Greetings, and welcome to the Inspire Medical Systems' First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a 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. Bob Yedid, Investor Relations from LifeSci Advisors. Please go ahead, sir..

Thank you, Hector, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the three months ended March 31, 2021. A copy of the press release is available on the company's website.

I'd like to remind you that on this call, management will make forward-looking statements within the meaning of the federal securities laws.

All forward-looking statements including, without limitation, operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year and quarterly 2021 financial and operational outlook and improvements in market access are based upon our current estimates and various assumptions.

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

See our filings with Securities and Exchange Commission, including our annual 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. The conference call contains time-sensitive information and speaks only as of the live broadcast today, May 4, 2021.

And with those remarks, it's my pleasure to turn the call over to Tim Herbert, CEO.

Tim?.

Thank you, Bob and thanks, everyone, for joining the call today for our first quarter 2021 business update. After closing a very strong 2020, we entered 2021 facing our normal expected seasonality, but also a significant resurgence in COVID-19.

That said, the team at Inspire showed the results and bounce back to have a very successful first quarter to the new year. We remain focused on our commercial execution driven by increasing our capacity at implanting centers and improving the education process with patients.

During this first quarter, we also achieved several very impactful development milestones highlighted by the FDA approval of the two-incision implant procedure, more on this in a little bit. Let's start with discussing our revenue.

In the first quarter of 2021, we generated worldwide revenue of $40.4 million, which was an increase of 89% compared to the first quarter of 2020, which of course was impacted by COVID.

This growth was primarily driven by the increased number of procedures occurring at existing centers, as well as new centers and territory managers added in the quarter. As I mentioned, we did experience seasonality early in the year, driven primarily by the resetting of high deductible insurance plans.

Further, the resurgence of COVID negatively affected procedure volumes in many of our sales territories early in the quarter. Despite this, procedure volumes in all of these territories rebounded nicely as the quarter progressed. We continue to monitor the situation. We do not expect to see a significant impact going forward.

Therefore, we have confidence in the outlook of our business for 2021 due to our strong performance in the first quarter, the positive trends in implant activity and the planned expansion in the number of implanting centers and new territory managers.

As such, we are increasing our full year 2021 revenue guidance to a range of $192 million to $196 million from our previous guidance of $183 million to $188 million. This guidance represents an increase of 66% to 70% over full year 2020 revenue of $115.4 million.

As always, I would like to reiterate that our primary focus remains on the patients, to ensure that each and everyone has the best possible outcomes from Inspire therapy. With that, let's now get into the details surrounding the first quarter, beginning with capacity. During the quarter, we added 47 new U.S.

implanting centers ending the period with a total of 472. This is well above our prior guidance of adding 34 to 38 new centers. As such, we are increasing our guidance to open 36 to 40 new centers per quarter for the remainder of the year.

As has been the case over the past several quarters included in this increase in new centers is a growing number of ambulatory surgical centers that have increased at a slightly higher rate than the addition of hospitals.

We will continue to add both hospitals and ASCs and expect to see a growing percentage of Inspire procedures being performed in ASCs. Regarding U.S. sales team, we created 10 new sales territories in the first quarter bringing our total to 117.

While this is above our guidance, we continue to expect to add eight to nine new territories per quarter during the remainder of 2021. We also increased the number of field political representatives by adding seven and in the first quarter with 51.

During the rest of the year, we will also scale our sales management and training teams to optimize our ongoing expansion and focus on strong patient outcomes and center productivity.

The addition of new centers and the continued build out of our field organization will increase our capacity and will remain one of our core focus areas throughout 2021 and beyond. As we said on our last call, our challenge in 2020 was that the utilization was significantly impacted by the pandemic.

And while we have achieved significant progress in the second half of 2020, and through the first quarter of this year, we expect this to further improve going forward. To make this point, historically about 50% of our growth has been from opening new centers. And about 50% was from increased procedures at existing centers.

For the year 2020, however, this was skewed heavily towards the growth from opening new centers. We did see a very strong rebound in the first quarter with the great majority of our growth coming from increased utilization.

We need to be careful comparing back to the first half of 2020 is that period was impacted by center shutdowns, following the onset of the pandemic. That said, we expect growth between new and existing centers to be more balanced throughout 2021.

The second key area of our focus is to improve our ability to assist patients interested in Inspire therapy by making a connection with a qualified healthcare provider. Our outreach programs have been very effective in generating interest in Inspire therapy, primarily through the inspiresleep.com website.

To further streamline this process, we continue to broaden our call center concept, the Inspire Advisor Care Program or ACP. As a reminder, the primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs.

We ended 2020 with approximately 180 of our centers utilizing the ACP, answering about 25% of all calls to physicians. Today, we have over 280 centers on the ACP and we plan to significantly increase the number of centers to nearly 500 by the end of 2021. This will enable the majority of patient calls to be answered through the ACP.

We anticipate that the Inspire ACP will have a significant impact on our business and look forward to providing you with further updates on this program throughout the year. We also continue to utilize our website and online tools to help enhance awareness of Inspire therapy and help patients connect with physicians.

For the first quarter of 2021, the number of visitors to our website was over 1.7 million, an increase of 7% year-over-year. In addition, approximately 27,000 physician contacts were established via the website, representing a significant year-over-year increase of 102%.

This increase was largely driven by our refreshed outreach programs, including four new TV commercials, which began airing in January along with a substantial increase in participation and community health talks about Inspire therapy.

The most significant event of the first quarter that will improve utilization is the recent FDA approval of our two-incision implant procedures. And just today, we received European approval of the two-incision procedure as well. We believe this is an important milestone that will help drive increased adoption of Inspire therapy.

And the qualitative feedback we have received from ENT surgeons to-date has been very positive. Importantly, this new approved procedure, which eliminates the need for a third incision will significantly reduce the average procedure time for Inspire therapy while providing additional therapy benefits.

This FDA approval was supported by a clinical study comparing this new two-incision approach to the original three-incision and procedure. The results showed consistency in the safety and efficacy of the therapy and reduce surgical time to just under 100 minutes on average, which was a 26-minute reduction.

Training for the two-incision procedure has ramped up significantly. And we are extremely excited about its potential impact on our business.

From a practical standpoint, this savings in procedure time may allow a surgeon to add another Inspire procedure in a single day, as previously, most surgeons would typically limit scheduling to two cases per day. Switching gears to reimbursement and coding.

Specifically, as we discussed on our last call, the new CPT code was approved and the RUC survey process to determine the surgeon reimbursement rates is ongoing and is expected to become effective January 1, 2022. In July, 2021, we expect that CMS will publish the 2022 proposed rule, which will list the new codes and proposed payments.

From a facility perspective, the new CPT code should not change the payment to the hospitals for ASCs. Further, a new Category I code was approved for the drug-induced sleep endoscopy, or DISE, diagnostic procedure, which has also been an ongoing challenge for ENTs and facilities.

Again, we will learn more when CMS proposes the new rules, which are expected to be released in July. Moving on, Europe also had a very strong quarter driven by increased procedure volumes, particularly in Germany and the Netherlands.

We expect the growth of Inspire to continue in Europe, as we are not currently seeing a significant impact from COVID in these two countries, which make up the majority of Inspire implants.

As you know, effective January 1 Inspire therapy is now integrated into the German hospital reimbursement system with a formal DRG, which represents another positive indicator for a European business.

In Japan, we were thrilled to recently announce our exclusive distribution agreement for Inspire therapy with Japan Lifeline or JLL, a leader in the distribution of innovative medical technologies in that country.

Importantly, this distribution agreement was entered into following successful completion of the reimbursement review of Inspire therapy by the Minister of Health, Labor and Welfare. Formal listing of Inspire therapy in the Japan National Health Insurance Payment Listing is expected to occur in June.

Our kickoff meeting with JLL is scheduled for next week and we anticipate the initial implants of Inspire therapy in Japan will occur during the second half of this year. The COVID pandemic is a serious concern in Japan today, and we will closely monitor as we build our training plans and work towards the first implants.

Japan has a tremendous opportunity for Inspire, as it is one of the largest markets for medical technologies in the world. We look forward to providing you with updates on our progress in Japan over the coming quarters. Switching gears to R&D.

Similar to the past two quarters, we increased our R&D expenses year-over-year in the first quarter of 2021, as we continue to invest in enhancing our technology platform.

During the first quarter, we also received FDA approval of the new Inspire physician programmer platform, which provides multiple key benefits for physicians when managing their patients treatment with Inspire therapy. We view this enhanced technology as a further demonstration of our long-term commitment to patients with sleep apnea.

Next, the Inspire Cloud or cloud-based patient management system continues to advance with the addition of a substantial number of centers in the U.S. and in Europe who are using the tool. As you know, in 2020, we launched the Inspire Sleep app for use on a patient's smartphone as an educational tool.

This app interfaces with the Inspire Cloud and allows physicians to collect clinical data on patients directly. The new physician programmer platform, the Inspire Cloud and the Inspire Sleep app are the first step in establishing interconnectivity between the patient and their healthcare provider.

The next step is FDA submission of the new patient remote, which will be Bluetooth enabled to allow data from the implanted system and the remote to be uploaded to the Inspire Cloud via patient's smartphone.

We anticipate that the new patient remote will be submitted to the FDA within a couple of weeks and are targeting a commercial launch following FDA approval late in 2021. Longer-term the design work for our fifth generation Inspire neurostimulator continues to progress. Once approved, we expect Inspire 5 to be commercially available late in 2023.

The Inspire 5 device will utilize the existing form factor with plans to maintain average 11 year battery life without the need for recharging. After extensive trialing with the new sensing technique, we are excited to announce that the Inspire 5 neurostimulator will eliminate the pressure sensing lead.

All sensing will be inside the neurostimulator using an accelerometer to measure the respiratory wave forms. Over the next years, well, I mean over the years, we have demonstrated the necessity for closed loop stimulation in this enhanced sensing mode internal to the neurostimulator will make Inspire 5 the state-of-the-art neurostimulator.

In summary, we continued to experience significant momentum in all key aspects of our business. Implant trends remains highly positive, and we continued to be well positioned to assist patients as they progress on their Inspire therapy journey, including longer-term through our investment in the development of multiple innovative technologies.

To we reiterate our core focus for 2021 is to continue to increase utilization at existing centers, as well as to increase capacity by training new centers.

We also intend to achieve further advancements in reimbursement that build upon a recent positive coverage decisions, continue our efforts to strengthen the growing body of clinical evidence and invest in the continued development of our robust R&D platform.

We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term shareholder value. With that, I'd like to turn the call over to Rick for his review of our financials..

Thanks, Tim. As Tim noted, the Inspire team delivered a strong first quarter. Total revenue for the first quarter of 2021 was $40.4 million, an 89% increase from the $21.3 million generated [Technical Difficulty].

Ladies and gentlemen, now reintroducing Tim Herbert..

Hi everybody, I guess we've got a little change in technology going on. So I believe that I completed my section and now I'd like to turn the call over to Rick and have him restart the financials..

Thanks again, Tim. As Tim noted, the Inspire team delivered a strong first quarter. Total revenue for the first quarter of 2021 was $40.4 million and 89% increase from the $21.3 million generated in the first quarter of 2020. U.S. revenue in the first quarter was $37.8 million, an increase of 96% from the $19.3 million in the prior year period.

In the first quarter, European revenue increased 25% to $2.6 million. The growth in the U.S. reflects a number of factors, including a larger number of implanting centers, commercial policy coverage, 100% Medicare coverage that went effective in June 2020, and an increase in the number of territory managers. The U.S.

average selling price in the first quarter was approximately 23,900, which was consistent with the prior year period. The European ASP was about 24,400 during the quarter compared to 22,300 in the first quarter of 2020. The higher European ASP was driven by favorable changes in foreign currency exchange rates.

Gross margin in the first quarter improved to 85.2% compared to 84.6% in the prior year period due to manufacturing, efficiencies and higher sales volume. Based on these ongoing efficiencies, we're increasing our full year gross margin guidance to be in the range of 84% to 85% compared to our prior guidance of 83% to 85%.

Total operating expenses for the first quarter were $50.1 million, an increase of 45% as compared to $34.5 million in the first quarter of 2020. This increase was due to expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs.

The increase in operating expenses is reflective of our ongoing plan to achieve continued growth and investments in key commercial and development initiatives. Our net loss for the first quarter was $16.2 million, consistent with a net loss in a prior year period.

The net loss per share for the first quarter was $0.60 per share compared to $0.67 per share in the first quarter of 2020. The weighted average number of shares outstanding for the first quarter was $27.1 million. We anticipate that the weighted average number of shares for the second quarter will be approximately $27.2 million.

Moving to the balance sheet. As of March 31, our cash and investment totaled $226 million. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers and training and opening new implanting centers.

As we’ve seen it earlier, while business conditions have improved, we continue to monitor the impact of the pandemic, as we did experience some cancellations and delays in several territories early in the first quarter. With that said, our strong performance and implant trends provide us with confidence and our outlook for the remainder of the year.

Therefore, we are increasing our full year 2021 revenue guidance to a range of $192 million to $196 million from our previous guidance of $183 million to $188 million. This revised guidance represents 66% to 70% growth over full year 2020 revenue.

In summary, the key metrics for our business remains strong and we are well positioned to achieve significant long-term growth. We are extremely pleased with our first quarter performance and are excited to continue executing on our growth strategy. With that, our prepared remarks are concluded.

Hector, can you please open up the call for questions?.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Robbie Marcus with J.P. Morgan. Please proceed with your question..

Great. First off, congrats on a really nice quarter..

Thank you, Robbie..

Hope the phone quality is okay. I hear you loud and clear..

There you go, we’ll yell..

Okay. So maybe just to start off, I wanted to get a sense of trends through the quarter. You said that there was some COVID disruption early on, wanting to see how the sort of the exit was versus the beginning.

And if you can quantify what you think the COVID disruption was in the quarter?.

Sure. Well first of all we have our seasonality, right, because we have the resetting of the high deductible insurance plans. And so there is always a great rush to do a lot of implants at the end of the year before patients high deductible plans reset in January. So that always has a little bit of a effect of a lot of implants in December.

And then people starting out slow in January, that's not a phenomena that we created, the echoes across industry.

But also remember that resurgence in January was shutting down hospitals regionally, and so areas down in the Southeast were more effected, including anywhere from going from Carolina to Georgia, to Alabama, a little bit of Texas, a little bit of Michigan and California.

So those areas started out really slow in January, but as we move through into February and March, we really saw all of those areas come back.

And that was – showed the strength of the quarter by being able to rebound strong in the second half and exit strong in February and March, that also gave us the confidence as we go forward for the rest of the year..

Got it. And as you think about the guidance raise, how much of it was due to better trends that you were seeing it in the U.S. and how much is outside the U.S. particularly Japan? Thanks..

We did not include any Japan. I think Japan, as we stated before in 2021 here is really a preparatory for the following year. So we're going to work with JLL to make sure that all of our plans are in place, our training programs are in place and we'll be able to ramp, but we did not increase our revenue due to anything in Japan yet.

Everything is based primarily on trends in the United States and we never with Medicare, we didn't get to really celebrate that last year. And as we start to ramp up and get through COVID and the vaccinations are higher we like the trends that we're seeing, hence that's why it – the increase is pretty much all U.S..

Right. Thanks a lot..

Thanks, Robbie..

Your next question comes from the line of Jon Block with Stifel. Please proceed with your question..

Hi guys, good afternoon. Maybe I'll just continue on the Japan theme for a moment. I know Tim, you just said nothing is included in the guidance this year, but just help us out, it's obviously a massive long-term opportunity.

When we think about the trajectory of that opportunity over the next couple of years, is there anything you can point to, or sort of any analogs you can give us as we think about how that market ramps in 2022 and 2023?.

Well, I think we just want to look at maybe in the terms of the size of Germany, right.

And the key difference between how we open up Japan versus how we open up Germany is we didn't have reimbursement, when we started in Germany, it took five years to be able to work through that NUB process and finally get an NUB1, and then just this year, we got a DRG.

Japan is not different, Japan, we start with reimbursement in hand, and now what we have to do is we have to build the market in educating the physicians, educating potential patients and there is a little bit different market development. So I think we could get closer to a Germany rate without taking that full five years.

So we're going to take the rest of this year to work with JLL that makes sure we figure out what programs we're going to put in place, such that when we come back to talk about 2022, that will have a good feel for how we're going to wrap it.

But we're obviously very optimistic with the reimbursement, and we have support from four physician societies to be able to launch this product, the society has been sleep, ENT, pulmonology and cardiovascular. So it's great to have those physicians working with us to launch in Japan..

Got it. Very helpful. And second question, maybe a quick two parter, but Tim for you, you've been running the DTCs for a little bit of time now, I know you obviously had some COVID disruptions along the way. But now that it's a bit baked, are you able to measure the returns and if so, your thoughts there.

And then Rick for you just revenue continues to be, but you're also investing a good amount in the business, increased territory managers, et cetera. So is there a sort of a refreshed or renewed thought on an EBITDA breakeven point for the company? Thanks guys..

Let me touch on the DTC and then hand over to Rick. We are getting much better with that. As we talked before, we opened, we launched Inspire app and we have the Care Program going.

So we're able to start working more directly and tracking patients closer to start getting a better measure of the number of patients coming through the system and being able to show that our direct-to-consumer is actually a very cost effective program to be able to educate patients and get them connected with the physician.

So our data is not there yet, but we're getting a good feel for where we're heading with it. And we're very encouraged and are obviously going to just continue the program. So let me hand off to Rick..

Hey Jon, good question. We continue to invest heavily in our sales organization as well as our DTC programs. And so in the past, we've talked around the breakeven is in that $250 million annual run rate of revenue.

We're not changing that at the current moment, but we – it's kind of a moving target depending on how heavily we want to add to our DTC efforts or if we were to change any of our cases on hiring or if we get opportunistic and other geographies that we're looking at.

But we're still running our plan and our cadence, but we have a lot of confidence in our ability to project with our higher guidance on the level of implants that we're having..

Understood. Thanks guys..

Thanks, Jon..

Your next question comes from line of Chris Pasquale with Guggenheim. Please proceed with your question..

Thanks, and congrats on the quarter guys. Tim, I want to understand a little bit better how you're handling the trainings for the two-incision approach.

It seems like it might be relatively challenging to get all of your implanters to either come to you or go to them and get them comfortable with a new technique, especially considering how quickly you're growing the install base.

So what's that process been like? And have you ensure that outcomes stay at a high level while everyone is learning something new?.

I guess to give a shout out to our Inspire training team. And I think very, very few people can match the talent of our training team and their ability to communicate with all the physicians.

What this team did is they work with some of the physicians that developed a technique while the FDA is reviewing, knowing that once approved, there is going to be a high demand to convert to the new procedure very quickly. They created live videos of training for the two-incision procedure, such that once we had U.S.

approval, we could immediately extend that out across the United States and train every physician and certify those physicians. Now, remember we have one less incision, but we're still placing the sensor between the intercostal muscles in the pocket underneath the neurostimulator.

And so they can do it now with direct visualization, so it's actually an easier procedure and it's a little bit safer, and yet we still get really good safety and efficacy numbers. So I believe that we're going to have the majority of cases converted over to two-incision, probably between the second and well, certainly by the third quarter..

That’s helpful. And then I was also surprised to hear you say that you really don't think COVID is a big issue for you guys right now in Europe, just given how much of a laggard that region has been for most companies this quarter. I get that your mixed there is maybe a little bit different than most.

But the European volumes for you guys, despite COVID not being a big issue are still growing at a relatively modest rate, especially when you factor in the increase in the Euro.

So why aren't Germany and the Netherlands growing a little bit faster? Is it that you're already in all the big centers there? And so all the growth has to come from productivity increases, or is there something else that's holding you back from being able to expand that region more quickly?.

Sure. Germany, number one, we got into the DRG this year. So we have to do – we do have to negotiate that if there is COVID impact, it's the ability to negotiate the DRGs with many of the large centers.

Now we continue to hire territory managers, we continue to open new centers, we have a directed consumer program in Germany and we'll continue to grow that. So we do believe that Germany will continue to grow and that is the primary source.

Netherlands is strong, the problem with the Netherlands is they still have the committee that reviews every individual case, which has a built-in governor on the number of procedures that we can do on a quarterly basis.

So the reimbursement in the Netherlands works to kind of hold back the number of procedures, but we still see good growth in Europe and primarily Germany.

Once we get through the review panel in the Netherlands that is a great opportunity, and with other countries as well, the real reason that COVID doesn't impact us that much is the great majority of our revenue and implants are all done in Germany and the Netherlands.

And so we don't have a significant impact and some of the more impacted States is Spain, France, Italy, we continue to do implants in Switzerland and Austria..

Thanks..

You bet, Chris..

Your next question comes from line of Amit Hazan with Goldman Sachs. Please proceed with your question..

Hey, good afternoon guys. It's Jamie Perse on for Goldman team. First questions is just on the U.S., I wanted to ask about center level utilizations, just given the strong news center ads that you have this quarter. First part of it is just, the question was asked that if you have disruption in procedures related to COVID.

I'm wondering if there is any disruption in news center ads related to COVID, just given all that they're dealing with, and if that number could have been even stronger, but for COVID? And then secondly, if you can give any color on the utilization rates for some of the higher, more mature centers and committee or newer centers and how long they ramped to maturity?.

Yes, let me touch on that new centers and then I'll have Rick touch on the utilization.

Maybe we could have had a few more centers if we didn't have the shutdown in primarily Southeast Texas, California, Michigan, but for the most part, we've rebounded strong in February and March to give us an opportunity to open those centers, but there'll always be some carryover.

As there was from the end of last year into the first quarter of this year, so we kind of liked the growth that we had in the number of centers enhanced, that's why we increased our guidance going forward again. Let me hand that over to Rick to talk about utilization..

Yes. Before I touch on that, we did add 47 new centers. We continue to add ASCs in our additional centers. And at the end of that first quarter, ASCs made them about 17% of our total centers and the year ago that number was 9%.

So that has improved still a low number, but that does give us confidence that we have a robust pipeline to add not only hospitals, but ASCs going forward. And so from a utilization standpoint we're seeing what we want – we want our centers, our new centers to give us really one implant day a month to start.

Generally they will do one or two procedures, maybe more now with reduced procedure times with the two-incision approach. And then after they get familiarity with our procedure and the economics of the hospital and working with prior authorization and so on, we want to increase that. And so we really want our centers initially to get to two per month.

And so across our entire base, you have the metrics there on what that utilization is. And then we think that will increase over time as we have less impact from prior authorization and so forth. But the overall number of centers who are moved from one to two procedures per month, that number has doubled from a year ago..

Okay. Thanks for that. One question on international, Street’s modeling revenue of about $13.5 million this year, I don’t know if you will comment on it, if we're thinking about that correctly, that's up about $4 million versus prior year.

And then similarly next year Street's modeling up another $4 million, but you've got the DRG coming into place in Germany, the Japan reimbursement now in place and maybe some movement on Australia.

So how would you have us think about first of all the 2021 number, and then if there is any potential acceleration with those catalysts in 2022? Thank you..

That's a good question. I think we'll have to defer on that. We're not going to put off guidance on Japan yet, we want to make sure we work with JLL to be able to get our plans in place so we can set our targets, what we want to accomplish next year.

And then also with the DRG, but we also are looking for expansion and other countries when we start getting into 2022 and beyond. So I like the way you're thinking about it, we are in line with the concept, just – we're not able to give you numbers right now..

Okay. I appreciate it..

Your next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your questions..

Thanks for taking the questions and congrats on the great quarter guys. Want to start with just Japan and kind of the incremental market opportunity, this opens up for you. Appreciating that you're not going to be able to go and convert this market overnight, I appreciate that.

But we estimated, and I think it was based on some commentary that you had provided in the past about a third of the U.S. market size is what Japan represents about $2 billion or so.

I guess, is that a ballpark kind of adjustable market opportunity that we should be thinking about this now opens up to you in that region? And can you comment a little bit on pricing for a product, it is there since you're using a distributor? But I also know reimbursement in negotiations took a long time, so I'd imagine you stood your ground on price.

So maybe just talk through some of that and the tamp?.

Absolutely. I do think, yes, I think generally speaking, the summary of how large the market is consistent with U.S., yes there is maybe 9 million Japanese that have Apnea Hypopnea Index greater than 15.

But again, I don't think our challenge is reaching that whole market, our challenge is going to be to open up centers to start to penetrate that market and grow the adoption.

And we're going to be working with JLL to see how broad a team they're going to put on place and how many centers we want to initially open that we've identified like the first 10 centers that will be trained. And we're going to be working very closely with JLL, because patient outcomes are equally as important.

As far as the reimbursement goes, absolutely we stood our ground. And – but I think we worked fairly with the Minister and they understood our global reimbursement, and it was important for us to have them understand the importance as we continue to expand that reimbursement was very important.

So that says we can provide the necessary training to protect outcomes, we can keep investing in important things, such as Inspire 5 and the digital platform, which we do want to have fully implemented in Japan as we do with every territory that we enter.

And so, the Minister worked very closely with us, we provided a lot of information over the last month to be able to get to a consistent sales price. Now we partnered with JLL, so certainly they deserve a part of that to cover their sales and marketing costs.

We will continue to do a lot of the training, the development of the technology, and so it's a win-win situation, I think across the board..

Okay. Thanks for that. And you guys have been making some good progress on advancing the technology, the two-incision procedure this year and now you're talking about advanced next-gen product capabilities by 2023.

Can you talk about where the procedure time is currently and where you think you ultimately can get the shortening of the procedure down to, once you have your next generation technology out in the field?.

In the clinical study with the two-incision, it was down to just under 100 minutes, the more – but that's also early in the development of the two-incision procedure. So I think the more proficient surgeons, once they get more expertise and higher utilization, they'll only get better and it'll only drive that surgical time down.

I don't want to push them to go too fast, because it's important to us for patient outcomes, that those electrodes get placed properly on the hypoglossal nerve and that is really the focus.

But think about it, we’re at 100 minutes down, and the advanced technology gets rid of the sensor, that's another significant reduction in surgical time, yet still probably have improved performance with it. So it's really a win-win and we'll continue to keep investing in technology going forward..

I guess, just to follow-up on that Tim. We think you might, while being safe another 20 to 30 minutes is a ballpark you'd be thinking in store for us, in the not too distant future..

Well, probably when you're talking Inspire 5, I think we can certainly achieve that. And even when we go to inspire 5, remember it's easier to go through the inter-operative testing that we do. So there is – it's on top of mind to continue to watch efficiencies for the surgeons..

Thank you very much..

Thank you, Rich..

Your next question comes from line of Bradley Bowers with Bank of America Merrill Lynch. Please proceed with your question..

Hi there guys, I'm on for Bob today. Thanks for taking our questions. Just the first one, I'm going to go onto the two-incision implant.

Are you seeing that as generating, helping penetrate deeper into some of your hospitals? Are you starting new conversations based off of this? And where there any centers or doctors that were maybe more hesitant with the older one, and now that the procedure is little faster, they can get to three a day maybe, and a little bit easier to do that, it's generating more conversations?.

That was the easiest question, the answer is yes. Let me explain. I think it’s all told, I mean, remember we have ear, nose and throat, so I'm going to work in reverse to kind take the comment back. Remember where ear, nose and throat.

And so while it's – they're comfortable doing a neurostimulator pocket sub clavicle or just underneath the collarbone, going down to the fourth or sixth intercostal space while it's a procedure to harvest intercostal muscles or say facial paralysis, so it is a procedure done by ENTs.

It was just a little bit of a stretch on little bit of their comfort zone. So being able to do it up in the IPG pocket, where they have a larger incision, they could do it under direct visualization, there it does put a little bit of a comfort feel for ENT during the procedure.

So that certainly does help both with existing surgeons and certainly with new surgeons going forward.

But then the rest of it, when we start talking about it's all about efficiencies and not having to make that third incision, not having it to tunnel the lead from the neural stem pocket down to the other incision where in the fourth or sixth intercostal space.

And so those efficiencies allow people to say, they can comfortably add another case in a day without being too concerned about it running too long and being – becoming fatigued during the case too. So I think it really kind of helps them on many fronts but you bring up a real interesting point.

That's important with just the comfort level of the ENT operating down by the fourth or sixth. And we kind of really eliminate that..

Got it. That's super helpful. Thanks for expanding on just beyond. Yes. Appreciate that. And then can I also ask another question on the seasonality? It's been a while – obviously you don't want to use 2020 as a comparison and you guys have grown a lot since 2019.

So would you say that that progression is still sort of a good analog like that we saw in 2019? Or is there any reason to think that we might see a little bit of a quicker acceleration in Q2 as COVID kind of comes out of the U.S.

understanding that Q4 is obviously still going to be your strongest quarter? Just anything you could share on that?.

Yes. Well, Q4 is always going to be a strong quarter. Q1 is always the toughest and really it's January. And COVID to your point really kind of emphasize that. So, yes, we think certainly Q2 will be improved lot of hands. That's why we've increased our guidance for the entire fiscal year. So we're looking forward to Q2, Q3, Q4.

And then the question is, is the seasonality that we get into Q1 of the following year, if we don't have that negative impact from COVID and you're right, it's very difficult to compare back a prior year because of the shutdown period that everybody had experienced in Q1, Q2 last year..

Bradley, I'd also add to that. Two years ago, we were a much different position, 2021, our first full year where we have 220 million covered lives, as well as a 100% Medicare coverage in the U.S. compared to two years ago where we did not have Medicare and maybe half the number of covered lives as well. So that will play into that phenomenon as well..

That's helpful. Thank you..

Your next question comes from line of Adam Maeder with Piper Sandler. Please proceed with your question..

Hey guys, thanks for taking the questions and congrats on another nice quarter. Maybe just picking up from where Rick just left off. The question is on patient mix, Rick was just talking about the progress made from a reimbursement and covered lives standpoint.

Curious what the patient mix looked like in Q1 between Medicare, commercial and VA and may be remind us where that's been in the past and how you think about that going forward, and then I had a follow up. Thanks..

Sure. I think it varies a lot. It goes up and down, but I think we're seeing it right now for the most part is 70, 25, 5, right, 70% commercial, 25% Medicare, 5% VA.

In the past, Medicare was a little bit higher percentage mix as was the VA because it was easier to open up the VA because we already had government contracts while with the strong growth rates in commercial based on all the positive coverage policies.

The commercial has really grown from probably 60% up to 70% of the increased number of procedures, right. And Medicare has continued to grow too because now we have national coverage across the United States. And VA is still hanging in there. VA is 5%.

They really had a big negative impact due to COVID last year, but the VAs are coming back online and they're still representing probably 5% of the cases and we think that's important and we'll certainly continue to support that group as well..

Got it. That's helpful color, Tim. Thanks for that. And then I guess, just on the follow-up one on the pipeline. I think it's a little while since we've gotten an update on the pediatric indication, so wanted to ask if there's an update on that initiative. I think you're still collecting some data there.

So just maybe remind us where that stands and how we should be thinking about latest timelines? Thanks so much..

Thank you very much, Adam. We actually have two studies that we're starting. One of them is actually a post-approval study based on the FDA approval from last year. And we agreed with the FDA that we would continue to collect data.

And as we always have, we collect data on not about patients using on right here, registry and let's go forward doing cloud we'll continue to do that. But we are starting a post-approval study of pediatrics aged 18 to 21. Again, that's really not where we want to go with this. We want to go to a younger age.

Secondly, we have submitted RFPs and starting the new pediatric study with kids with Down Syndrome. And we've taken over that study from the Massachusetts Eye and Ear Infirmary, who's done just a great job with the first three studies and we're actually starting the fourth study there.

So we're staying in close contact with the FDA and we we're going to continue to collect additional data to eventually get approval for the pediatrics..

Thank you..

Your next question comes from the line of Lei Huang with Wells Fargo. Please proceed with your question..

Hi, thanks. It's Lei calling in for Larry and thanks for taking my questions. I want to start with….

Hi, Lei..

I want to start with the pipeline one. Tim, you mentioned the late 2023 launch for the next-gen Inspire system. Is that pushed out a little bit? We seem to remember something maybe in 2022 timeframe. And also, can you talk about the regulatory pathway if you know, at this point you have to submit clinical data to the FDA and I have a follow-up..

We do have clinical data that we have been collecting. We have spoken with the FDA and we're going to go head out and we're going to have a meeting with the FDA, just on the Inspire V neurostimulator technology and submission. We've never promised 2022. That is more the submission timeline.

And so we're pretty consistent where we have that tracking late 2023..

Got it.

So it sounds like in terms of clinical data requirements, you don't quite know yet until after the FDA meeting?.

Yes, we are collecting clinical data right now because we can use with existing patients, we can collect data with accelerometers and we can do direct comparisons with existing patients. So we are collecting data and we will be submitting with data..

Got it. Okay. Thanks. And then my follow-up is just on your revenue guidance that you raised for the year.

What do you seem in the guidance in terms of new payers covering the procedure as well as potentially for the surgeons to increase the number of cases they do by doing the two-incision procedures and the time for doing that?.

We don't have it down to that level of specificity when we're talking to individual payers. With that, so we don't really have a significant impact with that.

It's more about opening centers in utilization increases, but a key part of growing utilization to your point is the reduced surgical time and the allowance to have surgeons do a greater number of procedures and that does help drive the confidence and the increased guidance..

Okay. Thank you..

Thanks Lei..

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

Hi. Great. Thanks Rick and Tim for taking the question. So I guess, I want to circle….

Hi, Ravi..

Hi. I guess, I want to circle back to guidance for the year. It sounds like there's a lot of good stuff going on in terms of the Advisor Care Program driving more people, the kind of rebasing of growth to your kind of 50/50 historical levels.

Yet, I feel like there's a certain level of conservatism, kind of baked into these numbers that I'd like a little bit more color on. You spoke about kind of rising sale throughout the year, I guess, in terms of prior seasonal patterns.

If my math is right, you're giving very little, if any kind of credit to rising utilization in the back half of the year.

So just curious, kind of how we should be thinking about what could kind of get you beyond the high end of your guidance, whether it's going to be utilization or center openings or kind of why it appears to be such a conservative take here.

Is there something in Europe that we're not contemplating correctly? And then I have a quick follow-up just on the Inspire remote. Thanks..

Sure. Let me work backwards on that. Europe, we put those growth rates in, but it was – as was previously asked by Chris, he's looking at those growth rates and we're limited by what we can do in the Germany is the growth and the Netherlands is limited. So that's why we don't have a huge upside in Europe, outside of what we already have in the plan.

As far as we come back to the United States, it's about execution and it's about getting the new centers open, getting them productive and getting the call center working, getting the efficiencies there. So we have a lot of things that are really exciting, but they're growing, right. We're just training on the two-incisions.

We're just growing the Advisor Care Program. We're just introducing our new direct-to-consumer outreach programs. And so while everything is exciting, it's still on the very front edge.

And so, yes, absolutely, we are going to keep our head, we're going to work hard, but we think we're putting in appropriate guidance out there yet, even with this new excitement, we're still confident that we are significantly increasing that guidance going forward..

Yes. Great. And then maybe just on the Inspire remote you said kind of late 2021, is there any kind of different method of reimbursement or kind of coding that a payer is going to have to go through that or incremental reimbursement that they can secure through that? Just curious there, thanks..

Well, that's creating a – that's a whole different question on a whole different revenue stream, right. And initially, the Bluetooth is provided to give the physician key real-time objective data from the patient's device, both the implant and the remote itself is timestamped, but we can upload those.

And then we can partner that with a home sleep study that they could upload. And so during Inspire Cloud, when a physician does a remote visit, which I think is going to continue well past COVID that is a reimbursable event, what we really want to move to.

And I think that we will see will be remote programming and that's something that the FDA has already approved for a different company, and that is a reimbursable event. But when you start talking about kind of what you're hinting at is a different revenue stream for the complexities of Inspire Cloud and the benefits it provides.

That's a bigger discussion that we need to kind of investigate. Thanks Ravi..

Your next question comes from the line of Michael Polark with Baird. Please proceed with your question..

Good evening. Tim and Rick, thanks for taking the question. So the ongoing RUC survey process for the upcoming physician fee schedule proposal. How has that influenced if at all, by the introduction of the two-incision procedure? My understanding is that the survey process that evaluates doc surgeon to work principally time.

And so I'm hoping you could put those pieces together. Educate me on what I'm not understanding perhaps..

I think the first surveys were already completed and the data was collected and it's already in the CMS. I'm sure, they're working on it because they're going to be coming out with their proposed rules in July and then there will have to be a different evaluation for two-incision at a later date. And then even when you get to Inspire V, right.

So it's going to be iterative process, but the new code will be available January 1 and CMS actually came out with the inpatient rules early, right. So we're saying July, but we'd love to see them come out early with the proposed rule and the proposed reimbursement. But I don't – the two-incisions that can affect that process.

I think it will be after the fact or after we evaluate..

Okay. And then just to level set ahead of this, because it may happen before your next earnings call, your expectation is that this payment is at or potentially slightly above where it was historically and where it was historically, at least for Medicare was call it $600 for the base payment.

I know there's a range of 600 and then the max of established 450 give-or-take for the 04660 since you add on so 600 plus 450 just call it a little more than 1,000.

Is that where you expect this July proposal to start?.

No, expected to be higher and the ENT society had all this data when they chose to submit, they had a choice, they could either just convert the 04660 to a Category 1 code lock in that payment, but they looked at it and determined the work for a hypoglossal nerve implant is more extensive than vagal nerve implant.

And that $600 to $800 was undervalued. And so they went to create a whole new code set, one that they could work directly with CMS to establish payment. So I would expect that number to be higher….

Thank you..

All right, Michael, thank you..

Your next question comes from line of Suraj Kalia with Oppenheimer. Please proceed with your question..

Hey Rick, Tim, can you hear me all right..

Very good, Suraj.

How are you?.

Perfect. Congrats on the quarter. So a bunch of questions have been asked on a global level. If I could just kind of drill down one layer and please correct me if my math here is off. So approximately 1,580 implants were done in the quarter in the U.S. across 472 centers, the math suggests roughly 3.3 implants per center per quarter, that's just mean.

And to Rick's comments about getting the centers do two implants per month, can you help us reconcile what percent of your sites at that two per month run rate? That's one thing. The second thing is how long does it taking for the centers to get there? If you could us same-store versus new store sales.

And finally, if I could and I'll end here, what is the conversion or the hit rate or the conversion rates for patients screened to actually implanted? Gentlemen, thank you for taking my questions..

Okay. Let me clarify that Suraj, screened at what point in the process..

Just if Suraj comes in today, he's a CPAP failure, a tolerant gets into the funnel, gets a consult, right. From that point to where the 0.14 Suraj gets an implant or is it now 0.25 Suraj get implant, just kind of trying to understand that..

Got you. Got you. Okay. Let's go back to the first one. There's always the distribution of utilization, right. And so when we start talking about an average of 3.3, or we always take it down to 1.1 per month, or the goal of getting to two. Yes. It's tough to say, Suraj, today but maybe a quarter of the centers are up over that mark already today.

And from same-store sales, a lot of the earlier centers have taken longer to get there, but when the new centers are trained over the last year or two, including this year, they're brought on with an expectation, but we now have reimbursement.

So I remember the early days we talked about this on how long it took to get a patient through a prior authorization process. And it really limited, there was a governor on the amount of procedures that they could do because of the amount of time they could spend on any individual patient.

When centers open up, now we can set the priorities saying, look, you don't have to deal with reimbursement, you have Medicare, you have commercial payers. And what we needed is to have a dedicated OR date such that patients can fill that funnel. Patients can come to the website.

Patients can get screened to your point and get the expectation higher to get to two implants a month and higher. Now, the reason that's so doggone important is if a surgeon isn't at that level, they don't become as proficient at the procedure. It's not just the surgeon. It's the sleep physicians and the staff who do the programming.

If they don't consistently see a lot of patients, they don't become as proficient and recognizing what to program and how to make the proper adjustments to get the proper outcomes and the sleep labs and the home sleep stud and the long-term follow-up by doing a consistent number of patients really improve the overall learning of a center.

Remember we're not training surgeons, we're training centers, and it really helps to get that higher utilization. So it does take a little bit of time now. The comparisons are sort of difficult because COVID gotten away, right. And COVID, we all had to deal with this and the world is still dealing with this heavily today.

But it's hard to really kind of show that the data on that yet. But I think this year 2021 is going to put some really good clarity around where are we going to begone with this. Your second question is a really intriguing one. And the answer is, it depends. And what I mean by that, it depends on where the patients originate from.

And when they come to the website, what we do at the website is we get them educated on what the therapy is and they understand they take a little qualifying test to say, they've gone through, and they've tried CPAP a couple of times. And they – we know what their BMI is and they select where they are regionally.

So they select what physician they'd like to see. And then they call the call center or they attend a community health talk. And so what our attempt is to be able to really educate patients greater, such that by the time they get to an ENT who wants to prescribe Inspire, they're more educated. And then you're getting a hit rate of 40% to 50%.

If you're getting a patient who's just a straight medtech referral from a sleep physician, yes, there Suraj, you're maybe talking maybe 2% because they don't understand what Inspire is, they haven't been through the education.

So what our goal is, is addressing just what you're asking is really try to get the patients educated, such that when they get to the ENT, the ENT has a much more proficient system to educate them. And we give them a little notepad with a video that they can show the patients who have not been introduced to Inspire. So great question though..

Thank you..

Thanks Suraj..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Tim Herbert, CEO for closing remarks..

Thanks very much, Hector. And hey, thanks everybody for joining the call today. I remain grateful to the growing team of dedicated Inspire employees to their enthusiasm, hard work and continued motivation to achieve successful and consistent patient outcomes.

The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts as we remain focused on expanding our business in the U.S., Japan, and in the U.S., Europe and now Japan.

For all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates throughout the year. Please stay safe and healthy. And thank you very much..

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation..