Inspire Medical Systems Inc

NYSE:INSP

Earnings Call Transcript 2018-Q4

[Operator]

Good day and welcome to the Inspire Medical Systems' Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. Following the speakers' remarks, we will have a Q&A session.

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

[Bob Yedid, IR, 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 fourth quarter and full year ended December 31st, 2018. A copy of the press release is available on the Company's website. I'd 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 2019 guidance and our expectations with regard to near and long-term growth potential of our business are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. See our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the SEC today for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise.

The conference call contains time sensitive information and is accurate only as of the live broadcast today February 26th, 2019. And with that, it's my pleasure to turn the call over to Tim Herbert, CEO. Tim.

[Tim Herbert, President & CEO]

Thank you, Bob. And thanks everyone for joining us today. I am pleased to welcome you to our fourth quarter and full year 2018 earnings call. We ended the year with significant operational and financial momentum that has carried us over into the start of 2019. I'll provide you with the details around what is driving our continued strong performance and our CFO, Rick Buchholz will follow with a comprehensive review of our fourth quarter and full year 2018 financial results.

Following this we'll open up the call for your questions. As I like to do at the outset of these calls, I want to reinforce the mission of Inspire which is to look to deliver positive and consistent patient outcomes for those with untreated, obstructive sleep apnea and to increase the awareness and adoption of Inspire therapy in the United States, in Europe as well in new regions such as Japan. Before we get to the operational results, I would like to touch on the successful follow-on offering we completed in December 2018, which raised $69.8 million of net proceeds for Inspire.

Importantly, this financing will enable us to hire additional sales and marketing personnel, primarily in the US and to expand commercial programs in Europe and in Japan. In addition, we will accelerate our investment in product development to further enhance our technology platform.

We are grateful for the support of all of the investors who participated in the offering and we remain focused on creating long-term shareholder value. So, regarding our performance in 2018 we continue with our balanced commercial growth strategy, which is primarily focused on the US market with the objective of first increasing patient flow at existing centers and secondly, training and opening new implanting centers.

In addition to our focus on the US market, we intend to continue growing the adoption of Inspire therapy in Europe, directing our commercial activities on those countries that have established reimbursement primarily Germany and the Netherlands. Our European team will also continue to pursue reimbursement in other key European countries. As we've previously discussed, we have regulatory approval in Japan. Further, we have updated our regulatory filing to include the new Inspire 4 Neurostimulator and the new sensing lead.

We are also working with the reimbursement authorities in Japan and are encouraged by the progress to date. With all that said, we anticipate the first implants of Inspire therapy in Japan to occur in the second half of '19 and target a formal launch in 2020. We're also beginning the process of expanding into other countries in the Asia-Pacific region.

As our fourth quarter 2018 top line results indicate, this growth strategy continues to generate strong performance from all aspects of our business. Worldwide revenue for the fourth quarter of 2018 was $16.6 million, a significant increase of 66% compared to the same period of the prior year. This overall strong performance to end the year resulted in full year 2018 revenue of $50.6 million, a 77% increase over 2017. These results exceeded our previously provided 2018 revenue guidance which was $47.5 million to $48 million.

We added 22 new US centers during the fourth quarter, ending the year with the total of 206. Throughout 2018 we had an increase of almost 50% over 139 centers we had at the end of 2017. Regarding territory managers, we added six during the fourth quarter, ending 2018 with a total of 46.

For the year, we added 18 new territory managers representing a 64% increase over the 28 territory managers we employed at the end of 2017. We began 2019 with nine regional managers and newly added level of sales management and have hired additional field clinical representative to help with case coverage.

We expect that these new centers and territory managers will have a positive impact on our overall growth, with our progress in reimbursement as we will discuss shortly. We are increasing our goal of opening new centers at a rate of 12 to 14 per quarter, versus our 2018 goal of 10 to 12 new centers, an increase in our goal of adding four to five territory managers per quarter, an increase from our 2018 goal of three to four.

Moving onto market access, also known as reimbursement. This continues to be a priority for the team and is an area where we have recently achieved significant progress. In the United States, we continue to have two key reimbursement strategies, expanding written positive coverage policies and concurrent with this process continuing to obtain an individual prior authorization. As we previously announced in January, the major reimbursement related achievement occurred when Evidence Street issued a favorable assessment of Inspire therapy.

Evidence Street is a corporate technical assessment group of Blue Cross Blue Shield Association. It is a national federation of 36 Blue Cross Blue Shield companies that when combined is one of the leading health associations in the United States covering 97 million lives.

This assessment has already had a meaningful impact and generating positive coverage decisions. In just in the last seven -- in the first seven weeks since receiving the favorable assessment, positive coverage policies of Inspire therapy have been issued by eight Blue Cross Blue Shield health plans, covering approximately 16.6 million lives.

We expect that the additional regional Blues policies will be issued throughout 2019. Adding to the growing list of positive coverage policies beyond Blue Cross Blue Shield, we are pleased to announce today that EmblemHealth has issued a positive coverage policy of Inspire therapy, which takes effect April 2019. EmblemHealth, New York's largest not-for-profit health plan covers approximately 3 million members across New York, New Jersey and Connecticut.

The National Coverage Policy from Aetna issued in 2018 continues to have a positive impact on our approval rates and reducing the review cycle times, a key trend, which we expect to continue especially with the recent we see a positive coverage policies from several Blues plans.

Although we're obviously excited about the momentum with these new policies, I would like to remind you that we expect that it will take at least five to six months, to begin to see a meaningful impact on these coverage policies as it takes time to work through the implementation process with the payers and the implanting centers.

With regards to prior authorizations, our overall at prior authorization approval rate in 2018 is approximately 35%, which was notably higher than the approximately 50% we experienced in 2017 and the average time to approval was reduced to below 90 days in 2018, first of our 124 days in 2017. As we continue to develop additional coverage policies we expect that the average time to prior authorization approval as well as approval rates will continue to improve.

We also believe that with the more streamlined process enabled by positive coverage policies, many centers are submitting prior authorizations on their own. In these cases, we do not have full exposure to these submissions. Therefore, in the short term, we will continue to report on these metrics. But our long-term goal is to reduce the burden of individual prior authorizations that these metrics will become less meaningful in evaluating as overall progress going forward.

Our internal team supported 639 prior authorization submissions in the fourth quarter of 2018 on an average of 49 submissions per week. For the year, we supported centers and submitted 2,477 prior authorizations. Our weekly average in 2018 by quarter was 43, 48, 51 and 49 submissions respectively. Please note, slight increase in the third quarter reflects the bonus of resubmission of Aetna patients following the issuance of the positive coverage policy.

In terms of prior authorization approvals, 395 patients received the prior authorization approval in the third quarter of 2018 and a total of 1,230 patients received approval for the full year 2018. This compares to the 583 prior authorization approvals in 2017, which represents a 111% improvement year-over-year.

As I mentioned, we will continue to monitor these metrics and report on them as long as they remain a relevant data point for assessing the performance of our business. Regarding CPT coding, we have a brief update on the application to convert the Category III add-on code to get a Category I code. Remember that this add-on code is only for the implant of our sensing lead.

The CPT meeting was held a few weeks ago on Scottsdale and our application was on the agenda. After discussions just prior to the meeting, it was determined that there was still confusion amongst the AMA committee members over this code application and further the utilization numbers with this Category III code did not match the actual growth of Inspire implants. This is likely because centers do not consistently report the Category III code, if there's no payment associated with it at this time.

Therefore, it was determined to be best at the table this discussion for the time being. And the application was withdrawn prior to formal presentation and discussion. We do not believe this will have any impact on the adoption growth of Inspire therapy, particularly in light of the progress we have achieved with the development of the positive coverage policies will continue to keep implant on the status of this call moving forward.

Moving on to clinical evidence. We will continue our aggressive efforts to build a therapy.ca to the publication of clinical data. As an example, in the fourth quarter, we announced the publication of data from the first 508 Inspire therapy patients included in the 2,500 patients adhere registry.

The data demonstrated that Inspire therapy is an effective treatment option with high patient satisfaction and low likelihood of adverse events. We expect several additional publications where we issued throughout 2019 and we will make committed on the on-going evaluation of Inspire therapy, with the intention of continuous improvement and consistency of the already strong patient outcomes. Another key aspect of our US commercial strategy is our direct-to-patient initiatives, which include a social media strategy.

This strategy has done successful in reaching and educating prospective patients above Inspire therapy, And we continue to broaden these efforts to correspond with the growing number of US implanting centers. These initiatives have led to an increase in web activity in 2018, as compared to the prior year.

For the full year 2018, we averaged approximately 46,000 web visitors each week and had approximately 1.3 million engaged visitors. Moreover, we had about 425,000 physician searches, which resulted in roughly 22,000 contacts with healthcare providers. We remain focused on identifying improved methods to educate patients and finding more efficient tools to connect potential patients with healthcare providers.

We recently launched a number of new direct to patient marketing initiatives to improve our education of prospective patients and have other plan throughout 2019. At the forefront of these initiatives is a redesigned website that will make navigation by patients easier and significantly streamline the process of connecting patient with qualified providers in the area.

Now, switching gears to discuss our R&D activities. Our product development team continues to work to improve the patient experience while maintaining and enhancing therapy outcomes. We recently announced the FDA approval of our new sensing lead in the US.

We launched this new sensing lead at several medical centers in US and we'll be expanding this launch in the next month. This effort was previously launched in Europe in 2018 and we have received very good feedback from the physicians to date. We also have projects ongoing to improve the physician programmer, the patient remote control and longer term, we have initiated the design activity for our Inspire 5 neurostimulator.

Later in 2018, we will report on the key design features, but will be incorporated into this new product. This will be a multi-year effort to develop the Inspire 5 device and gain regulatory approval. As you can see we are very excited about our long-term outlook. Specifically, looking forward to 2019, I am pleased to provide you with our initial full year revenue guidance in the range of $67 million to $70 million, representing an increase of 32% to 38% over full year 2018.

Although, we are not providing quarterly guidance, the third quarter of each calendar year is typically the business to med-tech companies as patient and high-deductible health plans seek to global procedures prior to the deductibles resetting at the start of the year. This often results in seasonally weaker period in the first quarter. We do expect that there may be some seasonality in Inspire's business during the first and fourth quarter of the year. Although in past years, this seasonality has been masked by strong growth triggered by the addition of new territory managers and centers as well as the underlying adoption of Inspire therapy.

In summary, we are excited by our continued progress and enter 2019 with significant momentum in our business. To reiterate what I have said before, our primary goal is to generate the highest therapy outcomes possible for patients. We continue to execute our focus growth strategy aimed at increasing the number of implanting centers, territory managers and territories on a quarterly basis. Along with further advancements in reimbursement that builds upon our recent positive coverage decision, we are confident that we remain well positioned to long-term success.

With that I'd like to turn the call over to Rick for his detailed review of our financials.

[Rick Buchholz, CFO]

Thanks, Tim. We are extremely pleased with our financial performance in the fourth quarter of 2018. We continue to demonstrate strong execution across our business and remain focused on expanding our team to support the growing demand for Inspire therapy in the United States and Europe. For the fourth quarter ended December 31, 2018, total revenues were $16.6 million, which is a 66% increase over the $10 million generated in the fourth quarter of 2017.

US revenue in the first quarter was $14.8 million, a robust increase of 77% from the $8.4 million, generated during the same period of the prior year. This growth was due to continued market penetration in existing territories, the expansion of our US sales reps in new territories, increased physician and patient awareness of our Inspire system and a greater number of prior authorization approvals. Our US average selling price remained consistent at 23,300 for both the fourth quarter of 2018 and 2017.

In the fourth quarter, European revenue increased 11% to $1.8 million from $1.6 million in the fourth quarter of 2017. Approximately 85% of the increase was volume-driven primarily by the activation of new sites in Germany and the establishment of reimbursement in the Netherlands, while 15% was attributed to a price increase with the introduction of the new neurostimulator in Europe in the second quarter of 2018.

During the fourth quarter, the European average selling price was 21,500 compared to 21,100 during the fourth quarter of 2017. Our geographic mix of revenue in the quarter was 89% in the US and a 11% in Europe, with a slightly greater revenue concentration in the US market as compared to the second and third quarters of 2018. The gross margin in the fourth quarter was 80.7% compared to 81.1% in the fourth quarter of 2017.

The fourth quarter 2018 gross margin was impacted by an accounting change as our third-party logistics costs are now included in cost of sales. This lowered our gross margin by 100 basis points in the fourth quarter of 2018. Total operating expenses for the fourth quarter 2018 were $18.3 million, an increase of 53% from $11.9 million in the fourth quarter of 2017.

The majority of the operating expense increase was driven by our continued sales force expansion, including sales leadership and sales support function. The increase in OpEx was also due to increased R&D spending and increased general corporate costs associated with being a public company. Our net loss for the fourth quarter was $4.8 million, compared to a net loss of $4.3 million in the fourth quarter of 2017. The diluted net loss per share for the fourth quarter of 2018 was $0.22 per share.

For the full year 2018, our total revenue was $50.6 million, a 77% increase over the $28.6 million of revenue generated in the full year 2017. The US revenue in 2018 was $44.4 million and increased 83% over 2017. European revenue in the full year 2018 was $6.2 million, an increase of 45% over 2017. As of December 31, 2018, cash, cash equivalents and short-term investments totaled $188.2 million compared to $16.1 million at the end of 2017.

The strong cash position reflects the completion of Inspire's IPO in May 2018 and our follow-on offering in December 2018, which in aggregate raised a total of $181.8 million of net proceeds. The weighted average number of shares for the fourth quarter was 21.8 million shares and as of December 31, 2018, there were 23.4 million shares outstanding, reflecting the additional shares sold by the Company and our follow-on offering in December. We anticipate the weighted average number of shares for the first quarter will be approximately 23.5 million.

Turning to guidance for 2019. Based on our strong results and our positive outlook, we are expecting our full year 2019 revenue to be in the range of $67 million to $70 million, which represents growth of between 32% and 38% over the full year 2018 revenue. We also anticipate that gross margins for 2019 will be in the range of 79% to 81%. In summary, we are very pleased with our financial performance in the fourth quarter of 2018 and we are well positioned to meet the necessary investments to support our growth objectives in 2019.

Operator, please open up the call for questions. Thank you.

[Operator]

[Operator Instructions] Okay. And we will take our first question from Richard Newitter. Please go ahead, Mr. Newitter.

[Richard Newitter, Leerink Partners]

Hi. Thanks for taking the questions, and congrats on an excellent year. Maybe just the first situation in your 2019 outlook here 32% to 38%. It's a very healthy growth rate, I guess, maybe give us a little color on any cadence factors we should be thinking about as you move through the year and what contemplated with respect to Blue Cross Blue Shield and the Aetna ramp?

[Rick Buchholz, CFO]

It's, Rich. We have several factors that really played role in our guidance for 2019. First of all, we had a really strong 2018, which we're very excited about and we will continue to work our cadence, if you will, we will continue to work on prior authorization submissions while in parallel we work to expand our coverage policies.

And so with that, we've increased our hiring cadence of territory managers four to five on a quarterly basis and increased our number of centers that we plan to add as we mentioned. And so we've also gotten recent news in getting eight Blue Cross Blue Shield plans covered since we received deposit assessment on January 7, from Evidence Street, but we know it does take time to find those patients to make sure we have centers up and running in those coverage policy areas, if you will, as well as making sure territory managers in those areas as well. So, as Tim mentioned, it might take five to six months with getting those policies to really take hold throughout 2019.

[Richard Newitter, Leerink Partners]

Okay. So progressing through the year and Blue Cross Blue Shield, it's probably not really factored in meaningfully to those numbers until the back half, what I think I'm hearing. The second question I had, just -- do you have any statistics or data on the -- the number of prior authorization submission to currently, what percent are comprised by or fall into the Aetna and Blue Cross Blue Shield insurers? Just trying to get a sense for kind of what percentage of your kind of your backlog, so to speak, or your pipeline is comprised of Blue Cross Blue Shield and Aetna patients?

[Rick Buchholz, CFO]

Fantastic. Thanks, Rich. So the Aetna as you recall prior to issuing the positive coverage policy back in July of 2018, and then we have those re submission that dominate a lot of the approvals. In fact, a third of our growth in, the third quarter of last year was Aetna. And so we track that closely and one thing -- Aetna right now it's a rough number event, but it's probably in the lower mid teen percentage of approvals is what is today, and that's pretty good. Because that start to increase over the prior year, which was basically zero, right, because Aetna wouldn't do any prior authorization.

The good news with Blue Cross Blue Shield, they have been approving all the equipment taking patients through second level appeal even third level appeal, which we called a EMR, external medical review, but what these new coverage policies are going to do is significantly reduce the time for those prior authorization approval. And so the team is working very closely.

We also have several consultants working with other regional plan to get those policies written such that in the back half of the year that we can drive down that review cycle time and really have an impact on the year and that's what we are pushing for as kind of the key driver of the cadence that we want to implement. But it's really, it comes at about the timing for those plans to write the policies, get them implemented and get them active with the centers.

[Richard Newitter, Leerink Partners]

Okay. Thanks a lot.

[Operator]

[Operator Instructions] We will take our next question from Chris Pasquale from Guggenheim. Please go ahead.

[Chris Pasquale, Guggenheim]

Thanks. And congrats on a great quarter and some outstanding progress. First Tim, can you update us on what you're seeing from, Aetna today in terms of their turnaround time on submissions, and you mentioned the bolus of Aetna submissions that went in the third quarter, did that lead to a subsequent bolus of approvals this quarter or most of those submission is still in process?

[Tim Herbert, President & CEO]

Thanks, Chris. The Aetna, once the policy came out, remember it took a while, with the logistics, because they had updated policy and then they had to update codes within the policy. And then we needed that the trickle-down to the centers. By about the middle of the third quarter, we pretty much have that stabilized and we are able to submit and the net result of that. Well, a third of our growth in approvals with Aetna cases in the third quarter, we continue to see that cadence happened now.

We believe that most Aetna cases get approved. And on average less than five days, because they are all approved at the prior authorization phase and they're not required to go to approval. And we kind of look back at the fourth quarter and estimate that the number of approvals from Aetna make up about 15% of our approvals in the quarter.

So it does have a significant impact. We're going to continue to drive that going forward. And it's really exciting for Aetna and the Aetna patients and their policy, I think really had a positive influence on Evidence Street, which in turn of course has such influence overall the Blues plans and so it's really put in the wheels in motion and really getting the policy train moving.

[Chris Pasquale, Guggenheim]

Thanks. And then you started to touch on this with the answer to Richard's question, but I think there's a little bit of confusion, given that Aetna was not paying for cases at all, so is kind of going from nothing to something and some of these other plans were albeit through a protracted process just how incremental these positive coverage decisions really are.

Can you spend a minute on how having coverage impact some other things like physician engagement, patients willingness to go -- to even begin the process and things like that. Or you are seeing a benefit even though these plans, maybe were technically paying for the procedures previously.

[Tim Herbert, President & CEO]

Let me answer that in a couple of different ways. First, let's go to the centers and look at, what the physicians are -- support team does everything, we tend to kind of streamline the process, but the centers are the ones that really have to submit the prior authorizations and the physicians are the ones that have to fight for the patients with the insurance companies.

So, it's really important that this streamlined process is going to make it easier for these physicians, and it's going to reduce on these physicians, because working with the patient to go through or working with an insurance company to go through three levels of appeal. And as we mentioned, the time to approve it, went from a 124 days to less than 90 in just one year, and we believe that number 90 is going to significantly reduce again here in 2018 and the benefit from that is going to be a reduced amount of physician fatigue in dealing with insurance and prior observation that's not what physicians want to do. They want to treat patients.

The second part is even patients themselves, when they come to our website and if you go to our website you stated very large, you're going to see a little chat line pop up and as could you have any questions in regard to Inspire therapy and the number one question that we get asked is, does my insurance Company cover this. And so it's important to be able to like, let patients understand that.

Yes. Insurance companies will cover this, but as you remember which we went through some of the cadence of the number of dropouts that we had through the appeal process and that's the -- again that's patient fatigue will take so long to get an insurance approval.

They are fatigued and they withdraw themselves from the process. And these coverage policies are going to have a significant impact on reducing that dropout rate because patients can now get approved in just a few days. So it's just like we did -- we're going to continue to monitor the impact that this Blues plans will have in the next few quarters. But more importantly, we will also be putting the pressure on other insurance companies at right positive coverage policies.

[Operator]

And we will take our next question for Jon Block from Stifel. Please go ahead, sir.

[Jon Block, Stifel]

Great. Thanks and good afternoon. Tim, what we -- sort of have your -- let me just ask on the policy today on the coverage policy from Emblem. If you can elaborate a little bit on that decision is that consistent with somebody earlier policies from the Blues, in other words BMI of less than or equal to 32, did it also had of a pediatric indication and then sort of a follow-on, can you talk about some of the Blues that did come with a pediatric indication. Maybe to what extent that was an upsized surprise for you? And then I've got a follow up.

[Tim Herbert, President & CEO]

Okay. Fantastic. Several questions in there. So let me kind of walk through those in detail. Let's go back a little bit to Evidence Street. And Evidence Street came out with a favorable assessment, and when they did their review, they only included the first FDA approval letter for Inspire.

And you cannot go way back, but our initial impact was for AHI range of 20 to 65 and subsequently we had a PMA supplement that lower that AHI down to 15. Evidence Street didn't incorporate that ended the review. So, our Kathy Sherwood has been working with Evidence Street to make sure that they have the necessary information, Evidence Street has recognized that. And we think that they're going to come back with an update, maybe mid-year that will get that AHI back down to 15.

It was not their intention to just slight to that 20, but they wanted to include the full indication from the FDA. So we expect that that will come back down to 15. The second step on that, what you assume with a lot of the Blues policies, if they're coming out with a BMI of 32, now Evidence Street as itself came out and they had a BMI less than 35. So some of the Blues have tightened up the parameters there. And we continue to work with investigators to look at the data from patients between BMI of 32 and 35.

We'll continue to publish data on that. From our standpoint, we're very excited to have these policies and with a BMI less than 32 that happens to match the BMI that we use during the STAR trial, which is a pivotal trial in New England Journal of Medicine. But since then we've moved that BMI higher up, it's important to note that the FDA when they approved Inspire therapy did not put a BMI limitation on Inspire therapy. So that is something new from the insurance companies, but we will work with each of them. And we believe in time, we'll be able to expand that and it won't have a significant impact in the short term on the Company.

The third item in there, whereas the pediatric population. This is something that's very rare that an insurance Company actually steps up and writes positive coverage for a population whereby we do not even have FDA approval yet. So, we've been very careful that we are communicating with the FDA, we do have an ongoing trial of 50 patients and 15 leading children's hospitals in the United States for a pediatric population with down syndrome and what we are very encouraged by is the Blue Cross Blue Shield organization really taking notice in investigating that population and in fact writing positive coverage policy for them. Can now instead, I'll go back to your first question on EmblemHealth, they did put the proper AHI range and which is 15 to 65.

This initial policy does have a BMI of less than 32, but they did not include the pediatric population, which is just fine. Again, we don't have the FDA approval on that to market that therapy anyways. So we'll continue to work with Emblem to be able to support their population and we'll continue to sell them data that it is a viable therapy for patients with a BMI greater than 32.

[Jon Block, Stifel]

Okay. Yeah. You did a much better job of answering that than I did of asking it. So, thank you. The second question, just in the K, you've -- that advertising expense this year was $7.8 million. It was up from $5.5 million last year, but you've got almost $190 million in cash. You're starting to get some of these payers coming on Board.

Can you just talk about the outreach in increasing awareness. So, we're going to see sort of a methodical increased advertising expense or is that something Tim, with the balance sheet and the payors coming on Board that you can start to accelerate pretty meaningfully. Thank you.

[Rick Buchholz, CFO]

Hey Jon, this is Rick, I'll take that one. So yeah, we did increase in 2018. We expect to increase, maybe a low but more aggressively in 2019, given that we are increasing the number of centers that we're adding as well as territories. And so when we do add those new territories, we will do radio and social media strategy and programs in those new territory. So, we will increase that ratably, but we will continue to have that, what, I call kind of controlled, sustained growth in adding reps and territories and centers to maintain those good patient outcomes. And so we're going to continue to be methodical even though we have a strong balance sheet.

[Operator]

[Operator Instructions] Okay. And we will take our next question from Lawrence Biegelsen from Wells Fargo Cisco.

[Larry Biegelsen, Wells Fargo]

Good afternoon, guys. Thanks for taking the questions and congrats on the really strong quarter and year. I apologize if I missed this but the category one CPT code for the sensing lead, I had emailed to me, it sounds like there was a change there. Could you talk a little bit about, it sounds like you pulled the application. Can you talk about why, what the next steps are.

[Tim Herbert, President & CEO]

Answered already. Thanks. But the--We did submitted. It was then the agenda. We were working very closely with the American Academy Otolaryngology which and they ENT society and if they did submit the application. They did have strong representation at the meeting and Scottsdale, to be able to increase. They did have time to discuss it with the AMA committee meeting members prior to the meeting and there is question still outstanding.

The purpose of the code, the understanding of the code and then we look at the statistics and the metrics in the usage of that code, as compared to the growth rates projected and discussed by Inspire. And there is a discrepancy in the numbers again, I and mentioned earlier, I think, we think the key reason is, a lot of centers just don't filed that because is a Category 3 called the railroads many payment. And so that's a creates a little bit of a challenge. So Category and that in itself creates a little bit of a problem, both the system has a payment and working to convert those are always difficult.

So the AAO [indiscernible] that and we concurred, that the right thing to do is let's look back up again and spend a little bit more time educating and not try the first still having this code rejected, because then we have difficulty rebounding and bringing that back to, so they withdrew the code and we'll come back and resubmit it to the AMA in the meantime, we'll continue to educate the AMA members and the importance of it from the hospital Standpoint, it has no impact on their payment level.

The payment level as all based on the primary code which is 64568 and the Mazda average Medicare payment this year is 27,700. So it's a good payment level to support not only the device, but the capitated for performing the procedure, the only person who is affected by this non-vote, if you will, or a day, then the code not being converted today is the physician pay is that this under the surgeon payment. And so there is still being paid their normal surgical fee for 64,568.

But the category three code will be slidely delayed again and we that might increase attainment about six to eight hundred dollars per procedure again. It's only the surgeon payment, we don't believe it's going to have any significant impact as the majority of our procedures today outperformed at high academic centers or the large private centers whereby the surgeons are salary based anyways. So we're going to continue to work with the ENT society, but don't think it's going to have any impact.

[Larry Biegelsen, Wells Fargo]

Thanks for that. Just curious, I'm Wendy plant, you said you're going to resubmit Tim. When do you plan to resubmit and then you know what does the guidance assume about additional payer coverage in 2019 and bigger ones like that and United, where you are on those two. And just lastly, Tim reimbursement in Japan, how is that going to remind us kind of the timing there. Thanks for taking the questions.

[Tim Herbert, President & CEO]

Thank you, Larry. Okay, makes. I think I got all those. So, there is one more submission left this cycle. I think there is actually two, but we won't be ready for the first one. We're going to continue to work with the, if we will be ready for, I think it's a November submission. I'll have to track that it may be likely that we're going to wait till the next cycle before we resubmit that.

As far as guidance go, we like our guidance set up using our prior authorization model. And as I mentioned, it's going to take five, six months to be able to get these policies -- working purely logistics of the payers and the centers and we're going to continue to work their cadence to drive more and more prior authorization -- I'm sorry, more and more positive coverage policies throughout 2019, Kathy has her team along with three contractors with assignments to all the individual Blues plants as well as some of the larger plants.

So we are in communication with some of our favorites with United and Cigna and Humana and the other non-Blues large payers, and we're working with all parties to make sure that they're educated on the clinical evidence we have published. And we continue to publish additional information. So, our guidance really hasn't driven a lot by two main more coverage policies that in are play. But we are assuming and expecting that we will get more coverage policy this year, which will really have more of an impact in 2020 and beyond. Did I answer all three of those questions? What was the third one?

[Larry Biegelsen, Wells Fargo]

That's clear, I'd appreciate. Yeah, if you didn't buy let it upfront in the prepared remarks, otherwise we can take an implied.

[Tim Herbert, President & CEO]

Let me comment on Japan. We do have the approval in Japan. But that approval was for our original products. And so now what we have. We submitted our regulatory submission to include the new Inspire of stimulator Neurostimulator and the new sensing lead that was just approved by the FDA recently and we did have our interactive review and questions from PMDA, which is the active way of Japan.

We believe that review is growing positively and expect approval sometime this year. And with that, we'd like to do have first implants with the new products. Secondly, we're working in concert with the societies in Japan for a three society the at the working on Inspire sleep E&P and cardiovascular.

They have formed a committee over with the oversight from PMDA again that's you FDA Japan to help launch Inspire and established therapy guidelines. Those guidelines have been drafted. We expect to see some of those results in the near future and the submission is twofold, one side from the company and the other side, I'm talking to regulatory and reimbursement submission our from both sides and we expect that to be submitted to the MLP HW which is the reimbursement authorities in Japan and they have also been active. So we do expect to do the first implants, but we're really looking to do a formal large in 2020.

[Operator]

Okay. We will take our next question from Isaac Ro from Goldman Sachs. Please go ahead.

[Isaac Ro, Goldman Sachs]

Okay. Afternoon guys. Thank you. Just another question on the Blue Cross effect here be helpful if you could give us any sense of whether or not additional coverage you guide and in, at the end of the year was helpful to revenue and basically what's essentially trying to get a sense of what's embedded for the rest is 2019, given how much coverage gotten in the last few weeks and probably the fact that we're going to get more in short order would be helpful to try and isolate that piece.

[Tim Herbert, President & CEO]

Thank you very much. We do think the Aetna had a positive impact as we mentioned before, a third of our prior authorization, growth in the fourth quarter in the third quarter were from Aetna and those kind of reflect more in fourth quarter implant and we did have a significant number approvals in the fourth quarter, some of which have been implanted again going back to our discussion about the pace of heightened deductible plans working to get their cases done before there high deductibles reset at the beginning of the year.

So Aetna is included in our guidance, we do think is going to continue to have a positive impact going forward from the Blues standpoint remember, when we talked less the, we didn't have evidence Street until just the beginning of January and then from there. The next step was to be able to work with individual Blues plans to policies and by those policies through the policy that we have to work to get them logistically implemented and organizations and with our implanting centers, so we do think it's going to be take a little bit of time to make it happen.

Now the next key step to those I like is looking at developing part of positive coverage policies with some of the key is policies in some of our higher implanting territories and we are working hand-in-hand with our consultants and with the medical directors and the do policies is put in place and what we have those in place that is going to have a significant impact, but we don't have those yet and so those patients is still working through the prior authorization process and again to review cycle is less than 90 days now as compared to a 124 previously, and I think when we get near to later in the year we going to see that number significantly reduced and that's going to be the impact that can be the answer to the question that your answer and asking.

We do think it's going to have a positive impact Blues policies or not. And as part of our guidance right now because we have a lot of work to do to get those implemented and to get additional policy expanded.

[Isaac Ro, Goldman Sachs]

That's helpful. And then just to clarify for the guidance that you set out for this year, does that guidance assume you get additional favorable coverage from those other Blues and as a result, get some revenue from those from those.

[Tim Herbert, President & CEO]

Now is very important for us either it to put our guidance that we have strong confidence in and we know we can grow this. That's what our prior authorization model and we know we can get those patients approved, albeit they have to go through quite an extensive cycle time and we also don't quite know the impact of the time it's going to take to get those positive coverage policies up driving and active.

As well as additional coverage policies in some of our high implanting areas. So we didn't include a lot of risk in our guidance based on the assumption that we will get those pilot those policies in place. Instead we put forward numbers that we're confident in that that we can drive with our prior authorization process.

[Isaac Ro, Goldman Sachs]

Got it. Thanks for the clarification. If I could sneak in one more quickly on gross margin. I appreciate your comments on that third-party logistics item that presents headwind, but I'm curious aside from that what would realistically gross margin at the low end of the range to actually be down year-on-year. Just seems like there's so much momentum in the core business that you should be able to generate pretty good gross margin this year all things considered?

[Tim Herbert, President & CEO]

Yeah. We expect to be in the range of 79 to 81 Isaac and depending on the acceptance at the sensing move in the US, which initially in Europe, it's been, it's been strong and then well received. We expect to be at the higher end of that gross margin throughout 2019.

[Operator]

Okay. And we will take our next question from Kyle Bauser from Dougherty & Company.

[Kyle Bauser, Dougherty & Company]

Great. So, apologies if you already covered this, but can you talk about the size of the opportunity for the upcoming expanded indication for pediatrics with Down syndrome in terms of prevalent incidents and also talk about your market development efforts, and if there'll be modified for these cohorts at all. Can you leverage the same physician call points will direct to consumer efforts be modified, etcetera.

[Tim Herbert, President & CEO]

Great question now tricky to answer, so we are doing our assessment of how large that population is we think it might be a 100,000 between provide for a dollar standpoint, with OHP because we have to the market is why, but between 100 to 200 million additional market opportunity beyond our 10 billion market opportunity that exists.

Now, let me comment on that. So those are preliminary market numbers suggest just putting bid, it's a different dynamic with this population that unfortunately these kids have a hard time. They just can't use CPAP and so the compliance. We to see of is very, very low and we also have a very organized group with the parent of these pediatric cases.

So market, our ability to communicate with this population is going to be quite get right. And it's not going to be just like the adult population. So we'll continue to develop that right now, we're still in the clinical study. And we are developing 15 leading children's hospitals to do these clinical studies.

What's important about this clinical activity, it is actually developing an installed base to be able to take care of these kids, once the therapy is approved by the FDA. And what's really encouraging is that Blue Cross Blue Shield has already written it in as part of their Evidence Street guidelines and several other policies have already picked up coverage for this population.

So, it's not as large of a population that all compared to the adult untreated obstructive sleep apnea market, but it's a very important population and why, one of those. Why we do what we do reasons. But as we are closer to working with the FDA and looking at the timing of such set approval, we will be doing a lot more work done. The whole market size and what we do to make our investments accordingly into that market, and how do we communicate with the parents and have this population and are very well organized. As though the pediatric ENTs, that are those that kind of serve that population.

[Kyle Bauser, Dougherty & Company]

Thanks. That's helpful. And then regarding the Inspire app that you're developing, which will be able to communicate with the system, the Bluetooth and then allow you to view the data and the cloud. You've talked about how you'll be able to see trends between hospitals and find out which ones are doing really, really well.

Can you kind of quantify how you measure the success that -- you know of course that average nightly use time of the system seems like you'd be a good and obvious metric, but I'm curious what sort of other performance metrics from the app, we might be able to capture to identify these high-performing centers.

[Tim Herbert, President & CEO]

I think our engineers are jumping up and down that you asked that question. Thank you. It's an important initiative to us. And that we have launched Inspire Cloud as you know. And it is a cloud-based patient management system, and right now the only input into the Inspire Cloud is from the physician and from the physician programmer and what we're doing is, we're just starting that platform and now we're going to start developing tools to be able to add additional information in to the Inspire Cloud, which is going to ease the physicians ability to really manage their patients.

One key step on that as you mentioned, as we are currently developing the Inspire App, which will be on a patient's cell phone and they can track their own progress and they can see what their therapy grows all are , and how they're responding to those growth. And the next step, after that is to be able to interface that device with Inspire Cloud and be able to have physicians see real time how their patients are doing by uploading that data to the cloud and having the position, be able to see how is one patient doing or how all of their patients are doing.

And more importantly, they can be identified and see a broader group of patients and see how their patients are comparing to other patients. And what it's all about is really driving patient outcomes, and we like to say around here that we're outcome obsessed.

And we really want to keep driving outcomes and make sure that we drive consistent positive outcomes and continue to improve Inspire Cloud in this app is just one more tool to be able to track and follow the progress of our patients.

[Kyle Bauser, Dougherty & Company]

That's great. Thanks for taking the question.

[Operator]

Okay. We will take our next question from Ravi Misra from Berenberg Capital Markets.

[Ravi Misra, Berenberg Capital Markets]

Great. Thanks for taking the call. Just a couple of questions. One on the guidance, just you spoke about this compression of time to approval and then you also kind of mentioned this concept of patients fatigue. I'm just curious with some of these payer conversions are you be able to maybe re-engage some of those patients and get them re-energized for this. And as a factor, and if at all to the guidance for '19, then maybe just my last follow up would be, just on the sensing lead.

Could you just help us understand, is this something that makes it understand the kind of lower profile makes more comfortable for the patient. But is it something that is able to reduced our times or kind of any efficiencies in the procedure itself. Thank you.

[Tim Herbert, President & CEO]

Absolutely. First off -- on your first question, really Aetna is kind of the example, now Aetna is a little bit more of an example. In that Aetna, didn't previously prior authorize. So, in the third quarter, we had a bolus of new resubmissions from Aetna patients which in fact were approved and that did have impact on revenue. And it's great that we're able to get those patients implanted and that's wonderful for the Aetna patients and wonderful that they're able to get the therapy. And we do think, to a lesser extent, it's going to have an impact on the Blues, because remember the Blues will approve.

And I use that, we've talked about two numbers and the other number being, if we could get patients all the way through the process, we could get 74% of them approved, but our overall net approval rate was only 55%. The gap is the patient, the peak of the patients that drop out. As we develop positive coverage policies with every payer, that gap is going to be minimized, because we're going to reduce patient fatigue, because the majority of patients will be approved in very short order to -- you use the term compression of time which is exactly what we're looking for.

We want that 90 days to approval to continue to go down, and make it easier for patients to get the therapy. The second question on the 43.40 Sensing Lead which previously launched in 2018 in Europe, and then we just launched it, just a few centers so far in the United States. And we'll be expanding that in the next month.

It is a lower profile product, the stimulation lead -- the stimulation lead body or the wire, if you will. We use that same design in the new sensor and that gives us the low profile, but it also provides us with operational, the efficiencies. And so we think that's a twofold, so it's smaller -- it's more comfortable. There is -- if we're showing pictures of the presentation. That's going to be uploaded on our website, you can download there will be picture of it. That shows areas of Blue, actually dyed areas where physicians can handle the lead.

So we think it's going to make it easier for the physician to implant and thereby will reduce all our times slightly, but really be a more robust product going forward. So, feedback from Europe has been very strong and we're very encouraged by giving it started here in the United States. So, let me summarize this. Thanks, everybody for your questions and just one closing comment. We remain very pleased with the robust pace of growth, we're demonstrating our business while maintaining high quality and strong patient outcomes.

Importantly, market demand continues to grow for innovative and effective solution for patients with obstructive sleep apnea who are unable to successfully use CPAP. I remain grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, continued motivation to achieve strong and consistent patient outcomes. The Inspire team's commitment to patients is unmatched.

[Tim Herbert, President & CEO]

Thank you, all for joining the call today. We certainly appreciate your continued interest in Inspire and look forward to providing you with further updates throughout 2019.

[Operator]

Okay. And this concludes today's call. Thank you very much for your participation. You may now disconnect.