Inspire Medical Systems Inc

NYSE:INSP

Earnings Call Analysis

Revenue Up 40%, Margins Steady, Expansion Mode

The company reported a robust third quarter with total revenue reaching $153.3 million, marking a 40% increase from the previous year. The U.S. market, seeing a 39% rise to $147.5 million, drove most of this growth, while international sales nearly doubled to $5.8 million. Average selling prices held around $25,000 domestically and $21,700 internationally. Gross margins were strong at 84.1%. Operating expenses rose by 34% to $142.4 million, reflecting the firm's expansionary efforts. The company revised its full-year revenue outlook upwards to $608-612 million, indicating a 49-50% growth compared to last year, and aims to maintain gross margins between 83% to 85%. Plans for expanding the market base include activating 52 to 56 new U.S. centers and adding 12 to 14 new sales territories in the final quarter.

Solid Revenue Growth Accompanied by Controlled Expense Management

The company reported total revenue of $153.3 million in the third quarter, marking an impressive 40% increase from the $109.2 million in the same quarter last year. This surge was primarily fueled by a remarkable 39% jump in U.S. revenue to $147.5 million, driven by higher utilization at existing centers, the addition of new implanting centers, ongoing direct-to-consumer marketing initiatives, and an expansion in the sales force. Overseas revenue also experienced a significant boost, with a near doubling to $5.8 million. These financial results reflect the company's adept balance of revenue growth and expense management.

Improving Operating Leverage While Scaling Operations

Operating expenses for the third quarter rose to $142.4 million, which is a 34% bump from the previous year. This increase aligns with the company's strategic plans, including sales team expansion and heightened marketing efforts. Notably, expenses remained flat sequentially, signaling a steady improvement in operating leverage. The company's gross margin also saw enhancement, reaching 84.1%, up from 81.9% the previous year, indicating strong pricing power and cost control in the face of growth.

Strengthened Average Selling Price and Gross Margin

Further indicative of the company's robust pricing strategy, the U.S. average selling price (ASP) increased to $25,000, up from $24,400 last year, with expectations to maintain this level. Internationally, ASP climbed to $21,700, compared to $20,500 in the previous year quarter. This pricing power, coupled with higher sales volume, particularly contributes to the improved gross margin performance.

Enhanced Financial Position and Outlook

The company sustained a net loss of $8.5 million for the quarter, cutting the loss nearly in half from the $16.8 million reported in the prior year period. With a substantial cash and investments balance of $467 million as of the end of the quarter, the company is strategically positioned to execute its growth strategy effectively. Looking ahead, the company has uplifted its full-year revenue guidance to fall between $608 million to $612 million, signifying an anticipated growth of 49% to 50% compared to the previous year.

Projections of Continued Growth and Expansion

For the full year, the company expects to sustain a strong gross margin between 83% to 85% and projects to activate 52 to 56 new U.S. centers as part of its expansion efforts. These projections highlight the company's confidence in maintaining its growth trajectory through the ongoing year.

Robust Product Pipeline and Market Resilience

The company is advancing its Inspire V product, having submitted the needed supplement to the FDA and anticipating approval in 2024, with a full commercial launch targeted for 2025. Despite market concerns, the company notes no negative impact from competing GLP-1 class drugs, and instead identifies opportunities to complement these treatments for patients with obstructive sleep apnea (OSA).

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. My name is [ Dilan ], and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Inspire Medical Systems Third Quarter 2023 Conference Call. All lines have been placed to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.I'll now hand the call over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

[Ezgi Yagci, executive]

Thank you, [ Dilan ], and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the 3 and 9 months ended September 30, 2023. A copy of the press release is available on our website.On this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including, without limitation, those relating to our operations, financial results and financial condition, investments in our business, full year 2023 financial and operational outlook and changes in market access are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. Please see our filings with the Securities and Exchange Commission, including our Form 10-Q, which was filed with the SEC earlier this afternoon for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.This conference call contains time-sensitive information and speaks only as of the live broadcast today, November 7, 2023.With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

[Timothy Herbert, executive]

Thank you, Ezgi, and thanks everyone, for joining our business update call for the third quarter of 2023. As always, we start with our commitment to patient outcomes and ensure that each patient has the best possible experience with Inspire therapy. We are excited to announce that during the third quarter, we surpassed a significant milestone of 50,000 patients treated with Inspire therapy, and the team is very proud to be able to make a difference in the lives of so many patients.With that, let's review our results. In the third quarter, we generated revenue of $153.3 million, representing a 40% increase compared to the third quarter of 2022. Our growth continues to be driven by increased utilization at existing centers, and is complemented by the activation of new centers.Internationally, we grew 99% with the European team delivering very good results. We had several wins, including growth in Germany and the first full quarter of leveraging country-wide reimbursement in Belgium.Looking forward to the fourth quarter in Europe, we are running up against inventory supply issues of polyurethane-based leads. We do not yet have our European Union Medical Device Regulation approval, commonly known as EU MDR, which allows us to start shipping the new silicon-based leads, which were approved in the Europe back in the third quarter of 2022. As background, we apply for EU MBR approval in December of 2021, but there is a significant industry-wide backlog in the European system, which has delayed approval beyond our expectations. As such, we have limited supply of the polyurethane leads, although it is difficult to predict, we have made significant progress with our notified body and are targeting EU MDA approval of the silicon-based leads in early 2024.In order to maintain product deliveries, we are pursuing a temporary pathway called Product Irrigation, which is a country-specific approval that allows for the early shipping of the silicon-based leads, while the EU MDR review is being completed. We have already received irrigation approvals in the Netherlands and have begun the delivery of silicon-based leads in that country.We have also initiated this irrigation process in several other countries, including Germany, Belgium and Switzerland. Therefore, during the fourth quarter of 2023 and possibly extending into '24, we expect that the delay of the EU MDR approval and the shortage of polyurethane-based leads will cause delays to implant procedures, resulting in a reduction in our European revenue of up to $4 million in the quarter.In the U.S., during the third quarter, we continued to increase our capacity to support the strong demand for Inspire therapy by adding 62 new implanting centers, ending the quarter with a total of 1,107 centers. During the fourth quarter, we continue to expect to activate 52 to 56 centers. Regarding the U.S. sales team, we created 13 new sales territories in the third quarter, bringing our total to 274. We continue to expect to add 12 to 14 sales territories in the fourth quarter.To highlight the strong patient demand, in the third quarter, the number of visitors to our website surpassed 3.8 million. And from these visitors, we had over 15,000 physician contacts. These are significant increases from the second quarter and are due in part to a change in the media mix, which we implemented in the third quarter.Further, we continued to improve our conversion of patients receiving Inspire therapy. Looking ahead to 2024, we will be more targeted in our approach to DTC. One example is increased attention to digital advertising directed towards qualified patients. As a result of this change in our strategy, these metrics will no longer be relevant and will not be reported into 2024.Summarizing the commercial activity in the United States; we tracked the decrease in the number of submissions by our customers seeking prior authorization to the Inspire procedure, resulting in a short-term impact on the number of implant procedures during the early part of the third quarter. As background, in early 2023, we initiated a pilot program with certain customers to minimize our involvement with their prior authorization process. Despite a careful and well-planned approach to the pilot program, a significant number of our customer experienced challenges with their prior authorization submission process.After recognizing this trend early in the third quarter, we reinvigorated our efforts to facilitate patient access to Inspire therapy, by more closely engaging with our customers with the prior authorization submission process, involving both our field and corporate prior authorization teams to assure timely, consistent and accurate submissions. As a result of these efforts throughout the quarter, the number of prior authorizations for patients seeking Inspire therapy began to normalize, which reinforces our confidence in the fourth quarter and beyond. Even with these improvements, we were limited in our ability to add implant procedures as a result of the ongoing challenge of ENT surgeon capacity.Having identified and addressed this prior authorization issue, and with the ever present patient demand, we are seeing significant momentum in the U.S. entering the fourth quarter, and therefore, we are increasing our full year revenue to be in the range of $608 million to $612 million, up from $600 million to $610 million, representing a 49% to 50% increase compared to 2022. This increase to our revenue takes into account the regulatory challenges in Europe.Switching over to reimbursement; we are actively working to include the FDA indication expansion into payer policies, just recently 2 large U.S. payers, Aetna and Humana updated their policies to cover patients with an AHI up to 100 events per hour and a BMI up to 40, as well as for the pediatric population with Down syndrome. We will continue to work with other payers to include these expanded indications.Furthermore, the final OPPS rules for 2024 were published last week, consistent with the proposed rules in July, with minimal changes to the site of care reimbursement levels. We also highlight the significant increase in the reimbursement of the drug-induced sleep endoscopy or DISE procedure, which increased from $180 to $1,618 for the Medicare facility payment in the hospital setting. The physician reimbursement had a slight decrease due to the general RVU reimbursement rate, but this is typically adjusted prior to the January 2024 effective date.Let's switch over to product quality; our real world evidence continues to show strong patient outcomes and patient satisfaction with Inspire therapy. We've recently published our 2023 patient experience report, which shows continued improvement in our already low revision and explant rates and demonstrates our unwavering commitment to outcomes. This report can be accessed on our website at inspiresleep.com.We continue to make investments in our clinical research, as evidenced by the PREDICTOR Study results, which were presented at the International Sleep Surgical Society meeting in Nashville in September. The results indicate that a narrow airway correlates with complete concentric collapse. Furthermore, each millimeter increase in pharyngeal width, correlated to a 10% decrease in the likelihood of complete concentric collapse. Additionally, the results from the initial subset of 300 patients, demonstrated that BMI plays a key role, as BMI was correlated with increased lateral wall collapse, which is a contributor in complete concentric collapse cases. In the early results, each unit increase in BMI, correlated with a 14% increase in the odds of complete concentric collapse. Importantly, these results do not vary from the result of the initial feasibility study.With these encouraging results, additional patients are being enrolled for validation, with the intent of identifying specific patient populations, for which DISE may not be required. We expect to complete enrollment of the second subset of 300 patients by year-end and published results once the full data set has been enrolled and analyzed.On the product development side, our pipeline remains robust. We submitted the Inspire V PMA supplement to the FDA at the end of the second quarter, and we have received the initial set of questions from the FDA. The team is working diligently on a thorough response to these questions. Recall, the Inspire V system incorporates sensing capability into the neural stimulator, using an accelerometer and will remove the need for the pressure sensing leads. We have several additional system-level qualification tests to be completed and expect to submit a response to the FDA in early 2024, and with a normal review time, we expect approval in 2024 and following a limited market release, we are targeting full commercial launch in 2025.Looking ahead to 2024, we will launch our new connected physician program in the U.S. called the SleepSync Programmer. This will allow physicians to access our programming screens from their own computers and eliminate the necessity for Inspire provided tablets, as part of the physician programming system and also paving the way for future remote patient programming. We continue to increase the adoption of our SleepSync digital platform and work on enhancements to streamline the post-procedural longitudinal patient management.Before I turn this over to Rick, I would like to address the impact of GLP-1s on our business. Despite the negative stock market reaction, we have not seen any adverse impact on our business, and we see tremendous opportunity to work alongside this class of drugs to treat the many patients living with OSA.As you are all aware, OSA is a multifactorial disease with many independent factors, including age, gender, weight and neck circumference. Inspire is designed to address anterior posterior airway collapse, also known as tongue-based collapse. Patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral wall collapse. A combination of tongue-based collapse and lateral wall collapse is identified as a complete concentric collapse of the upper airway, which is detected during a DISE procedure, and Inspire is contraindicated for complete concentric collapse.Also, while weight loss can help reduce a patient's AHI and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients. However, we expect GLP-1s will help patients address their lateral wall collapse, potentially bringing them into our indication.Furthermore, we believe the introduction of a pharmaceutical treatment option will significantly increase patient awareness and have a positive impact on the overall diagnostic rate of OSA, which still remains very underdiagnosed in the 20% to 30% range today. The combination of these factors should have a positive impact on our business.Lastly, as shown on our ongoing ADHERE Patient Registry, the average BMI of patients treated with Inspire therapy is 29, and the American Academy of Sleep Medicine guidelines recommends weight loss prior to surgery, for patients with a BMI greater than 35 and nonsurgical solutions for patients with a BMI greater than 40. Therefore, there is not a significant overlap in the Inspire patient population with the GLP-1 today.In summary, we remain focused on patient outcomes and physician education to continue the adoption of Inspire therapy. We will continue to increase utilization at our existing centers while adding capacity by opening new centers. We remain excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term stakeholder value.With that, I'd like to turn the call over to Rick, for his review of our financials.

[Richard Buchholz, executive]

Thank you, Tim, and good afternoon, everyone. Total revenue for the third quarter was $153.3 million, a 40% increase from the $109.2 million generated in the third quarter of 2022. U.S. revenue in the third quarter was $147.5 million, an increase of 39% from the $106.3 million in the prior year period. The primary growth driver in the U.S. was higher utilization at existing centers. Other growth drivers include the addition of new implanting centers, our continuing direct-to-consumer marketing and a higher number of territory managers.Revenue outside the U.S. increased to $5.8 million, which is a 99% increase year-over-year. The U.S. average selling price in the third quarter was $25,000 compared to $24,400 in the prior year period. We expect the U.S. ASP to remain steady at the current level. The ASP outside the U.S. was $21,700 during the quarter compared to $20,500 in the third quarter of 2022.Gross margin in the third quarter was 84.1% compared to 81.9% in the prior year period. Recall, the third quarter of 2022 was negatively impacted by obsolescence charges related to the transition from polyurethane to silicone-based leads and the introduction of our Bluetooth remote in the U.S.Total operating expenses for the third quarter were $142.4 million, an increase of 34% as compared to $106.6 million in the third quarter of 2022. This planned increase was due to the expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. However, on a sequential basis, operating expenses were relatively flat, reflecting our commitment to improving our operating leverage.Interest and dividend income totaled $5.5 million in the third quarter compared to $1.4 million in the prior year period. This higher income was driven by higher interest rates on our increased cash and investment balances compared to a year ago.Net loss for the third quarter was $8.5 million compared to $16.8 million in the prior year period, representing $0.29 compared to $0.60 in the third quarter of 2022. This includes $1.7 million of R&D expenses associated with prelaunch inventory related to Inspire V that is expensed for accounting purposes, bringing the total of expensed prelaunch inventory to $4.7 million year-to-date.The weighted average number of shares outstanding for the third quarter was 29.4 million. We expect the fourth quarter weighted average shares outstanding to be approximately 29.6 million.Our cash and investments were $467 million at September 30. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers, while training and opening new implanting centers.Moving on to updated 2023 guidance; given the continuing momentum in our business and taking into account the EU MDR approval challenge in Europe, we now expect full year revenue to be in the range of $608 million to $612 million, an increase from our previous guidance of $600 million to $610 million. This updated revenue guidance represents 49% to 50% growth compared to full year 2022 revenue.We continue to expect full year gross margin to be in the range of 83% to 85%. As Tim noted, we continue to expect to activate 52 to 56 new U.S. centers and establish 12 to 14 new U.S. sales territories in the fourth quarter of 2023.In conclusion, our strong performance and business momentum provide us with confidence in our outlook for the remainder of 2023.With that, our prepared remarks are concluded. [ Dilan ], you may now open the line for questions.

[Operator]

[Operator Instructions] And I show our first question comes from the line of Danielle Antalffy from UBS.

[Danielle Antalffy, analyst]

Tim and Rick, just wanted to follow up on the comments around the prior auth just if you can give any context around how many centers were piloting this program? Just trying to get a sense of -- or if you can give us the number of what you think is -- how many procedures did not get done because of it? Anything you can get there? And I do have just one follow-up.

[Timothy Herbert, executive]

Okay. Very good. What we know is we continue to scale the organization, and we need to start building independence, as we're working with some of the key centers to be able to help them along with their independence of the prior authorization. And we want to stay involved with some of the difficult cases, that involves both the field and the prior authorization team. So it was a pilot study with a significant number of centers and the centers that we've chosen, of course -- those centers that have higher utilization to be able to leverage the learnings at those centers. So while we don't have the exact numbers for you, we are comfortable that we're able to work with those centers and reenergize the field team and reenergize the prior authorization team to support these centers to get the prior authorization submissions back online, and we're seeing continued growth there and confidence moving forward.

[Operator]

And I show, our next question comes from the line of Robbie Marcus from JPMorgan.

[Robert Marcus, analyst]

Maybe to follow-up on Danielle's, I'll ask both of them upfront. One, it said in the release you started to learn about this early in the third quarter. I imagine it probably overlapped with the second quarter call. So just wondering when you knew about it and why not mention on 2Q? And then as you look to '24, I realize it's still early, but I think it's important for investors. Any early thoughts you have, and how do you feel about where Street consensus is?

[Timothy Herbert, executive]

Got you. Well, we're going to start out by looking at, certainly, we needed data as we continue to move through the first and second quarter. I mean, we talked about the first quarter is really focused on Medicare cases as we come out of the fourth quarter. And we also are in the process of implementing the pilot program. Further into the second quarter was being educated with new centers, and that's when we were able to start to track that a little closer.It wasn't until the beginning of the third quarter that we realized we needed to take some corrective action. And that we implemented that change, but we also want to watch for the data on those changes, which, of course, we don't see until later into the third quarter. And at that point with our capacity, it's challenging to be able to add those additional implant procedures within the third quarter. But it started to become evident maybe a little bit in the second quarter, but with tracking of the data, we really didn't take the action until early in the third quarter when we had a strong confirmation on that.I'm going to hand off to Rick there for -- talk about next year.

[Richard Buchholz, executive]

Yes. Hi Robbie, thanks for the question. So we provide annual guidance, and we've only provided guidance through 2023. Normally, we don't comment on consensus. But I mean, that being said, our focus is to continue on increasing utilization that we've proven, and also increasing capacity by adding new centers, territory managers as well as really focusing on capacity by adding new implanting or additional surgeons because the majority of our centers only have 1 implanter.Also as a reminder, too, we expect to get some utilization tailwind, as our centers mature. Roughly half of our centers have been added in the last 2 years. So as we look towards 2024, we expect that we'll continue to improve our operating leverage, as we progress through 2023 as well as 2024. I would note, though, one headwind is what we mentioned earlier about the EU MDR challenge in Europe, and that could carry over into early 2024, as Tim mentioned.

[Operator]

And I show our next question comes from the line of Larry Biegelsen from Wells Fargo.

[Lei Huang, analyst]

It's Lei calling in for Larry. I will also ask my 2 upfront. Just on the Q4 numbers, the implied 4Q growth is at 16% sequentially. In that number, what's assumed about impact of the prior auth program? Is there any implication from what you learned in Q3 going into Q4? And related to that, the $4 million that's coming out in Q4 due to supply in Europe, does that go into backlog, so when you get the clearance in Europe early next year do you get that $4 million back?And then my second question is on the Inspire V. Can you give any color on the type or number of FDA questions that you got and if you need to do additional analysis? I guess the bottom line there is, what gives you the confidence that you would get approval in 2024?

[Timothy Herbert, executive]

Sure. You bet Lei. The Q4 numbers, when we look forward to that, that does include the improvements that we're seeing with the prior authorization, as we discussed. We do see good momentum going forward in that. We did include a note on the European regulatory challenges of the $4 million. Now remember, we're working a [ derogation ] process. So we hope that we can actually overcome that during the quarter, but we can't be predictive of that. So we're being a little bit careful, as we work through those opportunities. Certainly, we already received approval in the Netherlands, and we're hoping that we can have communications with the other countries as well, to kind of help that through.As far as the Inspire V, we give the FDA a lot of credit. They did a great review on that. To put this in perspective, it is a Class III active implantable neurostimulator. The submission was 13,000 pages. So it's quite an extensive job for the FDA to review that. They came back with a series of questions in detail, both around the product itself, on biocompatibility around electromagnetic compatibility.The team has diligently kind of worked to answer each of those questions, but we're confidently moving forward with preparation of those questions. And once we put everything together with the programmers and the patient remote and the neurostimulator and do our system-level testing, we will be submitting right back to the FDA. So I have strong confidence that we'll continue to work with the FDA to move towards approval.

[Operator]

And I show our next question comes from the line of Travis Steed from Bank of America.

[Travis Steed, analyst]

I did want to ask about Medicare versus commercial mix. I know we saw that change last quarter. Was that due to the prior auths in anyway, and if you could talk about kind of the mix this quarter and the growth in kind of the Medicare versus commercial business, if you saw the Medicare business still hold in? And any comfort you can give on just to make sure that like -- I know you're talking about the prior auth submissions, but just give comfort that this was more of a self-inflicted wound versus something changing on the demand side.

[Timothy Herbert, executive]

Yes. Got that. From the mix, yes, we did highlight on the second quarter that we saw extraordinary -- a little bit higher mix of Medicare versus the commercial. And so while we always say in the beginning of the year in Q1, it tends to be heavy in Medicare. And by the time you get to the Q4, it tends to be heavy commercial naturally because of the high deductible insurance plans resetting the beginning of the year and the focus in Q4 is always with commercial cases. That continues to hold true. But in the second quarter, we highlighted that there was maybe a little bit higher mix of Medicare.I think it's a combination of a couple of things, but with the delay in prior authorization submissions, yes, that is correlated with commercial cases and does work in line with that hypothesis. So we do believe it is related to the comments we made back in the second quarter.We have confidence in the prior authorization process for the simple reason. We've already seen improvements and we see the trends moving forward, and that gives us the confidence to be able to increase our guidance as we move into the fourth quarter and the team, both the field and the internal prior authorization teams are working well with our customers, to make sure that we continue to help them get their accurate and timely submission of the prior authorizations. And as I mentioned, Travis, we're already seeing improvements in the metrics.

[Operator]

And I show our next question comes from the line of Jon Block from Stifel.

[Jonathan Block, analyst]

I'll ask both mine upfront as well. Maybe the first one, Tim, you mentioned the DTC switch maybe going forward from sort of this broad-based to more targeted the prior metrics that you gave will be relevant it seems in '24 and beyond. With such a big TAM, why is now the time to change it from that broad base to more targeted? And then the second question, admittedly, some other people weren't there, but I think it's an important one. There's always the fear that hyper growth companies can't see the next cut coming? And so can you give just some more details on how the trends changed call it, you worked your way throughout 3Q, or what are you going to -- even what you saw in the first part here in the fourth quarter to actually raise the guidance midpoint by $5 million, even while taking on that, call it, $4 million inventory headwind from the international markets?

[Timothy Herbert, executive]

Got it. DTC, we're not changing it now, but you kind of -- Jon, you have been with us since the beginning -- from the beginning of time. Remember back even when we did our clinical studies, we did radio ads to recruit for the clinical study. And then when we got FDA approval, we started really slow with Facebook and some radio and it was several years before we even started to change to get into television. And then later on, when we continued to grow and just a few years ago, we started national TV campaign. This is just an ongoing evolution of our experience with direct-to-consumer and the learnings that we've adopted over time.And what we've realized now going forward is we can even take it to the next level, and we should start really targeting our DTC towards qualified patients and really refining that approach, and it's going to show to be more targeted and more efficient. And that's just a natural progression of our program. It also goes hand-in-hand with the use of our digital tools and the technology, to be able to help patients get their appointments and help with the conversion process and really help people get in front of physicians and healthcare providers and give them an opportunity to receive Inspire therapy.So it's not an immediate change. It's an ongoing evolution of our DTC program and look forward to reviewing that going forward. Certainly, I understand your concerns with the hyper growth concept and what do we see around the corner. In this case, pretty good data that shows limitations on the prior authorization really had an impact. And it kind of is a little bit more reflective. I know we don't talk often about month-to-month comparisons in the quarter. But we did see an uptick in these last 2 months of the quarter, that really gave us confidence going forward and a significant uptick in the specific number of prior authorizations. And again, as part of evolution as we move forward, we know the confidence in getting approvals from insurance companies with prior authorizations has gotten extremely high. And so it makes it more predictive to be able to have comfort moving forward.So we think we're aware of what the future holds. We think that we're well positioned to manage our DTC and manage our conversions and handle the growth appropriately.

[Operator]

And I show our next question comes from the line of Richard Newitter from Truist Securities.

[Richard Newitter, analyst]

I'll ask my 2 upfront as well. As we think of the prior authorization situation, can -- are you basically recapturing all of the backlog for lack of a better descriptor, that may have materialized in 3Q -- in 4Q? Or is -- does your guidance assume some percentage of that backlog? Or tell me if that's not the right way to think about it? And then just secondly, you grew your revenue 2x your expense rate. I guess, how do we think about operating leverage and that revenue growth to OpEx growth, especially as we kind of look out even into 2024? And any color that you can provide on profitability and how the new DTC -- or not new, but how your approach to more targeted DTC could potentially drive increased efficiencies in the P&L?

[Timothy Herbert, executive]

Perfect. Thanks, Rich. I'm going to let Rick handle the second question there on profitability. But let me address the prior authorization and how do we work back with our centers to recapture those patients. And it's a combination of working the deal team getting in with the centers, to make sure that they're taking care of the patients who have a right to work with their healthcare provider, to be able to be provided therapy if they qualify.So the field team is working directly with the sites to make sure that we have the proper team in place at the site, to make sure the patient navigators and the healthcare providers are tracking those patients to make sure that they get the information necessary, to get the prior authorization put together.Our internal prior authorization team is supportive of these centers, to make sure we get timely accurate submissions in. So we will capture a lot of these patients. Now the question that you asked is really about when. And so the key is going to be -- we know the time from insurance approval to implant is variable, but it tends to run a little longer because of, again, our capacity with ENTs, which we're working to improve and train additional ENTs, get optimization and the procedures, as well as open new centers. But we're going to work hard to make sure every patient has an opportunity.It's going to be challenging for us to capture all of those patients in the fourth quarter. I think we will see some of those patients even move in. We're already scheduling cases, not only later in the quarter, but we are scheduling cases in Q1 today already. So I think it's a combination of the 2. But the focus is, we're committed to the patients, we're committed to giving each of those patients the best opportunity.

[Richard Buchholz, executive]

Yes, I'll follow on with what Tim said, Rich. I mean we're going to continue to run our playbook. We know profitability is important. We continue to make investments in our business, because we really want to focus on long-term top line revenue growth. With our strong gross margins, we know profitability will follow. We've made some good strides year-over-year, quarter-over-quarter. Our net loss in the third quarter was 8.5% compared to 16.8% a year ago. We continue to be positive EBITDA. We were about breakeven on that metric in the first quarter, but we've continued to improve that, improving our leverage.In the third quarter, our adjusted EBITDA was $6.6 million, and that compares to a $2.4 million loss in the third quarter of last year. So we are making those investments. Yet we are still showing leverage and improving leverage, and we know it's going to be important. And we'll give more clarity on that, as we get closer to 2024 or into 2024 when we provide our guidance around next year.

[Operator]

And I show our next question comes from the line of Adam Maeder from Piper Sandler.

[Adam Maeder, analyst]

I'll keep it to one. Just wanted to follow up on PREDICTOR. You presented the first data set, I think, a month or 2 ago. Have you started to dialogue with payers yet? If so, how have those initial conversations been going? And how do we think about the pace of policy changes and any impact to business in subsequent quarters?

[Timothy Herbert, executive]

Absolutely. PREDICTOR no, we're still working with the physician group. The first 300 patients closely in line with the feasibility study that was performed by Dr. Weiner a year ago. And so we are in the process of enrolling the next 300. We're making very good progress with that. We're over half the way through that enrollment and expect to be close to finishing that enrollment by the end of the year, to be able to give us a really good data set to predict what patients will not have complete concentric collapse and therefore, not require a sleep endoscopy procedure. So we're still kind of refining that work and then that will be brought forward to the payers when we have that.In the interim, the prior market access team is communicating with the payers, and we just mentioned Aetna and Humana, we had another payer come through today, with an updated policy on the high AHI, high BMI and pediatric population with Down syndrome. So we are making progress on both fronts and started communications even with CMS on the Medicare side.So really looks good. We're happy with the data that we see. We want to collect the second group of 300 patients, and then we'll really be able to communicate with the payers, finding the proper course forward for the patients.

[Operator]

And I show our next question comes from the line of Chris Pasquale from Nephron Research.

[Christopher Pasquale, analyst]

One question on the prior auth issue and then one on margins. Tim, it sounds like basically, you attempted to wean centers off of a service the company was helping them with, and they had a hard time making that transition and then the fix was to go back to helping them a lot. So is that right? And obviously, there was a reason you guys tried to do this and push them off on their own to begin with. So how do you get to that point, and to your point, put yourself in a better position to scale?

[Timothy Herbert, executive]

Great question, and then we'll come back to you on the question for Rick there. I think the key is learning. And I think we did it as a pilot program, and we positioned it well, we educated the team, but it's a strong transition for the centers. And while they submit their own prior authorizations, it's really a responsibility to give them a little bit of support on that and also the field team being involved in the whole patient flow and tracking patients, where are they now in the process. So we're really in detailed work on -- working with the navigators and the physicians to make sure that their patients have the best opportunity.But we need to kind of review this whole prior auth. As we continue to scale, we need to continue to encourage centers to be more independent, and we're going to continue to look at what the best approach to this, maybe it is transitioning with a third party in the interim. There are several different ways that we can go down this pathway.The advantage we have going forward is our technology is evolving significantly with the SleepSync system. So now we're in a better position to help patients through the overall process. And I think that's going to help us with the education, to make sure that we don't lose sight of patients and when they go into the dark hole. So we're able to be able to track them going forward. So we've learned obviously quite a bit with this process, and they're going to be really able to come back, circle back around.And as we continue to scale, it's going to be an important step for the organization to take and we're well aware of that, and we'll continue to take steps forward.And I'll come back to you. You had a second follow-up.

[Christopher Pasquale, analyst]

Yes. And then, Rick, just a detailed question, the 29.6 million share count for the fourth quarter, it looks like that implies a net loss position for the company. You guys were GAAP profitable last year in the fourth quarter, and given the progress you made, it seemed like you might get there again this time around. So just wanted to clarify if you're thinking you'll be in a net loss position in 4Q?

[Richard Buchholz, executive]

Yes. We provide annual guidance, and we don't provide quarterly guidance, Chris. And so we're going to continue to run our playbook -- as I said, we're going to make those investments. And so -- but we are taking a very disciplined approach to spending as we always do. But on an overall basis, we expect to continue to gain leverage. One thing I didn't point out is, we've -- we're not burning cash. Year-to-date, we've actually generated $16 million of cash, and our overall cash balance is $467 million. So we'll give more clarity on that again, as we get closer to 2024.

[Operator]

And I show our next question comes from the line of David Rescott from Baird.

[David Rescott, analyst]

Great. I wanted to follow up on or ask on your comments on the expanding coverage with Aetna and Humana. I know you've talked in the past about how these newer indications could be somewhat market expansion, obviously, some of those patients may have been getting prior off in the past as well. So just wondering with the updates you've seen with the expanded coverage you've seen so far, whether or not you have increased confidence in the ability for those newer indication expansions to truly be somewhat market expansion and whether or not you've seen any type of, at least increase maybe in those accounts already that have seen the indication expansion or that's still too early? And then my second question, just broadly, I guess, on the kind of consumer spending segments, we've broadly gotten a little bit of questions. I'm just wondering, 1.5 months or so into Q4, whether or not you're really seeing any type of weakness at all just from a consumer spending standpoint, as it relates to the interest in Inspire procedure.

[Timothy Herbert, executive]

Thank you. Let's go back to spend and coverage. Let's kind of take these one at a time and I think they're kind of key. I think from a high AHI, that's a pretty easy threshold. These patients just don't have any other options. And so while we've been able to work with payers to try and get prior authorization approvals, it's not always easy. Aetna is a perfect example. Aetna does not authorize prior authorization. So if you have a patient who's not indicated for Inspire and has a high AHI above 65, you really don't have a good pathway going in to get them to give you a special approval. And so those patients tend to get locked out.Now that they update those policies, the Aetna patients that have an AHI between 65 and 100, do have a pathway forward. That's really a great step forward. That will have a strong impact going forward, because there's obviously a lot of patients in the backlog that with a high AHI, that simply didn't qualify. And so that I think, is a real positive.I think the pediatric patients with Down syndrome is, again, another strong breakthrough. This is a new indication. It's still in the educational process of building awareness with the families and the physicians, and we're starting to see a better uptick there. And the good news is, most of the key children's hospitals are associated with other academic or other larger hospitals that already provide Inspire therapy. So it's a natural growth for those centers to be able to add in this really important patient population. And we continue to do clinical research in that group, as well as to continue to grow the clinical evidence with pediatric population.When we get to BMI, now we've got to be a little careful, because remember with BMI, we're tacking a ball, making sure that they have the proper physiology to receive Inspire therapy. And we talk about if you have a too high of a BMI, you have a lateral wall collapse. That's what is related to the GLP-1s and the tongue-based collapse is related to Inspire. The two in combination work together. So if we have patients with a high BMI, we're going to be very careful to not straight encourage them that they can go today and go get Inspire, because they may have the lateral wall collapse. That may require them to lose weight, be it a GLP-1 or bariatric surgery, but we need to be careful with the high BMI patients to make sure that they have tongue-based collapse, for which Inspire can treat. So again, we're going to be a little careful with that population to make sure we set expectations correctly. But high AHI is a go high -- or the pediatric population is a go and then the BMI we're going to be a little bit careful.As far as the consumer spending, we don't see that really affecting our business. The key to it is patients with untreated moderate to severe sleep apnea, let's take that a step further. Patients who have been diagnosed and have tried CPAP, so they know the benefits of positively addressing their disease, yet not being able to be treated with CPAP. Those are the patients that are pretty motivated to get Inspire. And once they get into the process, I don't think we have many people that drop off, because of the economic reasons, whether it be the co-pay with the private insurance, or I think the estimate from Medicare is about $800 out of pocket for a Medicare procedure. So we don't see patients really walking away, because of that expense.

[Operator]

And I show our next question comes from the line of Anthony Petrone from Mizuho Group.

[Anthony Petrone, analyst]

Staying on the coverage theme, that will be question one, and then one on GLP-1s. Tim, when you think about Aetna and Humana and you talked about AHI up to 100 and then pediatric, BMI, a little tricky. I mean is that something that you're already seeing here in November? And so i.e., is it a 4Q phenomenon, where that can sort of boost volumes in 4Q or is it more of a 2024 event? And again, if you can quantify how large of an opportunity you think, just getting the commercial payers on board with FDA label, how much of a shot in the arm to growth does that represent?And then quickly just on GLP-1, Eli Lilly has a study next year, the SURMOUNT-OSA study and a lot of talk on this call about certain percent of the patients are strictly [ weak ]. Some of them are on anatomical, you mentioned tongue collapse, lateral wall collapse. What are you expecting out of that study? Do you think we could see that nuance, where maybe it will prove out that a GLP-1 is really not going to be the biggest driver of reducing AHI or perhaps it will be? So maybe just some thoughts on that study next year?

[Timothy Herbert, executive]

Yes, absolutely. Yes, let's go back to the coverage first. I think the -- with the high AHI, those are patients that have been trying to get Inspire already. Many patients are getting stacked up. Remember the old days, where we used to do a prior authorization. And then once tonight, we'd have to submit in the first appeal, if that was denied, we'd go to a second appeal, then we'd have to go to an external medical review, which was an independent arbitrator. The problem with a high AHI before the approval is, those patients would have to go through that process. Now with Aetna and some other peers who don't allow prior authorization, they just don't have that ability going forward, same with Medicare.So this coverage is going to really help them a lot. I think you're already going to see some of those transition in during the fourth quarter, but certainly further into 2024, but we're already seeing those patients coming through.From a pediatric standpoint, almost a whole new program, because this is about brand awareness and making sure that the pediatric physicians and the families really understand about Inspire and it's kind of more of a market development play. So I think longer term, that's probably more of a 2024 increase going forward there, but really a positive market to be in. And we're going to want to continue to expand that into other indications in the pediatric groups and people that we can help a lot.GLP-1s, expectations of the SURMOUNT trial. I think we're looking at maybe some of the early data will get released in the spring. I think maybe it's going to be a little bit more of a detailed readout in the July timeframe. What we expect from that, when we're able to look at that study and look at the demographics of the study, the average BMI, the mean BMI is 40 and the mean AHI is fixed. And if you kind of look back at all the other studies on weight loss, even with the significant reduction in BMI, which would be great if all those patients achieve it, it's still not going to be to a point where they're going to have a clinically relevant reduction in AHI.We read through the detailed protocol and there's only so much detail we see, but it is a detailed randomized study. It is complex, but it only needs to show a statistically significant change in AHI as compared to placebo. So it's not as robust of a study, that can really show clinical relevancy. And so we expect that they'll probably show a statistical reduction. But again, we think that if the patients are able to lose that weight, stay compliant to the drug and keep the weight out, that they will, in fact, become close to the Inspire indication, which is, we believe, is really a positive.On the same token, there is 2 arms in that, there's a CPAP arm, and there's a non-CPAP arm. And that's been a discussion that's been kicked around too. What would these drugs do when we get on the market? We've queried a lot of our physicians. In fact, we're working with some of our physician groups to really understand how GLP-1s are going to affect our market going forward and how is it going to affect the patient population. And some of our doctors, in fact, not only longitudinally manage patients, but they also have a weight-loss clinic, and they have patients already come in, who either with bariatric surgery and those with GLP-1s have lost weight, and now find themselves in a position where they have tongue-based collapse to be treated with Inspire. So we're going to continue to build on that evidence as we continue to build forward.And the other side to it is, I think people talk about -- well people just start with GLP-1s and wait until they get on to CPAP, and we're not seeing that either. I think you heard Mick at ResMed talk about this a little bit, too. We're seeing patients are going to start therapy, at the same time they get diagnosed or prescribe GLP-1s. And by the time that they may be not compliant with CPAP, and they get to Inspire, they'll already have been down that pathway.So again, we think GLP-1s are going to be complementary to our business. And I think when you see this data coming out, it's going to show more evidence to that. And that we're going to certainly be there to help those patients out if they qualify, and we'll continue to track this very closely.

[Operator]

And I show our next question comes from the line of Mike Kratky from Leerink Partners.

[Michael Kratky, analyst]

Just really on that same GLP-1 front. I mean, can you talk a little bit more about what you've heard from surgeons regarding the current portion of your patients that are already getting GLP-1s, and if that's actually leading to an increase in terms of the number of patients that you're seeing?

[Timothy Herbert, executive]

Yes. Absolutely. Now the key is, it's still very low quantity. It's still -- when we talk about GLP-1, we have to bring it up to our physician groups. The people that talk about GLP-1s is really from the Street, from Wall Street. And that's where we get all the questions, and when we get our advisory committee together and we get our doctors together, we have to ask the questions about GLP-1 because it doesn't have a presence today. And when we get to the groups that do have weight management centers and have some experience with it, they have anecdotal experience with patients who had complete concentric collapses, and went to the weight management clinic and went on GLP-1 and some were able to come back.So very low numbers now, because we're so early in the game right now. And I think we're really ahead of where these GLP-1s are going to go and what impact they're going to have. And our job in the meantime -- we're keeping our head down. We're not worried about it. We know our patient demand is there. But if we can have patients with a complete concentric collapse, find a way to be able to lose weight relieving the lateral wall collapse, thereby qualifying for Inspire. That's really going to be a benefit for the patient, and it's certainly a benefit to Inspire going forward.

[Operator]

And I show our next question comes from the line of Mike Polark from Wolf Research.

[Michael Polark, analyst]

Just one on the prior auth topic, I'm curious, when you launched this pilot earlier this year, did you have an expectation that this was going to work well, meaning like, is this how therapies like this typically progress, centers become more autonomous? Or did you view your strategy as maybe more of a potential outlier outcome? And then the second piece of this is, I imagine, within the pilot, some centers did well on their own, some did less so. What are the characteristics of the center that was performing well with this pilot?

[Timothy Herbert, executive]

Great question. So if you kind of look at the evolution of therapies, we are in a pure market development program, if you will, right? We're introducing hypoglycemic nerve stimulation into the obstructive sleep apnea market. And that's -- while the necessity to provide the guidance for the support to the centers for submitting these prior authorizations is necessary, and it evolves over time.As you continue to scale the business, it's a natural progression to be able to move forward to building independents and educating centers on the specifics of Medicare, the specifics of individual payers, what to put into prior authorizations, what to be careful of, what patients are not indicated, what do you do with the off-label patients. It's a pretty complex process that we certainly have expertise on.But if you go back to -- well, Mike, you've been around forever, not calling you old, but you are better experienced in the field. Go back to the spinal cord [indiscernible]. Those started out at Medtronic and prior authorization. Sacral Nerve for urology in the InterStim program, which I worked on way back when, that actually starts all with the prior authorization too. And as these programs evolve, it's natural to start building independence, and that's the natural course that we're starting.Did we plan it out accordingly and step forward, of course. And did we expect to have success because we chose centers in the pilot program to be able to -- who would best benefit from it, and some centers continue to be independent today, but others, we need to provide the guidance back to them. So you're spot on with there are always these areas of success.The characteristics of centers that can be successful are those that do the routine prior authorization for all the other procedures they perform, some in sinus, whether it be oncology or cancer, whether it be trauma, whether it be tubes for kids ears. So the larger centers that have experience doing prior authorizations, are easier to adapt to it, and others just take a little bit more time from an educational standpoint. But it is just a natural transition for all new therapies.

[Operator]

And I show our last question in the queue comes from the line of Suraj Kalia from Oppenheimer & Co.

[Suraj Kalia, analyst]

Perfect. Tim, I'll quickly throw a couple of your way. Specifically, Tim, in terms of PREDICTOR and removing DISE from the picture, on one hand, DISE reimbursement has been increased to $1,100 or whatever, right? And now you remove it, obviously, patient referrals and the flow improves. So I'm curious, how could you think about the continuum of care? Now the sleep docs are not going to get the $1,100, right? So to me, I'm just thinking the general otolaryngologists, they'd be happy to implant, but the continuity of care is broken because they don't want to be involved, at least to a major part in terms of titrating and the follow-up. So I'd love to get some commentary there.And secondly, I know we've all belabored this prior auth to death, but forgive me for this. So Tim, what does -- help us understand the leverageability in the model? If you can't give up on prior authorization handholding, right, DTC is needed. Obviously, clinical reps case -- they need to be present cases. Help us understand the evolution of leverageability, where independent cases can be done at a certain period in time?

[Timothy Herbert, executive]

Absolutely. Okay. I'm getting a note to make sure I capture that second question. Okay. So PREDICTOR isn't that ironic, that end move. When we're doing the PREDICTOR clinical study to find the group of patients that don't need to have a DISE, at the same time, when the new code comes through and the new survey of that code comes through and they increase the facility payment. Now what's important in here, is that's the facility payment, it's not the physician payment, and the physician payment did not increase, and that's a smaller amount, not that significant, although if you ask your question in another way, some of the ENTs can do these procedures in their own ASCs, so they can get a little bit of a benefit from it.I think if you ask a lot of the ENTs and we work with our physicians to make sure that this is true, they'd much rather do the implant procedure to move forward, rather than picking up a couple of hundred dollars on doing a DISE procedure. And I think that there's enough patients in the pipeline, the demand is so high, we need to continue to drive efficiencies across the board.And so the continuum of care works. We know that we want the sleep physicians to help with the diagnosis, but certainly do the longitudinal management and there are CPT codes for them to do that, whenever they have a visit, remote monitoring, a device programming that has CPT code. So there's codes there for the sleep physicians.And the ENT codes are in place. We just got the new codes a year ago for the implant procedure, which is fairly reimbursed, because it's been through 2 RUC surveys over the last 2 years. And if we can continue to make improvements with today, Inspire V and make that procedure more efficient, it will improve the economics of the implant procedure for the surgeons as well.So it's still in the best interest that we perform DISE only on those patients that need DISE, and remember, the focus needs to be on the patient. And that is not a good experience in the patient pipeline to have to have a DISE. We want patients to be able to be diagnosed in an office setting with the PREDICTOR, which is a caliber measurement, being able to go straight to insurance approval and straight to implant, not having to have a disruption in the process for a sleep endoscopy, which adds a significant amount of time, because it's an added procedure.On prior authorization, it is certainly leverageable. And the key of prior authorizations is, as you continue to evolve in time, the number of procedures and the time it takes to prepare a procedure is significantly reduced because of practice. And because we know what are the essential elements that need to be in a prior authorization submission, so we can drive the metrics down on the time it takes to prepare a prior authorization. And number two, the insurance companies know that those prior authorizations are coming, and when they have the proper indication, that they can quickly approve those label procedures.And now what you're seeing, is healthcare is moving towards not allowing prior authorizations until it is in the responsibility of the center to make sure they have indicated patients. So we can certainly leverage this going forward. We just got to make sure that we have the centers educated to be able to take this on going forward.

[Operator]

This concludes the Q&A session for the conference. I'd now like to turn it back to Tim for any closing remarks.

[Timothy Herbert, executive]

Yes. I just want to say thanks to everybody for joining the call today, as always. Very grateful to the growing team of dedicated work [Technical Difficulty] continued motivation to achieve successful and consistent patient outcomes. The team's commitment to patients remains unmatched and is the most important element of our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts, as we remain focused on further expanding our business in the U.S., Europe and Asia. For all of you on the call, we appreciate your continued interest and support. We look forward to providing you with further updates in the months ahead.Thank you very much.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect.