenges there. And in a couple centers in Houston.

But other than that, we've been leaning forward and being creative and finding alternative ways for patients to get their devices, including -- as we talked earlier about opening up AFCs and being able to go to the issues that are owned by a lot of these same hospitals. So, we're monitoring that closely. But we think it's pretty limited at this time.

And with the -- we're watching those patients, too, and we'll get them scheduled back in those centers as soon as possible..

Great stuff. Thanks so much..

The next question is from Bob Hopkins, Bank of America. Please go ahead, sir..

Oh, great. Thank you and good afternoon. Thanks for the details. Just quick question on the guidance, again, for the back half.

Could you give us a sense as to what percentage of the back half comes from kind of already identified and backlog procedures or scheduled procedures versus new demand that you anticipate over the rest of the year? Do you have any sense for that?.

It'd be just a rough estimate, but it all started when you and I talked months ago when we started talking about the four buckets and we call them groups of patients here. And to make sure that we just didn't work through the backlog, and all sudden, we didn't have enough patients to be able to continue going forward.

So, that's why we continued the direct to consumer and a lot of the television going forward to bring patients to the website. So, I think what we're experiencing in June is really working through a great majority of the past cases, and that'll carry a little bit into Q3.

But I think when you get into second half, and third quarter, and most the fourth quarter, you're going to be into the second, third, and more importantly, into the fourth group of patients. And so, we're not relying on the patients that have their cases postponed.

We want to be able to get them scheduled quickly, and be able to get them their implant as soon as possible.

Did I indirectly ask answer your question?.

Yes. No, that's helpful. I mean, it's -- I know those are hard numbers to come by. But just wondering, again, how much is kind of visible versus new business you need to win.

Maybe one other way of kind of running confidence [ph] is, any chance you provide revenue for July just so we can sort of see where you are as of as of July? Again, normally wouldn't ask, but it's unique circumstances. Thank you..

No, I don't have in front of me. But, I mean, I can say that you saw the number of centers going up increase to 60%. And we're able to get good OR time with our physicians.

So, we're confident that we're going to have a good July and good Q3, and really focused on nonstop and ever continue to ramp all the way through Q4, as Emmett was talking about with how do we look at the guidance for the rest of the year..

Okay. And then, just one other quick follow-up on those 15 centers. I assume those were a tiny percentage of revenues.

But just was curious for a little more color there, whether that was you guys sort of giving up on them or them quitting their procedures? And again, I assume it's not a big deal on a very small percentage of the total, but just curious as to any additional color there. And then I'll drop. Thank you..

Absolutely. During the pandemic period, we routinely retrain our centers because we have updated implant procedures, updating procedures and programming, patient selection. And then when we push that training out to centers, we can do that virtually. And the centers and the physicians actually sign off on that.

And how we started that whole process -- we looked for centers that really haven't done the implants over the last year. We said okay, let's look at this. How much time are we spending at those centers? And the great people that take care of patients, we appreciate that.

But if they're not really active and they don't have the support team to be able to support Inspire program, we went back and talked to the territory managers and talked to the centers and determined that now's not the right time for them. So to your point, yes, those 15 centers weren't really contributing implants and revenue anyways.

But now we get to clean it up. And so the territory managers don't waste mindshare, or even time with those centers, we can drive those patients to the active and an effective centers..

Great, thank you..

We have a question from Richard Newitter, SVB Leerink. Please go ahead, sir..

Hey, Tim. It's Jamie [ph] on for Rich. So, quick question. I wanted to start just back with the guidance. I think you had said in your prepared remarks that in the areas where there are some reasons surges, some centers have limited their procedures.

So I guess just following the line of question on guidance, to what degree is the potential for centers limiting cases baked into the $88 million to $92 million? And then I'll have a follow-up..

I think we account for that in that $88 million to $92 million. We know that several centers aren't able to schedule cases today, but they're not waiting too long. And we don't expect this can be a long period of time before we can help those patients and help them get scheduled to get their procedure.

And, as I mentioned, in Texas, we're trying to move several of those cases to ASCs. What I didn't mention is Arizona was another hot spot, and California, and we're now seeing any slowdown there. So, we are confident now in the guidance that we gave you, and we're going to find solutions to be able to work through that we think..

Got it. Okay. And then you mentioned ASC. So that was kind of a nice lead-in to my next question.

Can you -- appreciating that kind of ASC is still a pretty small percentage of your business, could you just maybe give us a sense or remind us what the percentage of your business is today and then kind of how you expect that to potentially evolve over the second half and into '21 with COVID potentially being an incremental tailwind on top of the improved reimbursement?.

I think it's probably still less than 10% of our business today, as we even start up. When we start looking at new centers in the third quarter, I think you'll see an uptick in AFCs. I think the reimbursement has gotten a little bit stronger. The new proposed rules today also increased the average Medicare payment for ASCs for 2021.

So, there's a little bit more incentive for the ACS to be able to get started.

So, I think it's relatively small today, but it'll have more of an importance going in through the year, and then really when start getting into '21 and beyond is really you're going to see more of a percent of our business and percent of our implants being driven and conducted in ASCs, and not necessarily because of the COVID pandemic.

I think it's a natural step for an outpatient procedure like ours. If take the spinal cord stimulator, sacral nerve stimulator technologies, maybe half to two-thirds of those cases are performed in ASCs. And so, it's just an efficient way to be able to treat patients.

So, I think now that reimbursement has been, for the most part, locked in, it's a natural progression to move to ASCs..

Thanks for taking my questions..

Thank you..

We have a question from Chris Pasquale, Guggenheim. Please go ahead, sir..

Thanks. Tim, the overall trends are certainly encouraging. But honestly, I'm a little surprised that 40% of your customer base still hasn't come back online at this point. On the one hand, that's good because it means those that have are quite productive.

But do you have a sense for why the sites that are still down haven't come back? Are they prioritizing other types of patients first? Or is there an issue with sleep centers in those regions? Would just love any thoughts you have there..

First off, so, the numbers I gave you is active implants. Those are those are implants that have been performed. And so, I think that there's a greater percentage that have implants scheduled. So, as an example, the Vas are still shut down. VAs have not started yet.

And it's going to take a little bit time to kind of get them going, although that's a small probably 5% of our business. So, I think it's going to continue to grow, Chris. I think the number of procedures that are actually -- number of centers that are conducting hospice visits is very high.

Those that are doing telemedicine are high, those screening patients. I think sleep studies are increasing significantly, although a lot of those are being done with home sleep testing, so yes, I guess on one hand it is a limiting number of that percent of centers that have already performed an implant. I think a greater number have them scheduled.

And that's why we have confidence leaning forward that that number is going to grow quickly..

Okay.

Then can you share some of the data on the impact the call center is having on your conversion rate? In the places where you've had it for a little while would it be seen there?.

Well, early on, we started that call center on the first week of March in New York and Houston of all places, right. That's right when the pandemic hit. And so it pretty much stopped New York. Then what we did was we added several additional centers to start collecting some information and to start debugging the system to find out what works well.

What percentage of phone calls to the call center can we convert to appointments, and we're still working through those numbers. We're going to report those but about three quarters of the patients that we are now getting to clinic for appointments are in fact qualified patients.

One of the concerns early on is that patients that were just making appointments, they weren't qualified for Inspire. They needed help and we want to get them to a different health care provider but a lot of people have never had a sleep study before.

Well, we need to get them to a sleep physician where they can get their initial diagnostics and they can try out a mouthguard, they can try a CPAP unit.

I know several of those will circle back and what we want to do is kind of triage the calls coming in to make sure qualified patients who are ready, get appointments with the health care providers that prescribe Inspire. So a lot more to come on data there but we're up to 77 -- well, how many centers do we have? 328.

So we're just at the beginning just said about a fifth of the centers now, so we have a way to go. But we've had a chance to really take a lot of phone calls, debug the system, really identify what's working well and we've made a lot of corrections to improve the process. We'll keep wrapping new centers as we work through the rest of the year..

Thanks..

We have a question from Jon Block, Stifel. Please go ahead, sir..

Great. Thanks, guys. Good afternoon. To make sure to build on a couple of earlier questions, but just want to take a step back and ask about the drop ratio of patients that you expect to experience from COVID. So, Tim, maybe oversimplify, but other patients do expect it to undergo upper airway stem in 2020 at the beginning of the year.

What do you see now? Do you believe you're going to ultimately recapture 80% plus, 90% plus? I'm just curious what you're hearing from your sales guys. Then I've got a separate follow up..

Okay. So you're looking at patients who are already in the pipeline and being diagnosed and including those that may or may not have had their sleep endoscopy, we want to capture the great majority of those. So if they are in a physician practice, we want to make sure that we stay on top of that.

What we're trying to do is make sure that in the interim period, when we continue the direct-to-consumer that we don't have a big follow fall off in the number of calls and number of patients in the center. That's where it's really difficult to track those numbers but the call center we get some evidence that we're able to capture those patients.

With the use of virtual tools and telemedicine, we're able to build practices, but I think that that period is when we probably saw the greatest fall off and then we're going to have to continue on. But again, remember, we had 2.6 million people come to the website and 26,000 people reach out to a doctor.

So the patient interest remains very, very high. And we just have to stay on top of our game and work with the centers to make sure we capture those patients..

Okay, got it. Then maybe as a follow up question, and Chris alluded to this earlier, but I also want to ask about the center.

So they're ramping, you get helpful metric 60% in July, active implants, but is there a common denominator on the centers? Is it strictly just a geographic argument, is it a tenor argument? I'm just trying to figure out if the 60% -- are some of those at a much higher utilization of upper airway stem relative to some of the other centers? Maybe if you can just talk to that, Tim?.

I can talk to that without really talking about COVID. I think if you look at the end of 2019, we talked about we had one center over 100 implants. We had several centers in the [indiscernible]. So there is always a range of utilization.

Randy Ban, Chief Commercial Officer always talks about how many centers can you get doing two implants a month, and really just with that simple, simple metric to be able to grow that number, and it's still a little bit limited right now so of that 60%, you have some centers who have a significant amount of a lot of OR time and are really scheduling those cases quickly and there's others still just ramping up.

So it's going to be a whole distribution across the board. But really, utilization continues to be our key focus, and hence, that's why we're even deactivating those 15 sites..

Okay. And if I can just maybe as part of that question, and maybe just to be more straightforward, the 60% of centers in your opinion, do they account for 40% of your overall volume in 2019 or 80% of your overall volume? Again, just trying to figure out where they were skewed in terms of utilization of the overall base..

That's a very good question. I don't have that answer. I don't think no way could it exceed 40%. But we'll go back and look at that. I think it actually is a small percentage.

Remember how many new centers we opened last year and the new centers that were opening, didn't conduct a lot of implants last year, but they're set up to be really productive centers.

And so we also remember we ended the quarter with 91 territories so we're really starting to get a good number of territory managers out there who all have active centers, and so we're really spreading it out and keeping utilization an important factor across the whole geography..

Got it. Very helpful. Thanks..

We have a question from Adam Nadir, Piper Sandler. Please go ahead, sir..

Hey, guys, thanks for taking the questions. Maybe to start this one on the reimbursement front. Apologies if I missed this in the prepared remarks but any update regarding either Anthem or Humana just latest expectations there from when we might see a decision from those payers? Then I had a follow-up..

We know from Anthem we've been in communication with them. We know that the American Academy of otolaryngology, which is the EMT society, we know that they have been in communication with Anthem and really made sure that they stress what this is an important therapy for them to write policy on.

We believe that their annual review is between the end of August, September, and we're cautiously optimistic they're going to write policy in that timeframe. We have a couple of other papers and new studies coming out. We're going to surely get that to them as soon as those are accepted, which is only additional evidence for the safety and efficacy.

But we do think Anthem is working on it and we're cautiously optimistic. Humana has a significant part of the business is Medicare Advantage and by definition, with the LCDs in place, they must cover for Medicare Advantage. So we also think it's just a matter of time before Humana writes policy.

The other key players in there that we don't have policy yet Florida Blue we've been working with and First Coast the Mac in Florida is on the campus of Florida Blue. We know that they are reviewing and believed to be writing policy.

Then near and dear to our heart all the Inspire employees have Blue Cross Blue Shield of Minnesota which doesn't cover but I'm looking over my shoulder we can see their outfits and we'll continue to work very hard, but we believe that they're going to be writing policy in the very near future as well..

Okay, that's very clear. Thanks for the color there, Tim. Then just for the follow-up, maybe I'll ask you about new account ads. So you're guiding into new centers of I think it was 20 to 24 per quarter for the back half the year.

Can you just talk about your line of visibility there on new center ads? Then I'm wondering how that process has maybe been impacted with COVID-19. Just any color there would be great. Thank you so much..

Absolutely. Thank you very much, Adam. Our visibility has been pretty good lately because there's so many centers that were very active and wanted to get activated in the second quarter. We're unable to do that because they couldn't schedule their first cases.

So those are the centers that will get up and running early in the third quarter but we also have a group of other centers that have been in the process. I think the value ads committees that you referenced has continued to work during the COVID period right. They were still there. We're still able to push those through. And so we do have line of sight.

Remember last year, we also went and hired four area business managers one for each area vice presidents whose sole job it was to hunt new centers and find centers that can drive utilization and really be able to treat a number of patients. We're just starting to see a lot of those centers start coming through in the second half of the year.

So a very good visibility to that. We're pretty confident in the guidance that we're giving you that we'll be able to open that.

Rick?.

Adam, I like to add to that as well. In addition, we add additional hospitals through some of these national agreements that we recently entered into such as Ascension so we've gone through the value analysis committee on a network-wide basis and they have 150 different hospitals as well as 30 ASCs and so we don't have to go through that process.

We just need to find an interested ENT and get the patient flow going there. Also, we are going to focus on ASCs and those are standalone smaller facilities that really don't have as formal of a value analysis committee as large standalone hospitals..

Okay, very helpful. Thank you..

We have a question from Larry Biegelsen, Wells Fargo. Please go ahead, sir..

Hey guys, thanks for taking the question. I wanted to come back to the 60% number. Sorry to beat a dead horse. But two-part question. One is what does the guidance assume, what percent of centers are doing cases in and how much of an impediment is a sleep endoscopy test? Then I had one follow-up..

Okay, great. I think by the end of the year, again, we deactivated 15 centers. So I'm going to challenge the field and Randy, that number is going to be 100% of the centers will be implanted by the end of the year. And that includes new centers that we'll be bringing on by the end of the year.

So we're going to continue to ramp and we'll continue to get these centers active. Again, the only challenge we may have is if COVID persists in some of these hotspot regions. But we believe that they will be able to start scheduling cases or they will find an alternative to be able to do them maybe at an ASC.

The second part of your question was in regards to a drug-induced endoscopy and put some color behind that. Early on in the COVID period, it was scored as a high-risk procedure because of the aerosol because when you use a nasal scope, you can excite the airborne pathogens of COVID and makes it a little bit riskier for the health care providers.

About a month or six weeks ago, that was actually downgraded. It is a form of procedure to make it a more safe procedure and it was downgraded to just a moderate risk with guidance to use PE when performing those procedures.

So the centers that are doing the implants, equal number are doing sleeping endoscopy so both procedures go hand in hand, and so as we open up the new centers, we're able to do sleep endoscopy and build a pipeline right alongside..

Thanks, that's helpful. Tim, just one long-term question. You're adding six to seven new territories per quarter for the remainder of 2020. What's your ultimate goal here? Do you expect to continue to add a similar pace next year and where do you think you'll get to over the next few years? Thanks for taking the question..

Well, long-term, just real top-level. We estimate there might be 4,000 hospitals, there might be 4,000 AFCs. That's 8000 total. And if we can be in a third of those that's about 2,400. Did I do that right? And we'd like our territory managers to manage between six to eight centers. So you'd end up being close to 400 territory managers.

I think we want to continue our cadence of growth because Larry, back to the early days when we're talking early on, we continually add, but we never bring on the big bullets because we always control quality by controlling the patient outcomes and by advocating that we've increased the cadence because we've increased the size of our training team.

And we've been able to scale our training team just as we can scale the commercial team and scale the number of centers during the procedure and scale the number of procedures that centers do so it all worked hand in hand, but we have a long-term view of where we want to go..

Thanks so much, Tim..

The next question is from Ravi Misra, Berenberg Capital. Please go ahead, sir..

Hi, Tim. Hi, Rick. Thank you for taking the question. So just one on the closed centers. You gave us some color that they haven't done implants over the last year.

Just curious, were they more recent to come online or are these some of the older centers in that vintage analysis that you've given us on prior call?.

There's a little bit of a spread, but I know there's a couple of those centers that date all the way back to 2014. There'll be a group, some of them and each year. Remember how we always talked about class. There'll be some in every class going forward.

But some of them it might have to shut one down because the surgeon moved but you got to remember you're opening up another one because that surgeon moved. And so in the early days, we weren't as strict about training and identifying centers that had everything it took to be successful and so some of these are the old legacy sites.

You're right that we're closing down. Others are because a surgeon just moved across town or across two different states. But the key to it is we want training through.

The 15th probably weren't contributing much revenue anyways and we want to be able to focus our energy on those centers that can build the utilization and can be able to increase the number of patients that they treat..

Great, thanks. So just a follow up on that. It sounds like we should expect some level of churn in the future going forward? Then maybe if I can add a 15th question or whatever you want to call it to the guidance that you gave for the back half of the year. I'm doing my math, right.

Just the patients treated per center to kind of get to the top end of your guidance range assumes pretty much flat growth versus last year. Is that a reasonable way to think about it and what could take you beyond that? Is this all virus related or is there anything else that could drive you above that number? Thank you..

Absolutely.

What was the first question?.

The first one was dispatches ongoing how to think about the churn that's in your centers on a future basis..

I'm sorry. You got me on the second one. I started thinking about that and I missed the first one. I don't think so. I think we went through one time we really kind of retrained all the centers and we really leaned on the territory managers that identify those centers that we want you to spend time at and those centers that it's not appropriate to.

Now, it's not an ongoing churn that we're looking through. You're always going to have a physician move or retire, but we always want to build depth et cetera so there's two surgeons or a third surgeon to be able to continue on a program but I don't think you're going to expect a lot of that churn going forward.

As far as the guidance go, there is still some uncertainty as we ramp through the starting up the sites after post-COVID. So of course, we're going to be careful about what numbers we give you an aside, we're going to show flat from a utilization standpoint as we ramp up those centers.

And what can change? Well, the key is number one, if this curve levels off, that's going to really help and be able to get more cases into the centers. We want to be able to open up Miami and the rest of Florida because the [indiscernible].

They don't -- they haven't been able to go back and work on all their Medicare cases because remember, the medical policy just came online in the May-June timeframe. So there's still some things that we can work on. We're going to keep driving the call center to be able to drive more patients to centers, continue to increase that.

We are going back to our direct-to-consumer and we will start doing more television in the second half of the year and focus that on areas that are able to treat more patients. So we're being very creative to make sure that we are in a good position to achieve and even exceed that guidance that we're giving you..

Thanks..

We have a question from Frank Takkinen, Lake Street Capital Market. Please go ahead, sir..

Hey, thanks, guys, for squeezing me in here at the end. I'll just keep it to one and keep it quick. Just to touch on some of the geographies that have not seen a recent reflux in COVID spikes in cases. I was just curious about the current procedural volumes in the more normalized healthcare areas.

What are you seeing there on the both procedure side as well as dice procedures? Are you seeing some of those return to some pre-COVID levels or how are you thinking about some of the less impacted areas right now?.

Well, let's talk about New York. New York was so significantly impacted but right now New York has some of the lowest rates there and with very good controls, although the city's gone through a lot. We're seeing a very good rebound there.

We're seeing some of the private centers such as Long Island Jewish or the Northwell System and the over in Hackensack on that side. And even in Manhattan, those centers are coming back very strong and they have a strong backlog of patients to be able to take care of them being able to schedule those cases. So really like what we're seeing there.

Philadelphia has always been one of our top cities as far as Thomas Jefferson and UPENN and several other sites there. They continue to grow and it's across the board. We're seeing increases in Arizona, in California, even the Mayo Clinic is very active.

I don't want to leave out a city, but it's pretty much across the board but you got to remember the Medicare is having a really strong impact too, because Medicare is now present or Medicare policy is present in every single state.

So these centers are confident that they're going to be paid for the Medicare cases and that's really going to help those cases as well. So it's pretty much across the board..

Great, thanks. Thanks for taking my question..

We have a question from Mike Ott, Oppenheimer. Please go ahead, sir..

Good afternoon. Thanks for squeezing me in here. Curious on the competitive landscape. Specifically, I believe Nyxoah got FDA approval for its DREAM trial back in June..

Absolutely, while we like investment in stimulation for sleep apnea, I think that gives credibility to the therapy and I think that helps the stimulation for sleep apnea as a whole. That being said, yes, Nyxoah did get ID approval to start their study in the United States. I think they still have a limited amount of data out there.

They did publish a paper out of Australia of I think they implanted 27 patients and show data on 21 of those patients so very, very early on having on 20 patients, but I like that there's enough confidence in that data that they are starting out a new trial. I still believe they're probably four years away from any approval in the United States.

They are conducting sound clinical research in Europe as well. I don't think they've started any of the commercial activity. We haven't seen it yet but I think it's I like what they got going. They have some early feasibility and they're able to conduct more work. But again, I think they're probably four years away from approval.

So it's our job to keep our heads down and keep doing our work. LivaNova has been pretty quiet. We haven't heard from them for a while because they have the ImThera system..

Okay, very helpful. If I could just a couple of very quick housekeeping questions. Rick, if you can just give us the European ASP again and also if you guys have an updated total number of patient implants. I think it was 8,200 or so on your last call. Thanks so much..

Sure, Mike, on the ASP for Europe 22,200 for the second quarter, and that is compared to 21,900 in the second quarter of 2019..

Great, do you have the total number of patients implanted?.

Yes, 9,100..

Great. Thanks so much, guys..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back over to Tim Herbert, President and CEO for closing remarks. Please go ahead, sir..

Thank you very much. Just quickly thanks everybody 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 team's commitment to patients remains unmatched, and its most important elements to our success. I just wish to thank all the employees as well as the healthcare teams for their continued valiant efforts during this pandemic and for their focus as we ramp up implant activity, once again in many states in the United States and in Europe.

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 coming weeks and months. Please stay safe and healthy. Thank you..

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