Inspire Medical Systems Inc

NYSE:INSP

Earnings Call Transcript 2020-Q4

[Operator]

Greetings. And welcome to Inspire Medical Systems Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Bob Yedid of LifeSci Advisors. You may proceed, sir.

[Bob Yedid, LifeSci Advisors, IR]

Thank you, Laura, and thank you all for participating in today’s call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the three and 12 months ended December 31, 2020. A copy of the press release is available on the company’s website.

I’d like to remind you that on this call, management will make forward-looking statements within the meaning of the Federal Securities laws. All forward-looking statements including without limitation, operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2021 financial and operational outlook, and improvements in market access are based on 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 quarterly report on Form 10-K to be filed with the SEC today for a description of these risks and uncertainties.

Inspire disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, February 23, 202.

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

[Tim Herbert, President and CEO]

Thank you, Bob. Thanks everyone for joining the call today for our fourth quarter and full year 2020 business update. Let me begin by expressing my gratitude to the entire Inspire team for their immense efforts through the significant challenges we all face in 2020. No one could have envisioned the effects of the COVID-19 pandemic and the necessary stoppage of procedures in the first half of the year and during the resurgence late in 2020 and a continuation into 2021.

As a team, we made a commitment to stay focused on our patients and to steadfastly prepare for the time when centers were again able to offer Inspire therapy. As a company, we maintain their field expansion and continued to reach out and educate potential patients and physicians.

We leverage digital tools to continue community health talks about the therapy and supported virtual appointments. These efforts resulted in a very quick restart to our business as reported on our -- in our third quarter call and I am very pleased to announce this momentum continued and we had an extremely strong fourth quarter as well.

In the fourth quarter of 2020, we generated worldwide revenue of $46 million, which wasn’t -- which was an increase of 71% compared to the fourth quarter of 2019. Importantly, while there was some pent-up procedure demand from earlier in the year from patients previously scheduled for implant, but delayed due to COVID. This growth was largely driven by the additional centers and territory managers we continue to add throughout the pandemic and the increased number of procedures occurring at existing centers.

As I stated on our last call, our Inspire team, the centers and all healthcare providers have continued to adapt and identify safe ways to operate and treat patients in need. We are pleased as the number of potential patients seeking information on Inspire therapy [ph] and those that underwent diagnostic and implant procedures during the quarter has returned to pre-COVID levels.

Of course, as we have seen, business conditions during COVID are always evolving and we continue to monitor the impact of the pandemic. In late 2020 and into early 2021 we experienced some cancellations and delays in localized cases in select states.

Currently, most centers are back scheduling cases and we do not expect to see a sustained impact going forward. We expect a normal Q1 seasonality due to high deductible insurance plans, resetting at year end and increased caseload as patient thought to have their procedures completed in the fourth quarter. Even though seasonality may be more pronounced than in past years, we are already experiencing a rebound in procedures scheduling.

With this in mind and assuming continued normalized operations, our strong performance in the second half of 2020 and the positive trends in implant activity provide us with the confidence in the outlook for our business for 2021. Therefore, we are providing full year 2021 revenue guidance of $183 million to $188 million, which would represent an increase of 59% to 63% over a full year 2020 revenue of $115.4 million.

To reiterate what I said earlier, our impressive results in the second half of 2020 and our confidence in our prospects for 2021 are indicative of the forward planning and preparation during the peak of the pandemic. Of course, as always, our primary focus remains on the patient to ensure that each and every one has the best possible outcomes from Inspire therapy.

With that, let’s now get into the details surrounding the fourth quarter. Beginning with capacity, during the fourth quarter, we added 55 new U.S. implanting centers, ending the year with a total of 425. This is well above our guidance of adding 28 to 30 new centers in the fourth quarter of 2020.

Several of these new centers continued to be carryovers from earlier in the year, but we continue to pursue an expansion in the number of centers and planned to open 34 to 38 new centers per quarter in 2021.

Included in this increase in new centers is a growing number of ambulatory surgical centers or ASC, driven by the favorable reimbursement environment. We will continue to add both hospitals and ASCs going forward and do expect to see a growing percentage of Inspire procedures being performed in ASCs.

Regarding the U.S. sales team, we created nine new sales territories in the fourth quarter, bringing our total to 107. For the full year, we opened 34 new territories, a 47% increase over the 73 territories at the end of 2019.

As I noted earlier, we did not slower cadence of hiring territory managers during the peak of the pandemic to ensure that we were in a strong position once cases were able to resume. During 2021, we plan to increase our cadence of opening new sales territories by adding eight to nine new territories per quarter, compared to our guidance six to seven in the fourth quarter of 2020.

We also continued increasing the number of regional managers and field clinical representatives, ending 2020 with 20 and 44, respectively. The addition of new centers and the continued build out of our field organization will increase our capacity and will remain one of our core focus areas for 2021.

Our other strategic focus to increase capacity is accomplished by increasing the utilization at existing centers. Our challenge in 2020 was that utilization was significantly impacted by the pandemic and while we have made significant progress in the second half of 2020, we expect this to further improve in 2021.

To make this point, historically, about 50% of our growth was from opening new centers and about 50% was from increased procedures at existing centers. For the year 2020, however, this was skewed to about 65% of the growth coming from opening new centers. We plan to focus on increasing utilization at existing centers, and as a result, expect growth between new and existing centers to be more balanced during 2021.

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

During 2021, we plan to streamline this process even further for the patient. To accomplish this goal, we are continuing to broaden our call center concept, the advisor -- Inspire Advisor Care Program or ACP. The primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs.

We ended 2020 with approximately 180 of our centers utilizing the ACP and the ACP answered about 25% of all calls to physicians. We plan to significantly increase the number of centers under the ACP to nearly 500 by the end of 2021. This will enable the majority of the calls to be answered through the ACP.

To leverage this expansion, it is essential for us to stay active in identifying and educating new patients. Creating this awareness remains the core objective of our direct-to-consumer activities. To this end, we refreshed our outreach programs, including filming four new TV commercials, which we started airing in January.

We also continue to utilize a website and online tools to help patients connect with physicians. For 2020, the number of visitors to our website was over 4.8 million. In addition, nearly 62,000 physician contacts were established via the website represented a significant year-over-year increase of 73%. Combining this growth with the effectiveness of the ACP has us in a strong position to increase the adoption of the therapy.

Switching gears to reimbursement, I’d like to highlight that 2021 will be our first full commercial year without a significant risk of reimbursement-related headwinds in the United States. This means that we can focus on scaling our business.

As you know, in 2020, all Medicare local coverage decisions or LCDs were formally published and we have Medicare coverage in all 50 states. On the commercial policy front, we added 11 positive policies in 2020, covering a total of 55 million lives and today we have policies representing over 220 million covered lives.

At this point, Anthem is the last of the large commercial payers in the U.S. that has not yet agreed to provide coverage for the Inspire therapy. Despite this, we have had success supporting customers with obtaining prior authorization approvals, including with Anthem.

Looking at the prior authorization metrics, in the fourth quarter, our internal reimbursement team supported 1,452 prior authorization submissions. This compares to 988 submissions in the fourth quarter of 2019 and 1,233 submissions in the third quarter of 2020.

The news regarding prior authorization approvals is also positive. In fact, 1,276 patients received an approval in the fourth quarter, compared to 751 approvals in the fourth quarter of 2019 and 1,039 approvals in the third quarter of 2020.

We continue to experience increased approval rates into the high 90% and further the median time for an insurance approval remains at approximately 12 days, down from 25 days in 2019. These rates have improved significantly due to the large and growing number of positive coverage decisions.

As we have said previously, given the improved reimbursement environment for Inspire therapy, these metrics are less meaningful in evaluating the overall progress of our business going forward and we will no longer report on these metrics after today’s conference call.

Staying with reimbursement, but switching the coding, as we discussed on the last call, the new CPT code was approved and the process to determine the surgeon reimbursement rates is ongoing and is expected to become effective January 1, 2022.

In the interim, the surgeon payment was significantly increased by $450 into 2020, with the Medicare policies providing a payment for the sensing lead Category III new tech code. This is a meaningful additional payment for surgeons, as the average Medicare reimbursement for the base code is $600 to $800. This payment for the pressure sensing lead was also adopted by most commercial payers. From a facility perspective, the new CPT code should not change the payment to the hospitals or the ASCs.

Further, a new Category I code was approved for the drug-induced sleep endoscopy or DISE diagnostic procedure. This has also been an ongoing challenge for ENTs and facilities, and the more appropriate reimbursement provided by this new code should resolve this frustration.

Moving on, Europe also had a very strong quarter, driven by improved patient flow, particularly in Germany and the Netherlands. Effective January 1t, Inspire therapy is now integrated into the German hospital reimbursement system with a formal DRG.

Since 2016, Germany’s reimbursement for the Inspire procedure has been provided through the NUB process for new diagnostic and treatment procedures. The decision to include Inspire into the DRG catalog demonstrates that our procedure has become part of routine clinical practice in Germany.

In Japan, we continue discussions with the MLHW regarding the reimbursement of Inspire therapy. Our team met in person with the MLHW last week and while we do not have a resolution to-date, we remain active in discussions and expect to meet in person again in early Q2. Our expectation remains that Japan reimbursement should be consistent with the U.S. and Europe, and to this end, we will remain patient and continue the ongoing discussions with the Japanese authorities.

Switching gears to R&D, similar to the third quarter, we increased our R&D expenses year-over-year in the fourth quarter as we continue to invest in enhancing our technology platform. The Inspire Cloud project, our cloud-based patient management system continues to advance with the addition of a substantial number of centers in U.S. and in Europe, who are using the tool.

In 2020, we launched the Inspire Sleep app for use on a patient’s smartphone as an educational tool. Version 2 of the app was released later in the year and interfaces with the Inspire Cloud and allows physicians to collect clinical data from patients directly.

The Inspired Cloud project and the Inspire Sleep app are the first steps in establishing interconnectivity between the patient and their healthcare provider. The next step is FDA submission of the new patient remote, which will be Bluetooth enabled to allow for data from the implanted system and data collected by the remote to be uploaded to the Inspire Cloud via patient smartphone using the Inspire Sleep app. We anticipate that the new patient remote will be submitted to the FDA in the second quarter of 2021.

Longer term, the design work for a fifth generation Inspire neurostimulator continues to progress. As previously discussed, we anticipate that this will be a multiyear effort to develop the Inspire 5 device and obtain regulatory approval.

We continue to conduct feasibility trials with several technology innovations, which will make the Inspire 5 neurostimulator is state of the art and expect that it will further improve the performance of the system, including simplifying the implant procedure.

Finally, I’d like to welcome Bryan Phillips to Inspire. He recently joined our team as General Counsel, Chief Compliance Officer and Secretary. Bryan is an accomplished legal executive with broad corporate experience in the healthcare industry, and understands the dynamics involved with a growing medical device company through his years at Surmodics. We welcome Bryan to the team and look forward to his meaningful contributions.

In summary, we continue to experience significant momentum in all key areas of our business. Implant activity trends remain highly positive and we continue to be well-positioned to assist patients as they progress on their Inspire therapy journey. As I stated earlier, our core focus for 2021 is to continue to expand our business by increasing capacity and improving the process to connect patients with the proper healthcare provider.

We also intend to achieve further advancements in reimbursement that build upon our recent positive coverage decisions, continue our efforts to strengthen the growing body of clinical evidence in support of Inspire therapy and invest in the continued development of our innovative R&D platform. We remain extremely excited about the future prospects and are confident that we will have the appropriate strategy in place to drive long-term shareholder value.

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

[Rick Buchholz, Chief Financial Officer]

Thanks, Tim. I would also like to begin by recognizing the entire Inspire team for their tremendous effort in 2020 as we faced unprecedented challenges. Based on our fourth quarter results, we believe that we are well-positioned to expand the adoption of Inspire therapy, positively impacting the lives of patients with untreated obstructive sleep apnea. We are entering 2021 in a strong financial and operational position.

Total revenue for the fourth quarter of 2020 was $46 million, a 71% increase from the $26.9 million generated in the fourth quarter of 2019. U.S. revenue in the fourth quarter was $42.7 million, an increase of 72% from the $24.9 million in the prior year period. In the fourth quarter, European revenue increased 64% to $3.3 million.

The U.S. average selling price in the fourth quarter was approximately $23,800, which was consistent with the prior year period. The European ASP was about $23,600 during the quarter, compared to $22,400 in the fourth quarter of 2019. The higher European ASP was primarily driven by favorable changes in foreign currency exchange rates.

Our gross margin in the fourth quarter was 84.4%, consistent with the 84.2% gross margin achieved in the prior year period.

Total operating expenses for the fourth quarter were $45.9 million, an increase of 44%, compared to $32 million in the fourth quarter of 2019. This increase was primarily due to investments in the expansion of our sales organization, as Tim highlighted, as well as increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs.

As we noted on our previous earnings call and recent webcast presentations, the increase in operating expenses is reflective of our plan to achieve continued growth and our consistent focus on further investing in our commercial and development initiatives.

Our net loss for the fourth quarter was $7.5 million, a decrease compared to $9.1 million in the fourth quarter of 2019. The net loss for the fourth quarter was $0.28 per share, compared to $0.38 per share in the fourth quarter of 2019.

The full year 2020, our total revenue was $115.4 million, a 41% increase from the $82.1 million generated in 2019. The U.S. revenue for 2020 was $106.1 million, an increase of 44% over 2019. European revenue in 2020 was $9.3 million, an increase of 11% over 2019.

Given the significant progress we have made in scaling our business we are providing full year 2021 revenue guidance in the range of $183 million to $188 million, which would represent growth of 59% to 63% over full year 2020 revenue of $115.4million.

Historically and similar to other elective procedures, we have experienced some seasonality in our business. In the U.S. we have higher procedure volumes in the fourth quarter as patients with high deductible health plans seek to schedule a procedure prior to their deductibles resetting at the beginning of the year.

We also experienced some localized delays in scheduling cases due to the pandemic resurgence in late 2020 and early ‘21. However, we do not expect that these delays will be sustained. Given these factors, we anticipate that seasonality may be more pronounced than in past years.

Moving to the balance sheet, as of December 31, 2020, our cash and investments totaled $234.4 million. This strong cash position allows us to continue to execute on our growth strategy of increasing patient flow at existing centers, and training and opening new implanting centers.

The weighted average number of shares outstanding for the fourth quarter was 27 million. We anticipate that the weighted average number of shares for the first quarter of 2021 will be approximately 27.1 million.

In summary, our business is performing extremely well. We are very pleased with our results in 2020 and are excited about our long-term growth prospects.

With that, our prepared remarks are concluded. Laura, can you please open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Richard Newitter with SVB Leerink. You may proceed with your question.

[Richard Newitter, SVB Leerink]

Hi. Thanks, guys, and congrats on a fantastic quarter and impressive guide there. Just to start off maybe on the guidance. Can you give us a sense as to what you’re assuming in terms of the percentage of accounts that ASCs will comprise in 2021? I think you said in 3Q 50%, I am not sure what you said it was in 4Q. And can you remind us what the utilization differences are between kind of what can get done in an ASC versus other settings?

[Tim Herbert, President and CEO]

Absolutely. Hi, Rich. We did increase the number of ASCs in the fourth quarter and it’s still just about 15% and it’s a little early to be able to be measuring utilization between hospitals and ASCs. We’re going to continue to focus on both to continue opening those centers and keep that mix.

Although, I think, it -- it’s safe to say, as we mentioned earlier that, the number of procedures in ASCs will continue to grow probably faster than they will in hospitals, because of the number of ASCs that will bring on Board.

[Richard Newitter, SVB Leerink]

Got it. Thanks, Tim. In the past, we’ve asked you, why aren’t you going harder and faster at the opportunity and hiring reps faster? And you’ve already said, you want to make sure and preserve the quality of procedures, doing the procedures, et cetera? Well, here you are kind of talking about 34 to 38 new accounts per quarter and you definitely are planning on some territory expansion that’s above consensus. So I guess, this question is, what’s changed to give me the competence to be able to push the pedal to the floor a little bit here and it feels like there’s definitely a strong inflection here. So maybe you could elaborate on that a little bit? Again, congrats.

[Tim Herbert, President and CEO]

Yeah. Thanks. Thanks for asking that and bringing the quality into it, because that remains the number one focus and that is all about patient outcomes. We always talked about a balance between growing fast and maintaining strong patient outcomes.

So as we have scaled the organization. Remember, we talked about 19 going to the four areas Vice President and the regional manager and allowing us to scale. But we always had the headwinds, reimbursement have limited our ability to really ramp up too fast. But now this year with the reimbursement headwinds kind of behind us and moving through that, we have also scaled our training team.

And so as we start to open up additional centers and bring on additional new sales territories, we can do that by maintaining the same quality, because our training procedures have improved and just expansion of the training team in general to be able to control those outcomes.

And then I’d also want to add, remember we’ve also brought in a new focus to field clinical reps, right? And we’re looking to increase the ratio of field clinical reps to territory managers to be able to help the in service of the technology but also help the operation procedures.

So we are not moving away from quality. We’re making sure that is number one on the list. But we’re comfortable that where we are today and with the reimbursement environment, we can scale the business a little quicker and that’s why we’re being a little aggressive there.

[Richard Newitter, SVB Leerink]

Thank you.

[Tim Herbert, President and CEO]

Thank you, Rich.

[Operator]

Our next question comes from the line of Chris Pasquale with Guggenheim. You may proceed with your question.

[Chris Pasquale, Guggenheim]

Thanks and congrats on a great year. I am curious…

[Tim Herbert, President and CEO]

Hi.

[Chris Pasquale, Guggenheim]

… whether guidance assumes anything from either Japan or Australia, the two new territories that you’re still waiting on some reimbursement progress from?

[Tim Herbert, President and CEO]

No. From my comments, Japan, we did have a face-to-face meeting with them. We don’t have agreement on reimbursement yet. We have action items that will be working in concert with the MLHW over the next six weeks and we hope to be meeting again in person with them in the second quarter.

Our intention is certainly to come to agreement, but our expectations remain. The reimbursement in Japan should be consistent with United States and in Europe. And we’re going to continue to pursue that and provide the evidence that necessary to show that that’s appropriate. So we did not build that into the guidance in 2021. We would like to do the first implants in Japan in ‘21, but really set up for a broader launch in ‘22.

As far as Australia goes, we do have approval from a regulatory standpoint. But we don’t have the reimbursement to be able to launch there. That’s going to be an ongoing activity. We are in communication with the regulatory of -- I’m sorry, the reimbursement authorities in Australia as well. But we have not built that into 2021 either.

[Chris Pasquale, Guggenheim]

Okay. And then, Tim, you talk a lot about trying to get new site that you are coming on to commit to giving you a couple OR days a month to try and ramp that number of procedures percent? I’m curious how effectively you’ve been able to sort of get that that messaging through and get centers to buy into that and whether the ramping up of the call center to cover a bigger proportion of your installed base is a key element to that because that really puts you guys in the mix in terms of filling those bids?

[Tim Herbert, President and CEO]

Absolutely. That is a great question. I’m going to have you make sure you hold on to that question for subsequent quarters. Unfortunately, we don’t have the data to be able to back that up. But that’s exactly what our hypothesis is, is that if we can get senators to really commit more all OR time, then centers can know that the procedures are coming up and it’s not just the surgeons, it’s the OR staff. It’s the people in the operating room. They know what to expect on this day.

And the people in the coding and reimbursement they know what to expect when billing it and there’s a consistency across the Board that makes centers better skilled at taking care of numerous patients. Remember, Inspire Cloud is also built to build efficiencies into centers.

And then adding bringing the AC -- ASCs back into the discussion, we believe ASCs will have a little bit more flexibility and committing days to Inspire procedures and so their staff can plan for that. But I think this is going to be something that we’re going to continue to monitor and we’ll monitor that utilization closely going forward.

And the ACP, the advisor care program will really help us bring qualified patients to the ENT, and as we move forward and get the majority of our centers on the ACP, I think, we’ll be able to give you evidence that that is in fact being successful.

[Chris Pasquale, Guggenheim]

Thanks.

[Operator]

Our next question comes from the line of Robbie Marcus with JPMorgan. You may proceed with your question.

[Robbie Marcus, JPMorgan]

Oh! Great. Congrats on a great quarter.

Hi, Robbie.

[Robbie Marcus, JPMorgan]

Really -- hi. Really just one question from me, you talked about how in fourth quarter you got back to pre-COVID levels and you don’t really expect much disruption in 2021 here. That’s definitely counter to what we hear from most other med tech companies. So I guess the question I really am trying to dig into is, you got back to pre-COVID. But is there still some number of patients or volumes that are being left on the side and getting back to where you were pre-COVID? Could there still be a bolus in 2021 and into 2022 is, there’s still probably a lot of patients who would have gotten therapy that didn’t?

[Tim Herbert, President and CEO]

Absolutely. Again I go back to what we were talking about a little bit earlier. In the fourth quarter, we did have a little bit of the backlog that we’re working from the COVID period and so that was a significant increase. But also of the 55 centers we open, a number of them have been in the works for quite a while, but they just weren’t able to open up until the centers were able to restart.

The second part of that is we did see an impact of the resurge of the pandemic, probably, mostly in December and then into January. So, yes, we’re experiencing the same challenges every other company is seeing as well. But we’re starting to see most of our centers reopen and reschedule the cases.

And so we don’t see that as a sustained challenge going forward. And as Rick commented that, we may have a little bit more seasonality, because it’s impacted a little bit more from the resurgence of COVID-19 in the beginning of Q1. But we think as a whole for the year, we think we’re in pretty good shape and that’s why we’re putting on a little bit of an aggressive guidance going forward.

[Robbie Marcus, JPMorgan]

Well, that’s great to hear. Appreciate it. Thanks a lot.

[Tim Herbert, President and CEO]

Thanks, Robbie.

[Operator]

Our next question comes from the line of Lawrence Biegelsen with Wells Fargo. You may proceed with your question.

[Shagun Singh, Wells Fargo]

Thank you so much. This is Shagun in for Larry. Just a few questions from me. So on the guidance I was just wondering if you could elaborate on the cadence of revenue growth and OpEx spend through the course of the year? I know you did give some color on Q1. And then is there operating leverage opportunity in 2021 and how should we think of DTC investments next -- this year?

[Rick Buchholz, Chief Financial Officer]

Yeah. Hi. This is Rick. Thanks for your question. As we just talked about, we’re watching Q1 closely with seasonality. But we do not provide quarterly guidance. But we do think we will have a little bit more pronounced seasonality in the first quarter, because of some of those resurgence of COVID impacting in certain areas in December as well into January. But on an overall basis, we’re confident on our full year guidance, which is really represents 59% to 63% growth. So from a guidance standpoint, that’s our annual guidance.

From an operating leverage, we did have a improve leverage year-over-year as we had a strong fourth quarter on the topline. We are still investing in our business. We’re in the early innings, if you will, we’re in 425 centers. We’re going to continue to add 34 to 38 on a quarterly basis going forward and we’re going to also continue to increase the number of territories that we had.

We did increase our DTC efforts. We produce four new commercials in the fourth quarter and we will start to air them in 2021. And so you’ll see in our 10-K that’s filed that our DTC was about $26.4 million for the full year 2020 and in 2019 it was $18 million. So we’re going to continue to support our expansion with increased DTC efforts.

[Shagun Singh, Wells Fargo]

I got it. That’s helpful. And then if I could just ask a question on competition, are you seeing anything from of Naiops [ph] in Europe. As you know, they are conducting a study in Australia in patients with and without CCC. If their study is positive in that patient population, how would that impact Inspire? And then separately, I’m sure you saw a signify medical received approval for eXciteOSA device, any thoughts there would be helpful. Thank you for taking the questions.

[Tim Herbert, President and CEO]

Great. Thanks for your question. From a eXciteOSA standpoint, we haven’t really seen impact yet. We don’t are conducting trials. We think that’s wonderful and we will anxiously await to see that data and see how that data comes out. So we don’t make any other comments on that.

I know there are pursuing some clinical work in Europe, as well as in the United States. And we think that’s good for them to continue to collect the clinical evidence and be in a position to present that in the near future.

So as far as signify any other competition, no, I don’t think we have really any comments at this time. We’ll wait till they start to issue some data. And we’ll just focus on taking care of our patients and making sure that we maintain our own safe and effective outcomes. So thank you very much.

[Shagun Singh, Wells Fargo]

Thank you.

[Operator]

Our next question comes from the line of Jon Block with Stifel. You may proceed with your question.

[Jon Block, Stifel]

Thanks, guys. Good afternoon. Tim…

[Tim Herbert, President and CEO]

Hi, Jon.

[Jon Block, Stifel]

Hey, Tim. Maybe for the guidance just to start there, just call same of the approach with the conservatism that we saw in prior years, notably in ‘18 and ‘19. And then on the 2021 gross margins, Rick, the midpoint 84% is a bit below where you’ve been and when I think about the variables you’ve got stable U.S. pricing, you arguably have higher international pricing due to FX and you’re certainly increasing volumes. So why would we see even though it’s like why would we see that step back in gross margin and then I just got a follow-up.

[Tim Herbert, President and CEO]

Let me take the first and then I hand it over to Rick and he can talk about the gross margins. From a guidance standpoint, where we stand today is we’re watching the environment that we all live in. And so as we kind of discussed with Robbie’s question, just watching how COVID rebounds quickly and our ability to continue to open up these centers, continue to drive utilization, give the adviser care program.

Remember, we ended the year at 180 centers. We need to quickly keep adding on more centers taking more a higher percent of the calls, because we believe that that will have improve our ability that connect patients with their health care providers.

So we did want to put our guidance that we’re comfortable in. We have done that in the past. We’re not changing that strategy going forward. But again there’s a lot of work that needs to be done as we get through this pandemic and into get a life a little bit back to normal.

And even last week we feel for the people down south with the weather. And I mean, we ourselves last our warehouses is right next to health link and right next to FedEx in Memphis and we lost several shipping days. Our team is resilient.

We’re able to move product to be able to cover cases throughout the U.S. We don’t think that’s going to have an impact. But that’s just a lot of the ongoing challenges that we have to face and we are happy to see it’s warming up down there and everybody gets back to normal there too.

So, again, confidence on our guidance, but we always give you a range that we believe that we can achieve. But that doesn’t mean it’s don’t a lot of work that we need to deal with. And let me hand out to Rick for gross margin.

[Rick Buchholz, Chief Financial Officer]

Yeah. Gross margin is pretty straightforward. We do still have a little bit of variability on a quarter-to-quarter basis. We’re still working off a relatively low base and so we are at 84.4% is down a little bit from the third quarter. But again, as Tim mentioned, we’re putting forth our guidance 83% to 85% for 2021. So I think that gives…

[Jon Block, Stifel]

Okay.

[Rick Buchholz, Chief Financial Officer]

… enough sense. Yeah.

[Jon Block, Stifel]

Yeah. That’s helpful. And Tim that was very helpful perspective on the 2021 guide. I think as you know for a moment, Tim, can you revisit cohort data and sort of any color on the earlier classes of hospitals are they still growing. And if so, what is their growth trajectory look like the more recent cohorts and then sort of attack on into that more broadly speaking, the physician payment coupled with DISE could increase are really good amount in coming quarters. Can you talk about this is a potential opportunity for Inspire to reengage with previously train doctor centers that you might be running at sub-optimal utilization, because of some of the challenges they in encountered earlier on in the process? Thanks guys.

[Tim Herbert, President and CEO]

Absolutely. It’s a great opportunity. I think that newer centers understand the new reimbursement environment. So they’re coming in with a certain level of expectation and we want to get them up to a higher implant level. But we don’t want to lose sight on the early adopters, who remember a lot of them are the large academic centers.

Okay, now, when you think a 2022 and you think about all the news and you look at all those huge academic hospitals taking care of all the COVID cases that put a challenge on the utilization of our classes because the early classes are a lot of those top centers, which were the top centers committed to addressing the pandemic. So there is still rebounding and there is still coming back.

And I think long-term the story will be very, very strong. But as we mentioned in the comments, a higher percent of our growth last year was from opening new centers, not from increased utilization and we want to see that get back to normal.

I think we can do that again, especially based on what you highlight with the improved reimbursement for the physicians and even the reimbursement for the centers not having to deal with the risks of that can paid for Medicare.

[Jon Block, Stifel]

Got it. Thanks guys.

[Tim Herbert, President and CEO]

Thank you, Jon.

[Operator]

Our next question comes from the line of Bob Hopkins with Bank of America. You may proceed with your question.

[Brad Mas, Bank of America]

Hi there. This is Brad Mas on for Bob tonight. Thanks for taking the question.

[Tim Herbert, President and CEO]

Hi, Brad.

[Brad Mas, Bank of America]

I have a question on ASCs. I know one of your partners USPI has acquired 45 ASCs in December at least announced the plans to. So I was just wondering if that was contemplated in your guidance or how quickly you think that you would be able to penetrate those new centers?

[Tim Herbert, President and CEO]

Great question, I think that probably adds the real detailed specific. I think I commend them on acquiring 45 ASCs, but we’re still at the very beginning working with USPI and identified which of their ASCs will be adopting Inspire. And I think over the last couple of quarters, just a handful of really started Inspire program so far. But they will continue in earnest with USPI. But also what was the second one?

[Brad Mas, Bank of America]

SCA, surgical care affiliates.

[Tim Herbert, President and CEO]

Yeah. So we’ll continue in there and there’s also others that we are working to develop Nashville pricing agreements with. So big focused area just really early in the game right now and again really can’t -- don’t have specifics around their addition 45, which I think it’s great for them.

[Brad Mas, Bank of America]

Got it. Thank you. And then just one sort of follow up I guess just touching on, I think, this kind of got touch on a little bit, but just ask it more specifically. How should we think about with revenue percent of growth as you penetrate deeper into ASCs? Do you think that should - that growth will slow as some of the centers come on or do you think that there is enough deeper penetration within some of the older more recent cohorts to kind of keep that chugging along? Thank you.

[Tim Herbert, President and CEO]

Well, thank you very much. I think we want to make sure we continue to improve on that and where we talk about units per center per quarter and even though we’re bringing on a lot more centers as we did 55 in the fourth quarter and that increases the denominator, which kind of pushes that utilization down a little bit.

We’re going to keep driving that utilization to keep that number growing and I think ASCs provide an opportunity to actually increase that, again from their flexibility and scheduling and their ability to take care of the patients and the nature of the implant being just a short two hour outpatient procedure.

[Brad Mas, Bank of America]

Thanks so much.

[Operator]

Our next question comes from the line of Amit Hazan with Goldman Sachs. You may proceed with your question.

[Amit Hazan, Goldman Sachs]

Hello. Thanks. Hey. Good afternoon. I’ll keep it quick. Just a couple of quick ones. Just, first of all, just on the first quarter, just making sure if I kind of read your comments correctly, it sounds like February is actually gotten better from January, I wonder if you can comment on that. And then related okay Street sitting here at $36 million for the first quarter, does that sound like it contemplates your seasonality comments enough?

[Tim Herbert, President and CEO]

Well, I mean, I just generally comment and I think - I do think that coming out of December and to January, we did have a lot of regions affected by the pandemic and we all watch the news and we all know those regions were from the -- we transferred from the Midwest down to the Southeast and we’re having a lot of centers hold off on procedures from the Carolinas to Georgia to Alabama and Mississippi and a little bit into Florida. So there is always a little bit of concern there.

We do see those centers scheduling patients now and we do see just the normal seasonality starts to pick up in February as it does every year. So, yeah, it’s safe to say that activity in February picks up than it does in January and we anticipate March will continue forward.

So far as specific comment about where the Street is in Q1, I can’t really comment on that as you know. But I do think that we will see a little bit more seasonality that we do in previous years, but again we’re being pretty aggressive in our overall growth of 59% to 60% plus growth throughout the year. So we think we’re going to be strong in the second half of the year.

[Amit Hazan, Goldman Sachs]

Okay. And just as a follow-up on your comments on Germany, maybe just a quick color there would be helpful to just understand the significance of the DRG and what that could mean for the sales ramp there this year? Thanks so much.

[Tim Herbert, President and CEO]

Thank you, Amit. I think it really helps a little bit in Germany, because going from the NUB1 that’s an annual negotiation that hospitals have to have with the payers. And when we go to a DRG, it really sets up a more permanent formal reimbursement and this year is a little bit variable because the centers do have to negotiate their individual rates this year. But when they negotiate the DRG, it allows them to include other parts of the procedure that were not previously reimbursed such as sleep endoscopy right and other parts of the procedure.

So it gives them an avenue this year to increase the reimbursement. I think you’re seeing that a little bit with the ASPs that’s really driven by the exchange rate. But then after this year that’s when the formal reimbursement gets locked in. So I think long-term, it really helps the centers that they don’t have to negotiate this and ongoing.

But on top of that, it just gives credibility of the maturity of the therapy and that allows us to open additional centers. We continue with the direct to consumer outreach and Germany as well. We do have an active call center in Germany, that’s helping bring patients and connect them with their health care providers. So I think it’s just the next natural step in a permanent reimbursement.

[Operator]

Our next question …

[Tim Herbert, President and CEO]

Laura?

[Operator]

... comes from the line of Adam Maeder with Piper Sandler. You may proceed with your question.

[Adam Maeder, Piper Sandler]

Hey, guys. Congrats on the progress…

[Tim Herbert, President and CEO]

Hi, Adam.

[Adam Maeder, Piper Sandler]

… nice finish to the year and thanks for taking my questions here. I’ll keep it to one just on Anthem, Tim, you guys made a ton of reimbursement progress over the past 12 months, 24 months. Anthem was really the only small hiccup last year. I know you’re planning to reengage there or you’re currently re-engaging. So just latest thoughts around process and timelines and level of confidence that you’re going to be able to overturn that negative decision and I think you’ve talked about having some new data post-market Germany RCT data being published here in the near future, so just any update on that as well? Thanks so much, guys.

[Tim Herbert, President and CEO]

Absolutely. Well, I was looking to see the number of publications that we put out last year just to show that we spent so much time in our ongoing clinical evidence. And I think it’s close to 50 peer-reviewed publications on Inspire therapy were published in 2020.

Couple of those, one of them was an idea from Aetna years back about it’s a controlled study that patients with Inspire therapy were compared to a group without Inspire therapy and the reason they didn’t get Inspire therapy is the insurance company didn’t authorize that procedure.

There is also a randomized study coming out of a Germany that I know the authors have prepared a manuscript and they’re submitting that. So that’s a new Level 1 randomized study that just published this year.

We have the adhere registry that is well over 2000 patients enrolled. So we will continue to provide annual updates and build on that. So that being said, we’re going to keep working on peer-reviewed published evidence.

Number two is we have a strong focus for all Anthem patients have rights to Inspire therapy and we work with the healthcare providers to be for them to submit prior authorizations to Anthem and Anthem is being very good stewards, Anthem is reviewing the cases and they our proven cases.

Now, unfortunately, the time to approval is longer than that of a company with a positive coverage decision. But Anthem is approving cases and we’re seeing increased number of Anthem patients. And eventually Anthem will review their own data as well as additional data from other peer-reviewed publications.

So we have great confidence that we will convince Anthem that it’s appropriate that right a positive coverage decision and we encourage them to continue to review. And if it means, we have to wait to their annual review in summer, so be it, but we’ll continue to provide information that it becomes available.

[Adam Maeder, Piper Sandler]

Very helpful. Thank you.

[Tim Herbert, President and CEO]

Thanks, Adam.

[Operator]

Our next question comes from the line of Ravi Misra with Berenberg Capital Markets. You may proceed with your question.

[Ravi Misra, Berenberg Capital Markets]

Hi. Good evening. Thank you for taking the questions. I hope everyone…

[Tim Herbert, President and CEO]

Hi, Ravi.

[Rick Buchholz, Chief Financial Officer]

Hi.

[Ravi Misra, Berenberg Capital Markets]

Hey. If I could just start -- hi. Hi, Tim. Hi, Rick. If I could just start Medicare obviously is going to be a larger portion of your revenue this year. Just curious in terms of how we should think about it in terms of the growth guidance you’ve given and how to layered in with the commentary amongst new centers and growth from existing centers?

[Tim Herbert, President and CEO]

Absolutely. Well, let’s just go to the numbers and I think it’s all over the place and it changes quickly because we are in the COVID environment. We need to kind of let it settle down. But I think at the end of the year, we’re kind of running somewhere about 70% commercial, 25% Medicare and 5% VA and military.

Now interesting enough, VA and military are down quite a bit, because those facilities were really not allowed to do elective procedures and they just started really late. So I think probably early in the year, you’re going to see a little bit more of a resurgence in the VA centers.

But this is the first full year with the Medicare population and the Medicare decision, but you have to layer into that as the Medicare population is also tends to be the more susceptible to COVID. But that’s also the population that is now being vaccinated.

And so there is a lot of variables that you got to kind of combined together, but it does provide confidence that Medicare is really going to have a strong year going forward, but we’re not going to rest on that.

Because if you kind of look of our direct-to-consumer marketing programs that we setup and even the four new TV commercials, that’s really targeted for a commercial age group of patients. So what I’m trying to say is we’re going to keep pushing all three elements to grow commercial Medicare and VA consistent with each other. It’s probably going to be that commercial and Medicare will grow quicker than the VA just by nature of the limited number of VAs that there are in the United States.

But it’s a great question. I do think Medicare is going to have a really good year with it’s great for the Medicare aged population and that we have the policy decisions in place. And now that we get control of COVID here and globally that we can increase the number of Medicare aged patients that can have Inspire therapy.

[Ravi Misra, Berenberg Capital Markets]

Great. Thanks. If I can ask maybe two more questions and I’ll put them upfront. May be one on the product development…

[Tim Herbert, President and CEO]

Sure.

[Ravi Misra, Berenberg Capital Markets]

May be one on the product development side, one a bigger picture question, so you stated in the past, you’re working on remote -- potential remote programming. Can you maybe highlight what kind of steps you need to secure approval with the FDA there in terms of studies or kind of clinical design? And second, just if we can think about value-based care and healthcare, I’m not sure how much of that is really kind of coming into the sleep segment just yet. But maybe if you could help us understand, three years, four years or five years from now, what research is Inspire are going to be putting forward or what can be kind of thinking about to say, hey, this procedure, this product is taking cost out of the system or do you not foresee that kind of in that time window? Thanks.

[Tim Herbert, President and CEO]

Ravi, that’s a good question. While I’m thinking of a good answer, I’m going to answer your first question. That’s pretty straightforward. The FDA has already approved remote programming and they have established a new digital technology group at the FDA. In fact, our team is going to be communicating set up a meeting we still can’t travel yet, right?

But we’re going to have a virtual meeting with that digital team and we’re going to lay out what our plans are, then the first step is this Bluetooth-enabled remote that’s going to allow communication between Inspire Cloud and the implanted product and that’s going to the FDA in the second quarter and hopefully, the FDA will do a quick review of that.

The next step is to be able to enhance Inspire Cloud to be able to lower physician the log into that and work through the cloud to send instructions through the remote or through the patient smartphones through the remote in and reprogram the implanted product.

Technology, we can handle it, we need to make sure that we do it in the proper sequence, keep the FDA fully improved of our plans and our processes, but we believe we will be able to do that in the very near future.

Value-based care, long discussion that’s been in the works in and our medical devices for many, many years. It’s very difficult to quantify, because measuring the impact of improving the criticality of sleep apnea and how that relates to reduced hypertension and how that improves early mortality, it’s something that I know the CPAP companies have been struggling with for years and it’s very difficult to quantify that, but that doesn’t mean that we’re not going to keep trying.

So as we get into the adhere registry that eventually is going to get folded into the Inspire Cloud and we’re going to build our evidence based and call it our big data to be able to collect that level of information and we are even starting smaller scale outcome studies with some of the leading institutions to be able to show advanced benefits and to be able to show to the large payers that there is an economic benefit of value from covering Inspire and if there is a way that we can work with them to identify what is that value. Again, as you know, that’s going to take years for us to accomplish, but we know what is there and we know it’s something that we want to accomplish. Very good, Ravi.

[Operator]

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

[Tim Herbert, President and CEO]

I just have a couple of comments and I want to thank you all for joining the call today and I remain grateful to the growing team of dedicated Inspire employees for their enthusiasm, their hard work and continued motivation to achieve successful and consistent patient outcomes. The Inspire’s team commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts as we continue to grow our business in the U.S. and in Europe. For all of you on the call, we appreciate your continued interest and support of Inspire. Look forward to providing you with further updates throughout 2021. Everybody please stay safe and healthy, and thank you again.

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.