Inspire Medical Systems Inc

NYSE:INSP

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Inspire Medical System Incorporation Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like turn the conference over to Mr. Bob Yedid. Please go ahead, sir.

[Bob Yedid, IR]

Thank you. Thank you, all, for participating in today's conference 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 quarter ended June 30, 2018. A copy of the press release is available on the company's website.

I like to remind you on the call that management will make forward-looking statements within the meaning of the Federal Securities laws. All forward-looking statements including our discussion of operating trends and our expectations of future financial performance, including full year 2018 guidance and our expectations with regards to near and long term growth potential of our business, are based on current estimates and various assumptions. These statements involve material risk 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 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 sensitive information and is accurate only as of the live broadcast today, August 7, 2018.

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

[Tim Herbert, President and CEO]

Thank you, Bob, and thanks, everyone, for joining us today. I am pleased to welcome you to our first earnings call. As you know, we completed our initial public offering in May, raising $112 million of net proceeds after underwriting fees and other expenses. Our CFO, Rick Buchholz, will discuss the IPO in greater detail shortly, but I would like express my sincere thanks to all of the investors who participated in the offering and continue to support us today.

For today's call, I will provide a review of our second quarter of 2018 performance, including our commercial progress in the United States and Europe. Rick will follow with a more detailed review of the second quarter financials, then we will open up the call for your questions.

From the onset, Inspire's core objective continues to be delivering strong and consistent patient outcomes. We accomplish this through proper patient selection and accurate and consistent device implants and therapy programming of our Inspire Technology. Our growth strategy is primarily focused on the United States market with the objective of increasing patient flow at existing centers, as well as adding new implanting centers.

To achieve this, we look to consistently add territory managers to our direct sales team and trained physicians and staff at new medical centers in the United States. We're also focused on advancing our technology with our product development team and continuously working to build on reimbursement and coverage by expanding on the already strong clinical evidence and growing the overall knowledge of the therapy.

In addition to our focus on the United States market, we intend to continue therapy adoption growth in Europe and our focus, our commercial activities on those countries that have established product reimbursement and advancing the process of obtaining reimbursement in other key European countries.

With that, let me briefly summarize our key results for the second quarter of 2018. Worldwide revenue for the second quarter was $10.9 million, an increase of 81% compared to the same period of the prior year. US revenue for the quarter was $9.5 million, a significant increase of 96% over the prior year quarter.

Second quarter European revenue was $1.4 million, representing a solid increase of 20% over the prior period. Based on these strong results and our positive outlook, we are providing full year revenue guidance for calendar year 2018 of between $42.8 million to $44 million, reflecting revenue growth of approximately 50% to 54% over the full year 2017 revenue, which was $28.6 million.

Moving on, during our IPO roadshow meetings, we received numerous questions regarding what guidance and operational metrics we would provide on a quarterly basis. There are two critical aspects of our business today. They are the expansion of our direct US sales organization and the number of active centers, as well the expansion of insurance coverage. I will talk about both of these and the metrics we use to track our progress.

First, on the commercial front, our near term key operational focus is understanding the progress we're making in increasing patient flow, including the number of active centers and the number of territory managers that we have managing these centers. As we add new territory managers, several may enter new areas without any active implanting centers, while others are a result of spending in existing characteristics. Each are equally important over the long term, but will have varying impact in the short term. The result is a variable range of territory maturity. As such, we do not rep productivity in our daily management of the business and our intention is to provide the same metrics to the Street that we use on a day-to-day basis to run the business.

Therefore, we are focused on continuing to grow therapy adoption at existing centers, as well as consistently increasing the number of active centers. Obviously, by increasing the number of US centers, we'll have to increase the number of territory managers to support this growth. We also need to add these new centers and territory managers in a controlled and well trained manner to ensure continued strong patient outcomes.

To this end, we have established a cadence for selecting, training, and activating new centers with a target to open 10 to 12 new centers per quarter over the next six to eight quarters. In addition, we will work to increase the number of territory managers by three to four per quarter over the same timeframe. We expect that these new centers and territory managers will have a positive impact on our overall growth, and in combination with the growth at existing centers, will help us demonstrate a balance growth rate in therapy adoption.

We ended the second quarter with 36 territory managers, which was an increase of seven territory managers from the start of the quarter. We also have grown our support teams, including regional managers, field clinical representatives, therapy access managers, and training staff for both surgical implants and device programming. I should note that we slightly accelerated the number of new territory managers in the second quarter, following the IPO, but as stated earlier, we expect to settle into a cadence of starting three to four new territory managers per quarter moving forward.

Next, we have also generated a meaningful increase in the number of implanting centers as we market the benefits of Inspire Therapy to hospitals and surgical centers in the treatment of their patients. In the first and second quarters of '18, we activated 29 new centers in the United States, including 15 new centers in the second quarter and ended the quarter at 168 US centers. This compares to 139 centers at the end of 2017.

Moving on to coverage of Inspire Therapy, reimbursement continues to be a primary focus for the company and I'd like to reiterate our two key strategies; one related to prior authorization and the second related to expanding positive coverage. First, we are supporting physicians in clinical centers in their preparation of processing of individual patient prior authorization. We measure the number of prior authorization submissions closely and have adopted nomenclature for a patient whose case has been submitted as a patient expecting therapy, or PET. The PET or number of individual prior authorizations submitted is the most important metric we track to estimate the likely number of future implants.

In the second quarter, there were 619 patient prior authorization submissions. This is more than double the number of submissions in the second quarter of 2017 and an increase over the 559 submissions in the first quarter of 2018. We estimate that approximately 70% of all submitted prior authorizations that receive review or full review are approved and a full review includes several appeal cycles, including a review by an external medical reviewer, EMR, and the full process typically takes three to four months on average to complete.

The challenge is that some patients do not want to wait for the full process of three to four months and drop out. Another challenge is that, based on their health plan, some patients simply do not have the right to appeal their cases to a higher level of review. Further, some patients change insurance companies during the process which requires them to start over.

When we include all these cases, the overall approval rate for all submissions is approximately 50%. As insurance companies move towards positive coverage policies, we expect that this overall approval number will increase significantly and the average time to obtain an approval will shorten. Please note, as we develop positive coverage policies such as the one recently received from Aetna, these prior authorization metrics will have less of an impact and we will discontinue reporting on them.

The second arm of our reimbursement strategy is our work with commercial insurance companies to ensure that they have the latest clinical data information and are making well informed decisions in regards to writing positive coverage policy. We're certainly excited that Aetna recently decided to cover Inspire Therapy for their members nationwide. We will continue to work closely with all payers, as many are approaching their annual policy review and we believe that the Aetna decision will make it easier for other payers to follow suit and write their own positive policy. As our business continues to evolve, we recognize that the metrics we report on will need to evolve accordingly, so we intend to review these metrics on an ongoing basis to ensure that they are still appropriate measures of our progress.

Okay, so I want to switch gears and provide you with an update on several important corporate developments. As I just touched on a moment ago, after the close of the quarter, we were pleased to announce that Aetna issued a policy decision to provide coverage for its membership on a nationwide basis for Inspire Therapy, effective immediately. Aetna is one of the leading health plans in the United States and provides coverage for approximately 22 million members and this coverage decision represents a major milestone for Inspire.

With this positive coverage decision for Inspire Therapy in place, physicians do not necessarily have to make a prior authorization submission, but may do so to have written authorization to reduce their payment risk. Nonetheless, the approvals are now provided in just a few days rather than the current three to four month time to conclude the entire review cycle.

We believe that our growing body of clinical and real world data, including the five-year safety and efficacy results from our pivotal STAR data, and our ADHERE 300-patient registry data, as well as other independent publications, are instrumental for health plans such as Aetna during their internal review process.

To build on this clinical dossier, we will continue to collect data under the ADHERE registry which is currently planned to enroll 2,500 patients and have already submitted the next manuscript from the ADHERE registry which includes data from the first 500 patients. Our expectation is that our growing body of clinical real world data and positive reviews, again such as Aetna, will be the basis for additional coverage decisions by other major and regional health plans in due course.

To provide further insight into our US commercial activities, I'd like to touch on one of our key marketing program. Our direct to patient initiatives continues to be successful in reaching and educating prospective patients about Inspire Therapy. With the increase in the number of medical centers and new territories, we have a broader reach which in turn shows an increase in web activity as compared to 2017.

In the first half of '18, we averaged approximately 46,000 web visitors and approximately 25,000 engaged visitors on a weekly basis. An engaged visitor is defined as someone who stays on the website several minutes and visits several web pages. This is an increase over the first half of 2017 which averaged approximately 38,000 web visitors and approximately 21,000 engaged visitors on a weekly basis. We continue to look to find improved methods to educate patients and identify more efficient tools to connect potential patients with health care providers.

On our product development team, they continue to work to improve a patient experience as well as therapy outcome. In the second quarter of 2018 we launched the Inspire 4 Neurostimulator in Europe. As you may recall, this device provided a 40% size reduction, maintains the same 11-year device life on average without recharging, and enables patients to have an MRI under certain condition. The Inspire 4 Neurostimulator was previously launched in the United States in July of 2017.

At the Annual SLEEP 2018 meeting, that's the SLEEP of the - the annual meeting on the sleep physicians that occurred in June we launched the Inspire Cloud Patient Management System. Inspire Cloud is an online patient management system which provides a central repository of a site's patient data. We also have projects underway to improve the sensing technology, the physician programmer, the patient remote control and, longer term, we will be scoping out the design parameters of the next generation Inspire Neurostimulator.

We are also pleased to recently announce that Japan's Ministry of Health, Labor and Welfare has approved Inspire Therapy to treat moderate to severe obstructive sleep apnea. The approval in Japan opens a major market that can benefit from our Inspire Therapy. I traveled to Japan in July to meet with our reimbursement team and several sleep and ENT physicians who will be instrumental in beginning to treat patients there with Inspire.

As a reminder, we expect the first implants of Inspire in Japan in the second half of 2019. The reason for this timing is that the current approval is for the second generation version of the Inspire system where we intend to seek approval for the current system, the Inspire 4 Neurostimulator, and sensing lead in Japan. In addition, we recently initiated our reimbursement efforts aimed at establishing new coding for Inspire Therapy. Over the next year, we will build our commercial team in Japan while the regulatory and reimbursement teams work in parallel. We will also be executing a broader Pan-Asia strategic plan to evaluate potential opportunity in several other countries in Asia.

In closing, the team at Inspire is excited by the significant momentum in our business and the substantial growth potential that remains. We continue to be focused each and every day on achieving the highest therapy outcomes possible, we have implemented a strategic strategy to increase the number of territories, territory managers and implanting medical centers on a quarterly basis. This consistent cadence in growing our activities provides us the mechanism to ensure proper and successful staff and physician training, thereby further supporting the mission of a strong and consistent patient outcome.

And with that, I'd like to turn the call over to Rick for a more detailed review of our financials. Rick?

[Richard Buchholz, CFO]

Thanks, Tim. For the second quarter ended June 30, 2018, our total revenues were $10.9 million which is an 81% increase over the second quarter 2017. US revenue in the second quarter was $9.5 million, an increase of 96% from $4.9 million during the same period of the prior year. About 89% of the increase was volume driven while the remaining 11% was attributed to a price increase with the introduction of the Inspire 4 system in the US in the third quarter of 2017.

In the second quarter, European revenue increased 20% to $1.4 million from $1.2 million in the second quarter of 2017. Volume drove eight points of this growth while 10 points was attributed to a price increase with the introduction of the Inspire 4 system in Europe in the second quarter of 2018. The remaining two points of the increase was due to favorable foreign exchange rate.

Our geographic mix of revenue in the quarter was 87% in the US and 13% in Europe. The gross margin in the second quarter was 80.8% as compared to 77.2% during the second quarter of 2017. The gross margin improvement was approximately 330 basis points higher due to an excess inventory charge in the second quarter of 2017 related to the introduction of the Inspire 4 system in the US in July 2017. The remaining gross margin improvement is attributable to the higher ASP in both the US and Europe as compared to the second quarter of 2017.

Total operating expenses for the second quarter were $14.5 million, an increase of 60% from $9.1 million in the second quarter of 2017. The majority of the OpEx increase from the second quarter of last year was attributable to the increased headcount of the sales and marketing function which includes the US and European sales organizations and our market access team.

General and administrative expenses in the second quarter also increased from a year ago as we incurred additional legal, accounting, insurance, and stock-based compensation costs associated with being a public company.

Our net loss was $5.9 million for the second quarter as compared to a net loss of $4.8 million in the same period last year.

For the first six months ended June 30, 2018, our total revenues were $21 million, an 85% increase over the $11.3 million of revenue generated in the first half of 2017. The US revenue in the first half of 2018 was $18.3 million, an increase of 95% as compared to $9.4 million during the same period of the prior year. European revenue in the first half of 2018 was $2.7 million, an increase of 38% over the first half of last year.

Again, we were pleased to close our initial public offering on May 7, 2018, which generated net proceeds of $112 million. We would like to thank the investors we met during the IPO roadshow for their interest in Inspire. The IPO proceeds will be used to support our growth initiatives, including promoting the awareness of Inspire Therapy among patients, ENT physicians, sleep centers and referring physicians, expanding US sales and marketing organization to drive broader adoption of our therapy, leveraging our prior authorization model, while we work with payers to broaden insurance coverage, further penetrating and expanding into existing and new international markets and investing in R&D to drive innovation.

Now back to you, Tim.

[Tim Herbert, President and CEO]

Thanks, Rick. Again, we are very pleased with the strong pace of growth we are demonstrating in our business. We believe this reflects the market's demand for a solution targeted to patients with sleep apnea that are unable to successfully use CPAP and the attractiveness and effectiveness of the Inspire Therapy to both patients and physicians. I want to thank the growing team of Inspire employees for their enthusiasm and hard work and continue to drive to achieve strong and consistent patient outcomes.

That concludes our prepared remarks for today. We will now open up the call for questions.

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Bob Hopkins from Bank of America.

[Bob Hopkins, Bank of America Merrill Lynch]

Hi. Good afternoon. Can you hear me okay?

[Tim Herbert, President and CEO]

Yes, Bob.

[Bob Hopkins, Bank of America Merrill Lynch]

Great. Congrats on a great start as a public company. I just wanted to ask a couple quick questions on, not surprisingly on coverage and reimbursement. On the Aetna decision, I was wondering if you could just talk a little bit maybe about, was it one thing specifically that pushed it over the goal line. Do you have visibility to their process and what allowed that to happen in a timeframe that I think was definitely a little bit earlier than expected?

[Tim Herbert, President and CEO]

It's been a long process and we have had our internal team as well as several external consultants, most recently Baker Tilly have been helping us out quite a bit. So we have been working with Aetna over the last several years to educate them on the process and educate them on the Inspire Technology, patient selection and clinical evidence. We worked the prior authorization process very hard with Aetna and I don't think there's one specific element that pushed it over the top.

I think it was a continuum of many, many factors that just takes time to work the process, both from clinical evidence as well as their own experience with the therapy, as well hearing from their physicians and patients of the demand for the therapy. In the last year, we've had significant publications that have probably driven the evidence a little bit over the top that helped them make their decision, that being the five-year long term data from the STAR trial that showed sustained safety and efficacy.

We also published a large study with the 300 patients in the ADHERE registry. We had numerous independent clinical studies published by some of the leading institutions in United States, such as Thomson Jefferson, UPENN, University of Pittsburgh Medical Center, the Cleveland Clinic and I know I'll leave a few out, so it's dangerous citing centers, but we also had two centers do a comparison study of Inspire versus UPPP.

All told, we have over 775 patients in clinical studies published that Aetna could use in their review and through encouragement by our internal team as well as Baker Tilly, the Aetna Medical Director agreed to do a mid-year review and by doing a mid-year review, what that allows them to do is put the resources to it to do an in-depth review of the evidence and once they review that evidence, they came out with a positive coverage policy and so the lesson learned from our standpoint is to try and work with the other insurance companies to make sure they put the proper resources to the task of reviewing the therapies, so when they do their annual reviews, they're not just cursory reviews but actually get in depth and look at the evidence.

[Bob Hopkins, Bank of America Merrill Lynch]

Well, that's sort of a perfect segue into the next question which is, based on the discussions you're having and the type of discussions you're having, how likely is it that you have additional positive policy coverage decisions this year on the commercial side?

[Tim Herbert, President and CEO]

Well, until your last sentence, I was going to answer, yes, very confidently, we will have additional coverage policies. The challenge is the timing, of course, and it's difficult for us to come up and look at some of the large payers and say, are they going to be able to write policy this year. Most insurance companies do an annual review and we have ability to track when those review cycle start and we make sure that we provide the necessary clinical evidence before they do the reviews and encourage them, again, to put the resources to doing an in-depth review.

We have numerous companies doing reviews typically in the fall and so that would tend to lead to earlier '19 decision and it's likely many could come back and it could take another year to write policies. But on the other hand, we are also able to submit prior authorization and get patient approvals through the prior authorization process. That allows us to keep growing the adoption as a therapy as we keep working to drive these coverage policies. So, Bob, we're very confident we're going to get these coverage policies in place. I just don't - I am just unable to give you the timeframe for which these will come around, but, yes, that's a key priority for us.

[Bob Hopkins, Bank of America Merrill Lynch]

And then, last question, on the same sort of topic. Can you give us a sense for the timelines for the permanent code on the sensing lead and when you'll know and how you're feeling about that?

[Tim Herbert, President and CEO]

Absolutely. The code was submitted earlier this year and it was reviewed at the AMA Meeting, the American Medical Association Annual CPT Code Meeting, which was back in May. It did not receive a favorable approval and we have been working with the American Academy of Otolaryngology, which is the AAO or the ENT Physician Society. They have submitted a reconsideration to that decision because there are several key points that were not included as part of that review. That coding structure, or that reconsideration, remains in review and we're pushing hard and the next meeting is in the September timeframe for the AMA and we're hoping to have some resolution.

We do believe in time that will be approved and if it's not approved by the September timeframe, we may fall into the next sequence which is in - I think the next meeting is somewhere October, November. It's February meeting and we think we're going to have confidence there. This doesn't affect really the payment to Inspire, or the payment to the hospitals. The problem is it negatively affects the payment to the physicians and that's something that the Academy really wants to work for their physician group. So there are many people very motivated to get these codes approved.

[Bob Hopkins, Bank of America Merrill Lynch]

Great. I will pick it up offline. Thanks so much.

[Tim Herbert, President and CEO]

Very good, Bob. Thank you.

[Operator]

And we will take our next question from Isaac Ro from Goldman Sachs.

[Isaac Ro, Goldman Sachs]

Good afternoon, guys. Thank you.

[Tim Herbert, President and CEO]

Hello, Isaac.

[Isaac Ro, Goldman Sachs]

Hi, guys. A question for you on the update to the guidance, or the guidance for this year. It's a little bit stronger than we previously expected in terms of revenue, so interested in a couple of the key drivers behind it and I'm wondering, in particular, how you guys factored in the updated coverage from Aetna and I think you said there are other key factors that went into the math as you thought about the rest of the year, it would be helpful to deconstruct the key items. Thank you.

[Tim Herbert, President and CEO]

Very good, Isaac. I will be careful how I answer this question because there's a couple different factors that really drive it. First, from the guidance, we have seen a strong increase in PET, or patients expecting therapy, the metric that we track very closely and the number of submissions on a weekly basis has steadfast increased. The reason for that is the dedicated effort, of course, of the field team to work with centers and make sure that we identify the proper patients and the centers are able to submit those prior authorizations.

With that, we also are looking at the approval rates and seeing some promise there. So the growth that you see in the updated guidance is really driven by the performance of both new centers as well as existing centers increasing the number of patients in the pipeline. So the growth in the PET is going to drive the growth in the approvals and the growth in the overall revenue numbers.

Our ratios are pretty consistent, Isaac. We are still staying around 60% commercial, 30% Medicare and 10% VA. That means not only are we growing commercial implants, we're also growing Medicare implants and we're opening up new VA centers across the United States. So that really is the primary driver. We do have the new centers and new territory managers as well.

What we haven't factored in is what we call the Aetna factor and as you may recall, Aetna didn't previously prior authorize and allow patients to have higher level appeal. So it's going to take a little bit of time for the Aetna factor to have an impact where we can bring the Aetna patients back through, resubmit prior authorizations, get that approved and then get those cases scheduled and have those patients implanted. We do think there will be a benefit from Aetna, obviously, in the near term. We think that will have a strong impact in 2019, but we think that that may have a positive impact as we move towards later stages of 2018 as well.

[Isaac Ro, Goldman Sachs]

Okay, that's helpful. And just a follow-up question on reimbursement coding, just maybe can you give us the current state of your goals and plans with regards to getting a dedicated TPT code. I know there's lot of uncertainties that go into the regulatory process, but it will be helpful in terms of thinking through your strategy and maybe key catalysts over the next 6, 12 months that we should be watching here. Thank you.

[Tim Herbert, President and CEO]

Absolutely. We want to stick - the primary code is identified and has already been confirmed with all the societies and American Medical Association. That is that CPT code 64568. It's well-established and now it has been used across the United States on a very consistent basis. Getting the accurate use of that code was something that we always focused on. So now with that code in place, we need to give the secondary codes for the sensing lead that Bob referenced in his earlier question. We need to get those approved and it has been reviewed by the AMA and they did not approve it at the May meeting, but again, we're currently under reconsideration and we think with the updated justification that's been provided to the AMA, that they will vote favorably on that and that will really help with the physician payment levels.

[Isaac Ro, Goldman Sachs]

Okay. Maybe just last follow-up is, that updated justification you mentioned, could you give us a little more detail as to what they were looking for or what you presented to them at the margin [ph] that should help get you guys over the hurdle there?

[Tim Herbert, President and CEO]

I think it had to do with a bit of the utilization and the differences between the cranial nerve stimulator that the code was set up for and our existing Inspire stimulator. Again, we stimulate the twelfth cranial nerve and it was originally set up for a system that stimulates the tenth cranial nerve so the implant procedures are very consistent, and the American Medical Association has weighed in on that. That wasn't clearly articulated during the May meeting and so we provided some additional color to that with our submission. We also provided more evidence on the number of implanting centers in the United States and the use of the coding structure.

[Isaac Ro, Goldman Sachs]

Makes sense. Got it. Thank you.

[Tim Herbert, President and CEO]

Thank you, Isaac.

[Operator]

We will take our next question from Chris Pasquale from Guggenheim.

[Christopher Pasquale, Guggenheim Partners]

Thanks, and congrats on a strong quarter. Tim, could you talk a little bit more about how you decide which new centers to prioritize and maybe it would be helpful, just from a high level perspective, where you stand today in terms of penetrating the large sleep surgery centers across the country?

[Tim Herbert, President and CEO]

Absolutely. Randy Ban leads our sales organization, Chris, as you know, and does a very good job of early work at centers to identify what centers will get up and running and then be able to treat patients on a consistent basis. The number one factor when we go into a new center is to make sure that there is a physician champion, somebody who is going to lead the effort, and that by far and away is the characteristic that shows us the center is going to be productive and that also helps lead the whole introductory process and the processes, it takes time.

We actually ask centers to prepare an application to identify who's who in the zoo. Who is the ENT? Who is the sleep physician? We want to get in and talk to the C3 to make sure they understand the coding and financial ramifications of the therapy and the ability to treat a series of patients and it's important for us to open up centers that consistently treat patients because, as our training team will tell you, it's only by repetitive performance of implants and repetitive performance of programming devices do centers really become independent and our goal is to teach centers to be independent and not be dependent on Inspire to do programming and it's very important that we identify those factors right up front and that's how we prioritize what centers get activated and there's always numerous centers that want to move forward.

We are making very good progress with some of the large payers including Alton California. We are making very good progress with some of the large centers and being able to open up some of those hospitals to treat patients and we believe we'll be making very good - continued to work the work from the top tier of academic centers into the large private centers.

[Christopher Pasquale, Guggenheim Partners]

That's helpful. Thanks. Any sort of ballpark figure in your 168 sites today what you view as the universe of attractive centers out there?

[Tim Herbert, President and CEO]

Of the 168, we actually measure by classes and so as an example, I think we had 27 new centers that started in 2014 and, of those, I think there's still 24, 25 of those still in planning and those are some of the more productive. And so we look at the centers by groups of classes per year to make sure that we cannot only see growth in existing centers as well as new centers but we can see growth by different classes or years of what year centers came onboard and, in fact, we do see growth in all centers through 2017 and we're obviously early in 2018, but the key is to make sure a significant amount of our growth are with our existing centers. Those that have been with us since 2014, those that have joined in '15, '16, '17 and now even the new centers in '18 to continue to drive therapy adoption and patient flow.

[Christopher Pasquale, Guggenheim Partners]

Thanks.

[Tim Herbert, President and CEO]

Thank you.

[Operator]

And we will take our next question from Jon Block from Stifel.

[Jonathan Block, Stifel Nicholas]

Thanks, guys. Good afternoon and congrats on the early success. Tim, even maybe if we can just - the payer landscape, Aetna obviously, yes, United, I believe, United reviewed around a similar timeframe, maybe around July and did not cover, and if that's true, maybe you can just talk to us, what was United looking for? Do you have conviction it's just more time for the information or the submission to bake and, retrospect, was anything missing that you plan to go out and supplement in the coming quarters?

[Tim Herbert, President and CEO]

Yes, that's a great question, Jon. The key is what we do - when they come out with the new policy statements, we get pretty creative. We print out the prior year and then we print out the current year and we do a word-by-word comparison to see the level of detail that - okay, in this case United, they came out with - one of their regional payers had a plan that came out just in the last couple of weeks. We do a word-by-word comparison from the prior year, and from that, we can look at the level of depth that they went into in their review and unfortunately we find is very little change. In fact, many of them don't even cite the new publications which means they may have done an annual review but they didn't really put the resources to it to do an in-depth review. And as an example, the regional case from last week was still citing three-year data, didn't cite the five-year data, didn't cite the 300-page ADHERE, didn't cite all the independent studies that were done.

And you've got to - I'm sure all the insurance companies have many reviews that they have to do and it's difficult to put the resources to it to do a real in-depth review. That said, Aetna agreed to do an off-cycle review where they could take the time and review it. I want to maybe cite a different example. Blue Cross Blue Shield has a corporate tech assessment group called Evidence Street. And Evidence Street did a review that they promised they would put out in July. Well, they came back several weeks ago and they said, we're not going to make July because after reviewing a lot of the information, there is more work that needs to be done and now they expect to put out the report by the end of the year.

In a strange fashion, we're actually encouraged by that because if they were to push them out in July, it probably would have been a cursory review and we may not have liked the answer. So by them deferring to the end of the year, that means that they're committed to doing a more in-depth review, and by them taking the time to do that, that's the corporate lead that we think will lead to some more, even the regional or even corporate policies further down the road.

[Jonathan Block, Stifel Nicholas]

Very helpful, thank you for that. Tim, I'm going to actually ask about awareness. Obviously you had a successful capital raise, it seems like you hit the accelerator on the reps. What about on the advertising? I know radio has played a role in your awareness to-date. Can you touch on what has been the most effective medium to reach potential consumers? And do you see other effective venues outside of radio?

[Tim Herbert, President and CEO]

Great. We currently do radio in all of our markets and whenever there is a couple of new centers that start, a new territory, we will do a push in a radio market to get them kick started. We do do quite a bit of Facebook, we do Google ad placements. We are pretty much staying at that level for right now. We do like to work with centers, if centers would like to do their own awareness campaign. Many centers, when they start up, they do patient stories with local news agencies, as an example, and that's a very effective tool. We do do some national campaigns this year. We had several national news stories which, as you recall John, we have the CVS Morning News that had a significant impact.

Randy and his team has really focused on this. Randy has increased his staff to really focus on some of our outreach programs and looking for better tools to help us get patients to healthcare providers and maybe tools such as changes to our website. We've tried different avenues to help the patient's navigate the website and be able to find their way to our physicians and like I said, we've hired some more staff that is just starting, that is really going to focus specifically on that area; and we think that's a very important area going forward, and we look to expand that further.

[Jonathan Block, Stifel Nicholas]

Perfect. Thanks for your time, guys.

[Tim Herbert, President and CEO]

Thank you, Jon.

[Operator]

And we'll take our next question from Larry Biegelsen from Wells Fargo.

[Lei Huang, Wells Fargo Securities]

Hi, it's Lei Huang calling for Larry and thanks for taking my question. I just wanted to start on the revenue guidance, two questions there. First, you mentioned obviously you're expecting additional positive coverage decision at some point but the timing is hard to predict. Can you give us some color in terms of what you're assuming in your revenue guidance on additional policy coverage? So, for example, you mentioned United Health may issue a report towards the end of year. Is that something you're considering in your guidance?

[Tim Herbert, President and CEO]

Yes, Lei, thank you very much. The coverage policies - any coverage policy that we receive yet this year will have a very difficult time to have an impact on the guidance that we provided for the full year. The reason being that once the policy is in place, then we need to go back and resubmit the prior authorizations with the centers and then they've got to get to centers back - I'm sorry, they need to get the patients back into the centers to update their diagnostics, get the approvals and then schedule those cases. So we're still looking for what impact that Aetna approval will have due the end of the year, but longer term, we think that the coverage policies will drive the business several years out. And our assumptions to-date is the prior authorization model is primarily driving our guidance and I think the opportunity for coverage is more 2019 and beyond.

[Lei Huang, Wells Fargo Securities]

That's helpful. Just the second question on the guidance, so looking at little bit on seasonality, in the past couple of years, your revenue split was more 40-60 between first half of the year and second half of the year. As I look at what you did in the first half versus full year guidance, it seems the split is a little different, it's more 48% first half versus 52% second half. So is there a change of how you're looking at seasonality this year or is it just some conservatism built in there or something else?

[Tim Herbert, President and CEO]

No, we typically had, last year in the fourth quarter, we had a very strong quarter as you're citing. We are concerned about seasonality in the third quarter, a little bit from the European effect, and slightly more in the first quarter. So, again, going back to our comments on the guidance, we're being - we want to put forward numbers that we can stand behind. We think there are some factors that will benefit, that can allow us to achieve those numbers and even exceed it. One of them, of course, being the Aetna factor. But also we can continue the growth in PET and the approval rate, we may have some benefit from that standpoint.

But I think when we start talking about guidance, a real focus on guidance is really around the first quarter. We have concerns that coming out of the fourth quarter and with patients with large deductible plans, they will push to have implants completed in the fourth quarter and their deductibles reset in the first quarter. Also, in several sites in Europe we have to renegotiate some of the annual budgets with the NUB process. We're more leery of seasonal effect in the first quarter.

[Lei Huang, Wells Fargo Securities]

What was the update on pediatric use that you have pending?

[Tim Herbert, President and CEO]

Very good question and thank you for bringing that up. We have just about completed the second study. The first study was six patients that were conducted at the Massachusetts Eye and Ear Institute. This is in regards to treating pediatric patients with Down syndrome and the results of that trial were very strong and they have been published in a peer reviewed journal. The second study is a 15-patient, again, pediatric patient with Down syndrome study conducted at five leading children's hospitals in the United States.

I think we are pretty close, we have 13 implants. I think there is just two patients left in that study before that enrollment is complete and we're following those patients. And we have initiated the third study, the third study is a 50 patient trial at 15 leading pediatric hospitals in the United States, where you've been. We're now able to have a little bit more of a geographic spread and that study has started. The first patients have been enrolled and we're just working through the reimbursement process for those kids. It's a very important therapy for us. It kind of defines why we do what we do, and we can help these kids with Down syndrome and their Obstructive Sleep Apnea.

So we're staying in very close contact with the FDA at our progress, it is all being led by Dr. Chris Hartnick out of Massachusetts Eye and Ear Institute. Medicare is supportive and has written support for the kids in the study and we're working with the FDA in identifying the timelines for which we can submit data and ask the FDA for a formal approval indication to be able to more broadly treat this population.

[Operator]

And we'll take our last question from David Sherman from LifeSci Capital.

[David Sherman, LifeSci Capital]

Hi, guys. Thanks for taking my question.

[Tim Herbert, President and CEO]

Hello, how are you?

[David Sherman, LifeSci Capital]

Good. I was just wondering if we could talk a little bit about how important are the number of procedures that an individual payer has approved? And in terms of just understanding with Aetna, how many procedures they had approved prior to triggering their formal policy review? Does that give you some read-through and understanding as to how far along you are with other payers or is everyone pretty much independent and there's no reads there?

[Tim Herbert, President and CEO]

Well, I'll answer the first part of the question and then I'll contradict myself in the second part. So in the first part, it is a very important factor. I think there is three key things that drive coverage policy. Obviously the most important is strong, clinical evidence. The second one is support from the physician societies and the physician groups. But the third leg of the stool is all about experience of the payer in treating their patients.

That said, I think United Healthcare has paid for well over 150 Inspire cases, if not more, yet it's a large organization and that doesn't quite push them over the threshold. Some of the smaller regional policies or firms will react more to having several external medical review decisions. Remember an external medical review costs an insurance company the fees to be able to review those patients, and after they have a couple of approvals against them, then they move to write policy. So we think that's a very important part. That's why we push PET so hard, that's why we push individual prior authorizations to get insurance companies to have their own experiences.

Okay, that being said, Aetna didn't have an extensive amount of experience because Aetna wouldn't really prior authorize some of their patients and they would not allow them to go to upper level appeals which was extremely frustrating for the patient quite predominately, but also the physicians and, well, for everybody. So Aetna did have sufficient experience but not to the level of United Healthcare. But again, what Aetna did is they just went and took the time to do an in-depth assessment of the evidence and they did that in a mid-cycle review that gave them the opportunity to do a strong review and from that they are able to come to the decision to provide coverage for all of their patients.

[David Sherman, LifeSci Capital]

Okay, great. Thanks a lot.

[Operator]

It appears there are no further questions. At this time, I'd like to turn it back over to Mr. Tim. Please go ahead.

[Tim Herbert, President and CEO]

Very good. Well, again, we're very happy to successfully get through our very first earnings call, and we are very proud to be a proud company, we're proud for the work that we do for the patients that are treated with Inspire. We want to thank you all for joining our call. We certainly appreciate your continued support in Inspire and look forward to future updates.

And with that, I'll say have a great day and thank you, again.

[Operator]

And that concludes today's conference. Thank you for your participation. You may now disconnect.