Inspire Medical Systems Inc

NYSE:INSP

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Inspire Medical Systems Incorporated Third Quarter 2018 Earnings Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to Bob Yedid, Investor Relations from LifeSci Advisors. Please go ahead, sir.

[Bob Yedid, Investor Relations-LifeSci Advisors]

Thank you 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 quarter ended September 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 upon 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 except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time sensitive information and is accurate only as of the live [Audio Dip] November 6, 2018.

And with that, I’d like to turn the call over to Tim Herbert, CEO. Tim?

[Tim Herbert, President and Chief Executive Officer]

Thank you, Bob, and thanks everyone for joining us today. I’m pleased to welcome you to our third quarter earnings call. The third quarter was an extremely strong one for Inspire and was highlighted by significant commercial progress in both the U.S. and Europe. I’ll provide you with some detail on what drove us strong performance and our CFO, Rick Buchholz will follow with a detailed review of the third quarter financial. Following this will open up the call for your question.

First I’d like to again reinforce the mission of the Inspire team, which is to increase the awareness and adoption of Inspire Therapy, while maintaining strong patient outcomes. With this in mind, our commercial growth strategy is primarily focused on the U.S. market with the objective of increasing patient flow at existing centers, as well as training and opening new implanting center. In addition to our focus on the U.S. market, we intend to continue growing the adoption of Inspire Therapy in Europe and directing our commercial activities on both countries that have established product reimbursement, while advancing the process of obtaining reimbursement in other key European countries.

Our third quarter 2018 top line results indicate that this growth strategy is gaining meaningful traction. The worldwide revenue for the third quarter was $13.1 million, a significant increase of 80% compared to the same period of the prior year. U.S. revenue for the quarter was $11.3 million, an increase of 73% over the same quarter in the prior year. Third quarter European revenue was $1.7 million representing a robust increase of 141% over the same period in the prior year. Based on these strong results and our positive outlook, we are increasing our full year revenue guidance for 2018 to a range of $47.5 million to $48 million, up from our prior guidance of $42.8 million to $44 million. This revised guidance reflects revenue growth of approximately 66% to 68% over the full year 2017 revenue of $28.6 million.

Let me take a few minutes to discuss the key factors that are driving this drawn growth primarily on ongoing U.S. initiative. We will focus these individually, but as an overview, the key factors responsible for this growth are first enhancing patient flow at established implanting centers, while also increasing the number of implanting centers. Second, continue to grow the number of territory managers and further build the capacity of the organization to support this growth. And third, continue to focus on obtaining positive coverage policies, while driving approvals with our individual patient prior authorization process.

Individually, during the third quarter, we added 16 new centers and in the quarter with a total of 184 centers. We currently have 50% more U.S. implanting centers open then at the end of the third quarter of 2017. As a reminder, we continue to target opening 10 to 12 new centers per quarter, which seems to the sales organization, we added four territory managers during the quarter ending the period with a total of 40 territory managers. Our addition of four new TMs is consistent with our goal to increase the number by three to four per quarter and we are actively reviewing the capacity of the organization to support the plant growth in the business moving forward.

With this in mind, we also hired three regional managers in the third quarter and have immediate plans to add two additional regional managers for the beginning of 2019, bringing our total to nine regions, reporting to a two area Vice President. These regional managers represent a mix of internal promotion as well as external recruiting to maintain a balance in the organization. We’re also continually monitoring and recruiting additional support team members, including field clinical representative, therapy access managers and training staff, all required to facilitate patient flow and consistent and precise surgical implants with the intention of achieving positive outcomes. We expect that these new centers and territory managers will have a positive impact on our overall growth and in combination with an increased penetration at existing centers will help us maintain a balanced growth rate in therapy adoption.

Moving onto market access also known as reimbursement. This continues to be a priority for the team. To reiterate what we have said previously, we have two key strategies obtaining individual prior authorization and expanding written coverage policies. First, individual patient prior authorization is the method to allow patients access to the therapy while coverage policies are being developed in parallel. The number of prior authorization submitted is an important metric that we track to estimate the likely number of future implant. Two other factors regarding prior authorization are the overall approval rates and the time to approve – time to obtain these approvals.

In the third quarter, we submitted 661 individual patient prior authorization, which is an increase from the 619 submitted in the second quarter of the year. We also had a year-over-year increase of 49% compared to the third quarter of 2017. On our last earnings call, I spent a little time walking through the prior authorization process. As a reminder, a full cycle review includes three levels of appeal and oftentimes takes three to four months to complete. We also noted that approximately 70% of all submitted prior authorizations that receive this four review cycle or approved.

The issue of timing here is that some patients do not want to wade through the full process of three to four months and drop off. Other patients simply do not have the right to appeal their cases to a higher level and further some patients change insurance companies during the process, which requires them to start over. Where do we include these cases? The overall approval rate for all submissions was about 50%. We experienced a solid improvement in these approval rates in the third quarter, and this is largely attributable to the positive coverage decision from Aetna earlier in the quarter.

This coverage decision contributed to both the increase in prior authorization mission as well as the number of approvals in the quarter. In fact, Aetna was responsible for a little more than a third of the growth in prior authorization approvals in the third quarter. This was a combination of both new patients as well as patients who had previously submitted at Aetna did not receive a prior authorization review. The impact of the Aetna coverage decision is the increase of the overall approval rate to approximately 55% at the end of the third quarter up from 50% reported during the first half of the year.

For patients who had a full review of all three appeals cycles, this approval rate increased to about 75% up from the previously reported 70%. Moreover, in the third quarter, we experienced a 49% increase in prior authorization approvals as compared to the second quarter of 2018 and a 175% increase over the number of prior authorization approvals in the third quarter of 2017. We will continue to track these rates closely, specifically as other insurance plants add coverage, which will continue to reduce the time from submission to approval.

Now we also work – we also continue to work closely with all payers regarding additional coverage decision for Inspire Therapy, I believe that the Aetna decision will make it easier for other payers to follow suit and write their own policies. To date, over 300 plants have paid for the procedure and we have a priority list of payers that we are working with the foster further positive coverage decision. An important part of this peer communication is a full update of the clinical dossier and supportive Inspire Therapy that now includes the multitude of 2018 publication including those focused on the five year star data and the ADHERE large study result.

We are also making progress with those agencies that conduct the technical assessments. These technical assessments are important because the insurance companies rely on their external reviews in making their policy decision. As an example, just yesterday, we were notified that Hayes, which is a technical assessment agency, has again reviewed the Inspire clinical evidence and upgraded Inspire from a D2 rating to a C rating. This is a significant two step improvement in rating and there were actually several publications not included in the report, which is promising for future reviews. This upgrade will be viewed favorably by the insurance company.

Another example is Evidence Street, which is a corporate technical assessment group of Blue Cross Blue Shield. Now, they originally indicated that they would publish their findings in July and we subsequently reported that they had delayed the report until November, so as to provide additional time for a more detailed review. Evidence Street recently notified us of a further delay, although only one month until December. We expect this group to also revise their original ranking, which can then be reviewed by the region of Blue Cross Blue Shield payers, as we move towards coverage.

I would like to now provide an update on the CPT reconsideration intended to convert the CPT add-on code for the pressure sensor from a Category III to a Category I code. As you recall, the application was denied at the May, AMA Meeting and in collaboration with the American Academy of Otolaryngology or AAO, which is the ENT society. We submitted the reconsideration request that was heard at the September AMA meeting.

The reconsideration was not overturned, but comment that the meeting recommended a resubmission of the application for the February, 2019 AMA meeting. We are working with the AAO and the new submission will be sent to the AMA this week. We did not believe that this will have any short term impact on our business, as this is only an add-on code for the physician payment and the primary CPT code 64568 remains in place and provide the full reimbursement to the hospital. We will continue to report back on the progress of this process early next year.

We continue to believe that our growing body of clinical and real world data, are instrumental for health plans and the revaluation to add coverage for Inspire therapy, this was evidence during the recent AAO meeting, but this is the annual ENT meeting which was held in Atlanta. There were many presentations at the meeting, but most notably the report on a study comparing the effects of Inspire therapy on Medicare-aged patients to a younger patient population in the cohort of 600 patients.

The data demonstrated that both groups experience as statistically significant reduction in the Apnea-Hypopnea Index or AHI, following 12 months of Inspire therapy. The Medicare-aged population had a mean AHI of 7.6 events per hour, as compared to an AHI of 11.9 events per hour for the younger population.

Both groups also experienced a statistically significant improvement in their quality of life. This is the first study that specifically addressed the safety and efficacy of Inspire therapy in a Medicare-aged population. The physician investigators have submitted these compelling results to a leading medical journal, and we expect these to be published in the very near future.

Commercially, we continue to leverage, direct-to-patient initiative is a key aspect of our U.S. commercial strategy. These programs have been successful in reaching and educating prospective patients above Inspire therapy, and we continue to broaden these efforts to correspond with the growing number of U.S. implanting centers.

These initiatives have led to an increase in web activity as compared to 2017. In fact, in the first nine months of 2018, we averaged approximately 47,000 web visitors and approximately 26,000 engaged visitors on a weekly basis. As I said on our last call, we continue to see improved methods to educate patients and identify more efficient tool to connect potential patients with healthcare provider.

During the third quarter, we recruited several individuals with expertise in the area of direct-to-consumer marketing and we’ll have multiple initiatives over the next year to improve our education with prospective patients. Our product development team also continues to work to improve a patient’s experience, while maintaining and enhancing therapy outcomes.

We recently announced the first implant of our new pressure sensing lead in Europe. The sensing lead remember monitors a patient’s respiratory pattern, providing the information the Inspire system uses to time that delivery of stimulation of the hypoglossal nerve preventing obstructions during sleep. The new sensor lead design incorporates several features to ease the implant of the lead for the surgeon, and also have significant smaller profile including a reduction in diameter of the lead body of approximately 50% as compared to the prior lead, thereby improving patient comfort. Currently, the new sense lead is under review by the FDA and pending clearance. We expect the product to be available in the United States in the first half of 2019. We have other projects underway to improve the physician programmer, the patient remote control and longer term, we will be scoping out the design parameters of the next generation Inspire Neurostimulator.

So before I turn the call over to Rick for his review of the financials, I’d like to provide a quick update on our progress in Japan. As you know, at the end of the second quarter, we received approval from the regulatory body in Japan, which is the PMDA. The approval was for the earlier version of the Inspire system and we recently submitted the current system that being the Inspire 4 Neurostimulator and the new sensing lead for approval to PMDA. This review could take six to nine months to complete.

We’re also working with our consultants and several physician societies in Japan to divide to define the reimbursement program. Our current belief is that a new coding scheme will be required for Inspire therapy in Japan and this will entail in significant coordination of time with the reimbursement authorities in Japan. We continue to expect that the first implants of Inspire will occur in Japan in late 2019, but do not anticipate recording any meaningful revenue there and tell a broader commercial launch is executed in 2020.

In the interim, we continue to work to identify an appropriate partner in Japan to help us with this product launch. We will continue to update, as this is a key market for initiating our Asia-Pacific strategy. We’re also working on a broader strategic plan then includes the evaluation of potential opportunities in several other countries.

In summary, we are excited by the progress we have achieved with our business in the meaningful opportunities that remain. Our primary goal remains to generate the highest therapy outcome possible for patients. We have focus growth strategy to increase the number of territories, territory managers, and implanting medical centers on a quarterly basis, along with further development and reimbursement. We are confident that these strategies position as well for long term success.

With that, I’d like to turn the call over to Rick for his detailed review of our financial. Rick?

[Rick Buchholz, Chief Financial Officer]

Thanks. As Tim has reviewed, Inspire’s performance in the third quarter and year-to-date has been excellent. I’m very encouraged by the strong execution across many areas of our business and the expansion of our team to support the continued acceptance of Inspire therapy in the U.S., and Europe.

For the third quarter ended September 30, 2018, our total revenues were $13.1 million, an 80% increase over the third quarter of 2017. U.S. revenue in the third quarter was $11.3 million, an increase of 73% from $6.5 million during the same period of the prior year. This increase was primarily due to the expansion of our sales organization into new territory, increased market penetration in existing territory, and the growing number of prior authorization approval. Our U.S. ASP remained consistent at approximately $23,200 for both the third quarter of 2018 and 2017.

For the third quarter, European revenue increased to 141% to $1.7 million from 724,000 in the third quarter of 2017. Approximately, 90% of the increase was volume driven, while 10% was attributed to a price increase with the introduction of the new neurostimulator in Europe in the second quarter of 2018. The foreign currency impact during the quarter was insignificant. During the third quarter, the European ASP was $22,700, as compared to $21,300 during the third quarter of 2017. Our geographic mix of revenue in the quarter was 87% in the U.S. and 13% in Europe, which is consistent with the first and second quarters of 2018.

The gross margin in the third quarter was 81.1%, as compared to 78.5% during the third quarter of 2017. The gross margin improvement was approximately 240 basis points higher due to excess inventory charge taken in the third quarter of 2017 related to the introduction of the fourth generation Inspire system in the U.S. The remaining gross margin improvement is attributable to the higher ASP in Europe as compared to the third quarter of 2017.

Total operating expenses for the third quarter were $15.2 million, an increase of 63% from $9.4 million in the third quarter of 2017. The majority of the OpEx increase was attributable to the increased headcount in our U.S. sales organization, increased R&D spending and legal accounting and other costs associated with being a public company. Our net loss was $4.7 million for the third quarter, as compared to a net loss of $4 million in the same period last year. The diluted net loss per share for the third quarter of 2018 was $0.22 per share.

For the first nine months ended September 30, 2018, our total revenue was $34 million, an 83% increase over the $18.6 million of revenue generated in the first nine months of 2017. The U.S. revenue in the nine month period of 2018 was $29.6 million, an increase of 86% as compared to $15.9 million during the same period of the prior year.

European revenue in the nine month period of 2018 was $4.5 million, an increase of 66% over the same nine months of 2017. As Tim mentioned, based on these strong results in our positive outlook, we are increasing our 2018 revenue guidance. We now currently expect full year 2018 revenue to be in a range of $47.5 to $48 million, representing growth of 66% to 68% over 2017 revenue. This compares to our prior guidance range of $42.8 million to $44 million.

As of September 30 2018, cash, cash equivalent and short term investment were $120.4 million compared to $16.1 million at December 31, 2017.

With that, I’d like to turn the call back to Tim for closing remarks.

[Tim Herbert, President and Chief Executive Officer]

To reiterate, we’re very pleased with the robust pace of growth were showing in our business while maintaining high quality and strong patient outcome. We believe this is indicative of the markets demand for our innovative and effective solution for patients with obstructive sleep apnea, who are unable to successfully use CPAP.

I’d like to take this opportunity to express my sincere appreciation to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve strong and consistent patient outcomes. Their commitment to the patient is unmatched.

So that will conclude our prepared remarks for today, and we’ll now open up the call for questions.

[Operator Instructions] Our first question will come from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, Wells Fargo]

Good afternoon guys. Congratulations on another nice quarter. Tim, I wanted to ask you, a couple of – a couple on reimbursement and DTC and M1 for Rick on the guidance. So, Tim, let me just start with a reimbursement. You talked about Evidence Street coming out in November. What are your expectations for that and what are the implications?

[Tim Herbert, President and Chief Executive Officer]

Thanks, Larry and Hi. We need to wait for Evidence Street to come out. I know they are very busy and preparing many different reviews and we’re trying to coordinate to find out the exact timing of when that report will come out. If it comes out in December, we believe it’ll come up a couple steps from the ranking of having us experimental and investigational. And we need to kind of wait to see what their final rating will be, but assuming it is a – it comes up a little bit, we will then pass that along to all the regional Blue Cross Blue Shield’s along with the clinical evidence dossier and encourage them to write positive coverage policies at a regional basis. That will take a little bit of time in the beginning of 2019 to accomplish that.

[Larry Biegelsen, Wells Fargo]

Okay, that’s helpful. And Tim, one thing that unique about what you’re doing is the amount of emphasis on direct-to-consumer and I noticed that, you’ve mentioned in the prepared remarks that you’ve hired more people to help you with your DTC efforts. I didn’t get in the past. You’ve talked about spending about $5 million on direct-to-consumer advertising in 2018. Does that still the case and how do you – where do you see that going in 2019 and as I said, I had one more follow-up.

[Tim Herbert, President and Chief Executive Officer]

Okay. I think that we’re going to spend quite a bit of time in reviewing our current webpage in the methodology for which we are educating patients and connecting them with healthcare providers. And we’ll look to be more efficient and be able to provide more patients that connection. That being said, with those initiatives, I would expect that we will increase the amount of spend we have for advertising simply from the fact that we’re opening more territories and have a greater reach for patients. And I know you have a follow-up for Rick and I’ll have Rick comments any further on advertising.

[Larry Biegelsen, Wells Fargo]

Rick, did you want to comment before I ask the guidance question?

[Rick Buchholz, Chief Financial Officer]

With – what Tim said, we will assess our marketing spend and we would probably not break that out going forward as a detailed number, but will continue to increase that as we build our sales organization and enter into new territory.

[Larry Biegelsen, Wells Fargo]

Thanks. And then Rick, on the guidance, the approval – the prior authorizations are going up, that’s a leading indicator. The approval rates are going up as Tim mentioned, but your guidance implies for Q4 for about 35% to 40% year-over-year growth versus the 80% year-to-date. It’s also flat sequentially. And in the past, we’ve seen sequential growth in Q4. So just trying to understand, why we might see – why we won’t see more sequential growth from Q3 to Q4? And just lastly, Rick, you can probably anticipate the next part of the question, consensus is about 35% year-over-year growth in 2019. Is that something, you’re comfortable with at this point? Or could you do better based on the growth we’ve seen year-to-date? Thanks for taking the questions.

[Rick Buchholz, Chief Financial Officer]

Thanks, Larry. I’ll answer your second question first. Since we’re so early in the fourth quarter, we’re not going to provide 2019 guidance yet. And regarding our guidance that we provided today, we really did have a very strong third quarter and this provided us confidence to increase our annual guidance by almost 10% with only one quarter remaining. And as we said before, it’s really important for us to have guidance that we’re comfortable with and that we can achieve.

Our guidance does take into account the hiring cadence of three to four territory managers and adding 10 to 12 centers on a quarterly basis. But with that said, we did have a strong Q4 in 2017 and part of that strong fourth quarter as well as at the end of the calendar year is the push for patients with high deductible insurance plan to schedule implants before the end of the year when their deductibles reset.

So with that, it could result in some peek implants in the fourth quarter, but it could also have a negative effect on our first quarter of 2019. So this is one of the key seasonality effect that we’re expect to see in our business between the fourth and first quarters in the future. But again, there may be some seasonality, but we are still early that are strong revenue growth has masked the seasonality.

[Larry Biegelsen, Wells Fargo]

Thanks for taking the questions guys. Congrats again on the nice quarter.

[Tim Herbert, President and Chief Executive Officer]

Thank you, Larry.

[Operator]

Next, we’ll take a question from Jon Block from Stifel.

[Jon Block, Stifel]

Great. Thanks guys, good afternoon. Maybe two or so for me. First, I think Tim, you mentioned helping the main metrics are sort of that 50% approval or the appeal go to 55% and 70% to go to 75%. I don’t know if you want to get this granular, but I’m just curious on how that may have trended throughout the quarter. In other words, was that no little snow out of the gate as a messaging got passed down and then you saw a difference in how things looked September versus July? Maybe if you can provide some commentary on how the uptake from Aetna has been over the last several months.

[Tim Herbert, President and Chief Executive Officer]

Very good. Yes. Our market access team was pulling their hair out in the beginning of the quarter and that while, Aetna wrote a corporate policy that doesn’t automatically distribute to the regional medical director. And so it took quite a bit of time for that to filter down and to get the awareness at the regional levels. And we were still getting the same response back on prior authorization probably, midway through the quarter. And even in the over last couple of weeks, Aetna actually updated their policy to include the CPT codes that they did not have in the original policy. So it’s been a lot of work, working with Aetna, to gift, everybody on the same page. But we did see a positive trend there at the end of the quarter. And that’s kind of why we emphasize that end of the quarter. And we’re going to track that progress very, very closely. Through the fourth quarter, we look at the impact that it may have on the fourth quarter. But more importantly, as we move into 2019.Remember there’s always a little delay between the submission of a prior authorization and approval and then scheduling the implant.

[Jon Block, Stifel]

Okay. Very helpful. And maybe just to go back to Larry’s prior question around Evidence Street, it sounds like there’s been some consistent communication with you guys and them, and correct me if I’m wrong, but you mentioned the July go to November, the November going into December. So I’m just curious, your level of conviction Tim, that they’re looking at the most recent, dossier, if you would. Do you feel like they’re scrutinizing the right information? They’re looking at the ADHERE registry, whatever may be so that they will be fully prepared to make the best decision possible? And then I’ve got one quick follow-up.

[Tim Herbert, President and Chief Executive Officer]

I think so. We know from July, they had quite a bit of interaction with our market access team and from that they realized that they hadn’t done enough homework back in the July timeframe. And so we were able to provide additional information and we have been having additional communications with Evidence Street that we do believe they are taking the deep dive to really understand what’s going on with that Evidence. We do believe that they are also communicating with the American Academy of Otolaryngology and even somebody ENT physician. So yes, we believe they’re doing their homework and they’re putting their best foot forward and we look forward to seeing the results.

[Jon Block, Stifel]

Okay, great. And last one for me. Pediatric indication, if you can provide an update there and it’s the right thinking that that should be more likely 2020 event, similar to that of Japan, as you mentioned earlier. Thanks for your time.

[Tim Herbert, President and Chief Executive Officer]

Thank you, Jon. We have moved into the third pediatric trials. These are my kids with Down syndrome. We completed the first trial of six patients that was published. We haven’t completed the enrollment and the second study that brings that up to 15 patients. I do believe, there’s still one or two patients that still are yet to be implanted. They’re still working on the prior authorization process. And we have started the third study which increases the population to 50 patients. That also increases the number of centers to 15. So this provides us to develop, implanting base for once it is approved. So remember that these cases are also reimbursed by Medicare or a commercial payer. So they are units and then we invest in conducting the clinical trial. So we – I’m unable to comment about when we’re going to go to the FDA. But we keep the FDA closely informed of our progress. But we are doing well with the study so far. And the good news is the kids are doing very well.

[Jon Block, Stifel]

Thank you, guys.

[Operator]

Our next question will come from Chris Pasquale from Guggenheim.

[Chris Pasquale, Guggenheim]

Hey, congrats on the quarter, guys. Tim, can you just give us a sense now that the Aetna situation has maybe fully played out, it’s disseminated down to the regions. What’s the typical experience for an Aetna patient at this point? How many hoops are they still having to jump through? How long is the time lag for those patients between when they request therapy and they’re actually able to get an implant?

[Tim Herbert, President and Chief Executive Officer]

Thanks, well, the good news is, is there’s energy around Aetna patients, whereas before, as you recall, when they came in and were diagnosed, when they submitted the prior authorizations, they oftentimes didn’t get a chance to have a prior authorization review. And now if the patients are on label and they did put a requirement in their BMI less than 32, but all other requirements are in alignment with the FDA indication statement. That it’s a positive experience for the patients. They still have the normal diagnosis of making sure they have up-to-date sleep study, have a sleep endoscopy to make sure that their anatomy is supportive of an inspire implants. And then when the prior authorization is submitted, the approval cycle is relatively short and can be as little as a few days. And then it’s just working with the surgeon to schedule the implant. So as of today, it’s a pretty positive experience for the Aetna patients. And we look forward to the day when we can expand that to the Blues and United and all other payers.

[Chris Pasquale, Guggenheim]

That’s helpful. Thanks. And which payers in the past have cited the Hayes Rating in particular as a reason to deny coverage?

[Tim Herbert, President and Chief Executive Officer]

That’s a really good question. And I have to get back to you on that one.

[Chris Pasquale, Guggenheim]

Okay.

[Tim Herbert, President and Chief Executive Officer]

I don’t quote anybody. I can’t tell you, if in general, people use Hayes and I don’t have a specific answer for you, Chris. Sorry.

[Chris Pasquale, Guggenheim]

Okay. But you guys do view that update as a significant milestone or improvement relative to where you were?

[Tim Herbert, President and Chief Executive Officer]

Oh, I absolutely do. Going up from a D2 to a C is a very positive step, even with the current assessment. I think it is even blended with a lot of the feasibility studies of other companies. So it’s still a little slanted. But this really good news, that Hayes took the time and did a solid review and did upgrade two-step. And of course, the first thing we’ll do is turn around and request them to upgrade another step. But we do think as a great breakthrough and we’ll be viewed positively by the payer.

[Chris Pasquale, Guggenheim]

Thanks. And just the last one for me. Other than the Evidence Street update, which we’re still waiting on, do you have visibility on the potential timing of any other decisions that you guys are keeping an eye on?

[Tim Herbert, President and Chief Executive Officer]

Well, from a technical assessment, which is where Hayes and Evidence Street is – I think we’re still pursuing with ECRI, who’s another tech assessment group. They put out a short report earlier in the year and we expect their full report to come out in the near future. But then as far as payers go, we are working with several consultants and each consultant is assigned a number of individual payers and then we have our group here working with another group of payers, so really be able to spread our wings and contact as many payers in parallel to encourage them to review the dossier and to write policy. And while I can look at the schedule for when payers have their annual reviews, I can’t cite any specific examples of when we would expect an individual payer to write policy.

[Chris Pasquale, Guggenheim]

Okay, thanks.

[Operator]

Next, we’ll go to Richard Newitter with Leerink Partners.

[Richard Newitter, Leerink Partners]

Hi. Thanks for taking the questions and congrats on a quarter. One or two, maybe just to start off on the 2018 guidance and linked that to the improvement that you saw in the prior authorization approval rate. I think, you said you went from 50% to 55%. And just as we’re thinking about, what the implied 4Q guide is, is it fair to assume that for now you’re assuming that goes back down to 50% for the purposes of your guidance and perhaps that you’re kind of base case, but if it were to manifest in a way that it did more towards that 55% level way, it was trending 2020, end of the third quarter, there would potentially be upside to the fork, you implied guide. Is that a fair way to think about it? Or are you actually thinking about the world in that kind of a – this is the new base rate and that’s what’s contemplated in your 4Q implied guidance?

[Tim Herbert, President and Chief Executive Officer]

Well, I like to think about is the new base rate, in fact, over time I want to actually increase that, right? We don’t want to be limited to just 55% of the patients. So as more policies are written, we believe that number will continue to increase in the future. But would you also have to build into your equation? There is the timing. And so while, Aetna had a significant factor in the growth of approvals in the quarter, you still have to remember that all the other payers are still the three to four month review cycle. So while we still talk about the 55%, the question is going to be what impact will that have on the fourth quarter? Is that more factor that’s going to have a bigger impact in the first quarter and then in all of 2019.

[Richard Newitter, Leerink Partners]

Okay. And just with respect to the ratings upgrades that you’re getting, for example in the notches and the grade increases that you’re getting in Hayes. What we can expect in Evidence Street? I think you said you’re expecting a couple of notches improvement. I guess my question here with respect to Evidence Street in particular, what gives you the visibility that you think it’s going to be a couple of notches and not something either more than that or less than that? And then two, how does that translate into the actual decision making process when the regional’s decide whether they adopt that to switch something to a coverage policies? A couple of notches enough to kind of just get wholesale conversion of all the regional’s that just kind of plug and chug, what Evidence Street says? Or is it going to take more lobbying with a couple of notches improvement?

[Tim Herbert, President and Chief Executive Officer]

Answering the first part of the question is, if I was in the room and I had an opportunity to influence the decision makers that Evidence Street, I think we would go up more than two notches. But all we can really do is provide the necessary information and give them the contact information for physicians and the American Academy of Otolaryngology and trust that they take the time to be able to do an in depth review. Now we know Aetna did that when they did an interim review, but we don’t know how much of an in depth look at Evidence Street is taking on it. We also know that they have a handful of other reviews going on in parallel. And it all comes down to the resources that they assigned to this project.

And so I’m a little uneasy to be able to go on a limb and say, we’re going to hit a home run with Evidence Street when experience shows that if you don’t do the homework and do the right level of review, that we’re going to be disappointed with the rating. Now, that being said, we do believe that they are in good communication with the AAO and with physician group, so we’re confident that they will come off their existed rating, which again is equivalent to the lowest rating as with Hayes. Yes. And so we do believe that they will come up a couple steps and ideally you’re right. If they really spend a time to it and they do a review like Aetna, maybe it comes up a lot higher. That would be a little optimistic I think. Now the way the process is going to work. Go ahead.

[Richard Newitter, Leerink Partners]

No, no, go ahead. Yes, I think you’re going there.

[Tim Herbert, President and Chief Executive Officer]

The way the process is going to work is, they will send us a copy of the report but more importantly Evidence Street sends that report out to all the regional Blue Cross Blue Shield plant, call it Minnesota, New York, Massachusetts, Michigan or pick your favorite state. And our job then is to work with our consultants to make sure that the proper evidence packages are there to full clinical dossier along with information of the implanting centers in a particular region and have those physicians contact them, encouraged a interim review with all the regional Blue Cross Blue Shield payers to have them write policy. So once we get Evidence Street, that’s what’s going to give us one more piece of information to go after the regional payers to request that they do a in depth review and write policy.

[Richard Newitter, Leerink Partners]

Okay. That’s helpful. Just to follow up on that Tim. My understanding is that there are some regional Blues that just follow exactly what Evidence Street kind of recommend and it’s like immediately they just flip it to whatever it is. So I guess my question was more on, is a few notches of improvement enough to kind of get those plans that tend to just flip once the new policy comes out. Is that enough to get them to flip or is it going to be like a lobbying even for those that are more kind of relatively following whatever the Street does. Does that make sense?

[Tim Herbert, President and Chief Executive Officer]

I’m going to write down that question. I’m going to answer it at our next earnings call.

[Richard Newitter, Leerink Partners]

Okay.

[Tim Herbert, President and Chief Executive Officer]

Because then I will have real data. And I think it’d be a little risky for us to make an assumption that Michigan or Texas or Illinois will just automatically flip. I don’t think that the world is that take more work than that. We’ll push it.

[Operator]

Our next question will come from Bob Hopkins with Bank of America.

[Bob Hopkins, Bank of America]

Thanks. Can you hear me okay?

[Tim Herbert, President and Chief Executive Officer]

Yes. Hi, Bob.

[Bob Hopkins, Bank of America]

Good afternoon. So, couple of questions I’d like to ask on the same topic of reimbursement. First off, obviously you had a big win in 2018 with that and we see it producing really good results for you. More from a big picture perspective as we look at 2019 how confident are you that you could have one or two more Aetna type wins, like whether United or some of the other major commercial payers. I mean, I know you’re helpful – hopeful. I know it’s a process, but what I want to gauge is how confident are you that we could have one or two or more of those types of announcements in 2019 based on where you are in discussions with those organizations?

[Tim Herbert, President and Chief Executive Officer]

So I’m very confident we’re going to continue to pick up regional policies. And ideally some of those policies will be some of the larger Blue Cross Blue Shield regional policies. I think I’m going to be a little gun shy about talking about the behemoth like United and Anthem. Those are the 40 million covered lives. Those are the big guys. We will continue to work with them very closely and push them hard. But I think it’s a safer bet to really talk about the regional payers and be able to get individual win and keep knocking down the dominoes as we continue to move forward. And, and some of the big guys like United may take a little longer than next year.

But again, we have them on our priority list and we’re making sure they have all the latest information. And as we get new publications and as we get new information, we really worked them hard. But to your point, if we can get a couple of those big ones that really kind of changes the prior authorization and the overall approval rates and what’s more important, it will significantly reduce the time to get approvals. And that’s a really exciting process that the team is really looking forward to. We know that day will come.

[Bob Hopkins, Bank of America]

Is there something in particular that these behemoths are waiting for in terms of additional long-term data or one of these Hayes or Evidence Street or one of the others? Is there something in particular these groups are waiting for or is it more just a process of getting in front of them?

[Tim Herbert, President and Chief Executive Officer]

Yes. I think it’s more – I think it’s the latter. I think it really is a process to get their attention to get UnitedHealthcare, to do a detailed review. And when they do their annual review, if they just have so many different therapies that they have to review that I believe they have to just end up doing a cursory review because they don’t have the resources assigned to it. But if we can get their attention and get them to do a detailed review as Aetna did, I think that the Evidence is very strong. We have close to 1000 patients published from clinical studies including randomized trials, five year data to large studies of 300 patients.

We have comparison trials, they’re kind of running out of excuses. And by the way, we continue to keep conducting additional research and keep conducting or publishing new clinical evidence both sponsored by the company as well as independent from other hospitals. So we believe we’re going to keep continuing to putting out more and more evidence, keep pushing to get in front of the payers that get their attention, do detail reviews and in fact do believe that they will write policy. And the challenge that I can’t answer for you is exactly what date they will do that.

[Bob Hopkins, Bank of America]

And then lastly on the CPT reconsideration for the pressure sensor, as you said, denied made or not are denied in May – denied in May and then denied September. And then there’s going to be fresh looking February of 2019. Could you just help us understand why that hasn’t gone through already and what would give you confidence that it will in the February setting?

[Tim Herbert, President and Chief Executive Officer]

Yes. I think number one, I think what happened back in May and continued into September is the word confusion. And when it was presented, it wasn’t clear to all the panel members of what was the necessity to do this because as you recall, what the base code 64568, there are multiple procedures that use that code. Not just Inspire and LivaNova with a vagal nerve stimulator for epilepsy. But we needed to be a little bit clearer on the necessity to that. So in this new application, we put in a couple of real simple diagrams and a couple clarifying statements to keep it simple and we’ve already got confirmation with the AAO, one of our leading physicians is intended to be there at the February meeting.

And this is a physician that has – with Inspire to the FDA for panel meeting. So very knowledgeable on the therapy and really going to be clarify this. What happened at the September meeting is, there was a reconsideration and we weren’t allowed to introduce any new information and that was unfortunate. But they did come back and say, come back in February. I do believe the ENTs also have worked out with the neurosurgeon any kind of concerns about the sharing of the code.

So we have confidence that’ll go through. That being said, most hospitals today tend to be the high academic or teaching hospitals or large hospital networks and whereas a lot of the ENT are salary based, so really doesn’t have a big impact in the short-term. And as an example, I think a lot of the spinal cord for pain, I think it was done with a lot of private practice in ASCs. We’re not at that level yet and it’s going to take us several years to get there. So we have time to be able to get this code in place before it will have any impact on our business.

[Bob Hopkins, Bank of America]

Okay, got it. Thanks so much.

[Tim Herbert, President and Chief Executive Officer]

Thank you, Bob.

[Bob Hopkins, Bank of America]

Okay. See you.

[Operator]

Our next question will come from Isaac Ro with Goldman Sachs.

[Isaac Ro, Goldman Sachs]

Good afternoon and thanks for taking the question. Hi guys. Rick, just want to start with the comments you made on approval rates that you’re seeing. I imagine you guys gave us some of those stats that 55% up from 50% to help us get a sense of the benefit the Aetna coverage is having on just your overall success rate with other payers. And so if that’s right, I’d like to just maybe understand your underlying assumption for the point at which that might taper off pending future coverage, right? Like we obviously can’t predict when you’re going to get additional payer coverage, but between now and that point, it seems like there might be a leveling off if you will of the approval rate. Maybe just help us think through what you’re assuming there?

[Rick Buchholz, Chief Financial Officer]

Sure. So as we mentioned, the Aetna factor, it’s still very early, as we mentioned, we got the coverage in the third quarter. Aetna coverage as we mentioned, contributed to just over a third of our growth in the number of prior authorization submissions and approval in the third quarter. So we expect that this will continue in the future as we increase the submissions and approvals across other payers as well. As we continue to kind of grow the entire business. So there may be an increased factor for the fourth quarter slightly because it will be our first full quarter with the policy in place. As Tim said, most of the third quarter was spent implementing the national policy down to the local offices.

[Isaac Ro, Goldman Sachs]

Okay, that’s helpful. And on the second question for me is on Europe. Germany has been kind of one of your lead areas of focus. Can you give a sense of what you’re doing there to try and pave a path to more permanent coverage? Where you are in that process and maybe any timelines you can share for us in terms of when we might know more?

[Tim Herbert, President and Chief Executive Officer]

Right. The good news in Germany is we have a NUB 1 and we can stick with a NUB 1 for a long period of time. And as really good and we can increase the number of centers that apply for any NUB 1, which just the due date was I think Halloween or late October was the final submission date. So we believe we’ll have a NUB 1 again this year. The good news is we’ve really been able to continually increase the NUB 1 payment to the hospital, which allows us to significantly increase the number of implanting centers, training the number of implanting physician and really been able to grow that. So we don’t see a real emergency to be able to drive or get to a more formal DRG or a ZE code. The NUB 1 is serving us very well and we can continue with that moving forward.

And then the other thing I’d want to say about Europe is, the Netherlands, we received reimbursement this year and really has had a strong impact. And we’re going to continue to grow that moving forward and we’re also really looking to start building on reimbursement in other countries. We think that we’re going to have the continued growth in Europe as we move forward.

[Isaac Ro, Goldman Sachs]

Okay. Maybe just sneak in one more. On the NUB 1 in Germany, I mean, is there any reason why you would or wouldn’t want to push forward with more formal coverage to the extent that maybe informed the rest of the region or is it maybe more of a country specific thing? And so therefore not really much benefit elsewhere in the region in Europe if you were to go for full coverage?

[Tim Herbert, President and Chief Executive Officer]

Well, with NUB 1 that is full coverage, right?

[Isaac Ro, Goldman Sachs]

Right, but I thought that was sort of a temporary thing.

[Tim Herbert, President and Chief Executive Officer]

Well, no I don’t – when you talk about temporary, you think about something that’s two to three years and that’s not the case. We can stay with NUB 1 for many, many years. And eventually we’ll go to a DRG with ZE code, but we’ll wait till we really have good penetration across the country. We do have S3 guidelines, so we’re – S3 guidelines are the high level cross functional guidelines. So we have the highest level of therapy guidelines, we need to continue to build on additional centers to be able to support NUB, to support the DRG and a ZE code. Such that when they start that process, there’s the correct number of hospitals performing as sufficient number of cases to do a proper financial assessment.

[Isaac Ro, Goldman Sachs]

Got it. Thanks for the clarification.

[Tim Herbert, President and Chief Executive Officer]

You bet, Isaac.

[Operator]

And that does concludes our question-and-answer session today. I’d like to turn the conference back over to Tim Herbert with any closing or additional remarks.

[Tim Herbert, President and Chief Executive Officer]

Great. Thank you, Melissa. Just want to thank everybody for joining the call today and we certainly appreciate your continued interest and support in Inspire. And really look forward to our next progress update. So thank you all very much and have a great day.

[Operator]

That does conclude our conference for today. Thank you for your participation.