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Greetings. Welcome to the Inspire Medical Systems Incorporated Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Mr. Bob Yedid with LifeSci Advisors. You may begin.
Thank you, Jesse, 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 third quarter ended September 30, 2019. A copy of the press release is available on the company’s website.
I would 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 regards 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 Quarterly Report on Form 10-Q filed with the SEC today for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise.
This conference call contains time-sensitive information and states only as of this live broadcast today, November 5, 2019.
With those remarks, it’s my pleasure to turn the call over to Tim Herbert, CEO. Tim?
Thank you, Bob, and thanks, everyone, for joining us today. I would like to welcome you to our 2019 third quarter earnings call. I’m extremely pleased to report that once again, the team’s efforts have resulted in very strong results. I will provide you with the details around what constitutes or continues to drive our consistent progress, and our CFO, Rick Buchholz, will follow with a detailed review of our third quarter financial results. Following this, we’ll open up the call for your questions.
As I do every quarter, it is important to restate our most important goal that the team at Inspire and the healthcare providers who prescribe and support Inspire therapy continue to be fully committed to delivering positive and consistent patient outcomes for those with untreated obstructive sleep apnea. This has been and will continue to be our mission at Inspire. And we believe this will lead to continued growth and therapy adoption globally.
Regarding our strong performance in the third quarter of 2019, we continue to execute on our balanced commercial growth strategy, which is primarily focused on the U.S. market and with the objective of first increasing patient flow at existing centers; and second, training and opening new implanting centers.
Let’s get into the 2019 third quarter results. Our worldwide revenue was $20.9 million, an increase of 60% compared to the third quarter of 2018. During the quarter, we added 21 new U.S. implanting centers ending the period with a total of 266. Further, we added seven new territories in the U.S., bringing our total to 66.
Let me expand on this. During our second quarter call, we announced the expansion of our U.S. sales team with four area Vice Presidents, and plans to increase the number of regional managers from nine to 13. Several of these additional regional managers were internal promotions from existing territory managers.
We have backfilled those territory managers positions, as well as adding the seven new territories, which brings us to our current state of 66 territories. As a comparison and to highlight our expansion, at the end of the third quarter a year ago, we had 184 centers and 40 territory managers.
These new centers and territory managers will have a positive impact on our long-term growth. And we are therefore, increasing our guidance and expect to open between 15 and 17 new centers in the fourth quarter, as well as maintaining our guidance of adding four to five new territories during the quarter. As always, we will do this in a controlled manner, ensuring that we hire the right people and open centers in a methodical and well-disciplined approach.
I’d like to now turn to market access or reimbursement, where we continue to execute on our two key strategies, which are to expand the number of positive written coverage policies, and concurrent with this process, continue to obtain individual prior authorizations.
The most significant progress here is the substantial growth and positive coverage policies. Specifically, we currently have 45 positive policies for Inspire therapy, representing over 145 million covered lives. This includes four previously unannounced plans, the most notable being CareFirst, Blue Cross Blue Shield, which covers approximately 2.7 million members in Maryland, the District of Columbia and Northern Virginia, and became effective August 28.
As a reference point, there were only 25 million covered lives just one year ago. We continue to work with all the remaining peers in the U.S., who have not yet written coverage to encourage them to conduct in-depth reviews of all the published literature, documenting the clinical evidence of Inspire therapy. We expect that our momentum with these positive coverage policies will continue through the end of the year and into 2020.
Medicare is another area, where we demonstrated significant progress in the third quarter, with the publication of six local coverage determinations by the Medicare Administrative Contractors. The publication of the six draft LCds covers approximately 30 million Medicare patients in 44 states. Just one remaining MAC, Wisconsin Physician Services, which covers approximately 4 million Medicare patients in six states has yet to publish a draft LCD for coverage of Inspire therapy.
Regarding this process, once a draft LCD is published, it is followed by a public meeting and a 45-day public comment period. Once public comments are collected and reviewed, a final LCD is issued several months thereafter. We are pleased that the MACs are coordinating their efforts to ensure consistent Medicare policy across the MACs. And all six of the MACs, who issued a draft policy, have already conducted their public meetings. This coordination may add a little time to review comments and coordinate the final LCDs, but we expect that these final LCDs will be published early next year.
Further, we will continue to encourage Wisconsin Physician Services to publish their draft LCD in 2020. And with the other six MACs having formal policies in place, we expect that they will follow soon thereafter.
Turning to prior authorization metrics. I will review how the new positive coverage policies have improved these metrics. In the third quarter of 2019, our internal reimbursement team supported 812 prior authorization submissions. This compares favorably to the 661 submissions in the third quarter of 2018, as well as an increase from the 735 submissions in the second quarter of this year.
In terms of prior authorization approvals, 672 patients received an approval in the third quarter of 2019. This compares to the 373 approvals in the third quarter of 2018, as well as an increase from the 581 approvals in the second quarter of this year.
Regarding prioritization success metrics, we ended the first nine months of 2019 with an overall approval rate of 76%. And for those patients that completed the entire appeals process, the approval rate was about 90%. As a comparison and to highlight the positive effect of the new coverage policies, the overall approval rate in 2018 was 59% and 77% for those patients completing the entire appeals process.
The average number of days for a prior authorization approval for the first nine months of the year was reduced to approximately 50 days. As compared to 2018, where the average time to receive an approval was approximately 125 days. These are slightly higher than the second quarter report, which is natural is there has been more time for the appeal process for the 2019 submissions.
Another way to look at this data is the median time to approval. The median number provides a more accurate view of the overall sample, as the average or mean calculation is biased from the few cases with an extended review process.
For the first nine months of 2019, the median time to approval was 25 days versus 2018 median days to approval of 100 days. Therefore, significantly more patients are receiving approvals at the initial prior authorization stage and not having to go through the appeals process.
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 authorization by working with commercial payers to develop positive coverage policies. Thus, these metrics will likely become less meaningful and evaluating the overall progress of our business going forward.
We continue to further develop the published clinical evidence of Inspire therapy in support of our adoption and reimbursement efforts. To this end, we recently published data from the first 1,000 patients enrolled in the ADHERE registry. This large data set continues to demonstrate that Inspire is a safe and effective therapy with high patient satisfaction.
We expect other key publications prior to the end of 2019, and these can include comparison trials against no therapy, or alternative therapies. But we have long talks about the importance and effectiveness of our direct-to-patient initiative. This strategy continues to be successful in reaching and educating prospective patients about Inspire therapy, and we remain focused on broadening these efforts to correspond with the growing number of U.S. implanting centers.
We were excited in the third quarter to rebrand Inspire and launch our new website at inspiresleep.com. We have received very positive feedback from patients on its ease of use and utility the educational resources provided.
As of the end of the third quarter, the number of visitors to our website has exceeded 3 million year-to-date, which is an increase of 84% year-over-year. In addition, 400,000 physician searches have been conducted, an increase of 27% year-over-year. Moreover, there were 30,000 physician contacts established via the website, representing an increase of 40% year-over-year.
In addition to our new website, during the third quarter, we began testing TV advertising by airing commercials in three markets: Pittsburgh, Kansas City and Cleveland. In the fourth quarter, we expanded this to six additional markets: Philadelphia, Chicago, Phoenix, Birmingham, San Francisco and Denver. We will continually measure the effectiveness of TV advertising and plan to expand further in 2020.
I would like to make just a few comments on our international activity. As Rick will report, Europe again had a very strong quarter. This was primarily driven by an increase in patient flow at several of our key centers in Germany and the Netherlands. We have been very successful and increasing adoption in these countries, resulting in additional attention from the commercial payers. This is to be expected in Europe and may impact adoption at a few centers in the short-term, but we do not believe this will have a significant impact on the overall growth of global therapy adoption.
We continue to drive towards a reimbursement decision in Japan and have been actively engaging with the authorities to work to a decision on the reimbursement of Inspire therapy in that country. We remain confident in achieving a mutually agreeable solution that could allow us to execute a limited product launch in 2020.
Switching gears to our R&D activities. Inspire product development team continues to work to improve the patient experience, while maintaining and enhancing therapy outcomes. This is a very important initiative for the company and we have made a significant investment to further advance our technology. The Inspire Cloud project, our cloud-based patient management system continues to progress with the addition of centers using this tool.
In 2020, we will launch the Inspire app on patient smartphones, which will further involve the patients in managing the OSA, as well as create interconnectivity through Inspire Cloud. We also have active projects to improve the physician programmer and the patient remote control.
Longer-term, the design activity for our next-generation Inspire 5 Neurostimulator is ongoing. We anticipate that this will be a multi-year effort to develop the Inspire by device and gain regulatory approval. We are actively conducting feasibility trials with several technology innovations, which will make the Inspire 5 Neurostimulator state-of-the-art and will significantly improve the performance of the system, including reducing the complexity of implanting the system.
In summary, we’re thrilled about the direction of 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 a focused growth strategy, and at first, increasing penetration at existing centers; and second, expanding the number of implanting centers, as well as adding territory managers.
Along with further advancements in reimbursement, including Medicare, that build upon a recent positive coverage decisions, our growing body of clinical evidence and a strong balance sheet, we are confident that we remain well-positioned for long-term success.
With that, I’d like to turn the call over to Rick for a detailed review of our financials.
Thank you, Tim. We are extremely pleased with our financial performance to date in 2019. With the growing market demand we are experiencing from Inspire therapy, we continue to demonstrate significant top line expansion.
For the third quarter of 2019, total revenues were $20.9 million, a 60% increase over the $13.1 million generated in the third quarter of 2018. U.S. revenue in the third quarter was $18.6 million, an increase of 65% over the $11.3 million in the third quarter of last year.
Our U.S. average selling price was 23,900 in the third quarter, compared to 23,200 in the prior year period. The higher ASP was driven primarily by our new sensing lead, which was introduced to the U.S. market in February 2019.
In the third quarter, European revenue increased 27% to $2.2 million from $1.7 million in the third quarter of 2018. This increase was volume-driven primarily in existing territories, but also through the expansion of our European sales reps into new territories.
During the quarter, the European ASP was 21,700, compared to 22,700 in the third quarter of 2018. The lower ASP was driven by changes in foreign currency exchange rates. Our geographic mix of revenue in the third quarter was 89% in the U.S. and a 11% in Europe.
Our gross margin in the third quarter was 83.4%, compared to 81.1% in the third quarter of 2018. The improvement was primarily due to the introduction of the new sensing lead in the U.S. in February 2019, as we’re able to achieve manufacturing efficiencies with both the new sensor and the stimulation leads, which share common materials and processes.
Total operating expenses for the third quarter were $26.1 million, an increase of 71% from $15.2 million in the third quarter of 2018. This increase was primarily due to higher employee-related expenses with the expansion of our sales organization, as well as increased direct-to-patient marketing programs and continued product development efforts.
Our net loss for the third quarter was $8.2 million, compared to a net loss of $4.7 million in the third quarter of 2018. The diluted net loss per share for the third quarter of 2019 was $0.34 per share, compared to $0.22 per share in the same period last year.
As of September 30, 2019, our cash, cash equivalents and investments totaled $161.2 million, compared to $188.2 million at December 31, 2018. With our strong cash position, we do not have any current plans to raise additional capital.
Turning to guidance, we are increasing our full-year 2019 revenue guidance and now expect full-year revenue to be in the range of $78 million to $79 million, representing growth of 54% to 56% over 2018 revenue of $50.6 million. This compares to the prior revenue guidance of $73 million to $75 million. In addition, we now expect gross margin for full-year 2019 to be in the range of 82% to 83% compared to our prior gross margin guidance range of 81% to 83%.
The weighted average number of shares outstanding for the third quarter was $23.9 million. We anticipate the weighted average number of shares for the fourth quarter of 2019 will be approximately $24.2 million.
In summary, we are very pleased with our financial performance in the third quarter and the first nine months of 2019. We are confident that our balanced growth strategy positions us well to maintain our positive momentum through 2019 and into 2020.
With that, we are concluded. Jesse, could you please open up the call for questions?
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Jon Block with Stifel. Please go ahead.
Thanks, guys. Good afternoon. Nice quarter. I think I’ll start in the U.S. solid numbers. You talked about the DTC campaigns. I guess, Tim, how are you measuring the return from that spend in the early days? This is clearly not like an impulse purchase. So what metrics are you guys looking towards? Is it website hits? Is it contacting centers that you’re using to determine if you even want to get more aggressive with this initiative in the coming quarters?
Yes, thank you very much, Jon. How are you? We like to use the term conversion. And as we tracked our metrics years back, you’ve been following Inspire for sometime and you know how we track everything from the web hits we get to the people doing physician searches to the physician contacts that we get.
But we also look to the receiving end on centers, the inbound calls to centers, the increase in those calls and their ability to bring those patients through reimbursement and eventually to implant. We track that very, very closely. We want to continue to improve that process one step ahead of time.
I think the big breakthroughs this year were simply reimbursement, really helps patients get from the diagnosed phase to the implant phase without that long frustration of going through the prior authorization appeals. And that was the area that really allowed us to expand the front-end and rebranding the Inspire and the new website.
But then it was time now that we have the reimbursement that we could start pushing the direct-to-consumer and trying television. The results have been very solid to date, as we’ve seen from the inbound to the website, as well as the physician contacts. And we specifically track that in those three markets and ran that with testing against three control markets without television and we can see the benefits. And so we are expanding that test to six additional markets in the fourth quarter.
So we’re really able to track the metrics in great detail. And really the theme going forward is about improving our conversions and making the therapy more available for patients.
Got it. Very helpful. Let me see if I can lay out the second one effectively. The beat in the quarter was healthy, but the raise was even bigger. And so maybe if you can just talk to the cadence throughout the quarter and into 4Q. Are you seeing some of those commercial policies that take a little while to get going? Have those accelerated recently? Is it a better feel that you have with now some of the MACs coming online? Maybe if you can just talk about the momentum and the underlying business, notably in the U.S.? Thanks, guys.
Thank you very much, Jon. I think the key is commercial approvals. And really driving all that and what allowed us to increase our full-year guidance so significantly was, we are really seeing the trend with the commercial payers, specifically with United Healthcare.
As an example, we’ve had not quite as many approvals in the third quarter as we had during the first-half of the year, but the great majority of those approvals are now at the predetermination stage, or the very first request in the United Healthcare, whereas in the prior – in the first-half of the year, most of those cases would have to go through the full appeals process.
That is really the big change that we’re seeing in the third quarter and we expect to see further into the fourth quarter as these commercial policies are put in place and we’re really able to help patients get approvals much quicker. We talked about the medium time being down to 25 days, and the greater percentage of those cases being approved on the first prior authorization.
Medicare is going to be a little bit longer. So we think Medicare is probably – will have more of an impact in 2020, as we’re working through the public comment period and the implementation of those formal LCDs. So that will take a little bit longer to implement. And so really, the fourth quarter is based on what we’re seeing with a lot of the commercial peers.
Fair enough. Thanks for your time.
Thank you. The next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.
Hey, guys, thanks for taking the question and congrats on another nice quarter. Let me pick up where Jon left off. And when we look at the full-year guidance for 2019, 55% growth at the midpoint and the tailwinds you have, such as Medicare, Tim, that you just mentioned, commercial reimbursement and new territories in Japan. Why should growth slow in 2020? You could make an argument that it could even pick up. So maybe any color on how you’re thinking about momentum next year and some of the puts and takes would be helpful?
Well, we – as we’ve always said before, Larry, we always put out guidance that we have confidence in and numbers that we will achieve. And while we’re seeing great promise with the commercial payers and evidence that the prior authorizations are improving dramatically, we haven’t seen the immediate results of Medicare and testing the draft LCDs to see if they will be good stewards and the MACs, that the MACs will be good stewards until such time as those formal policies are released. So there is potential upside there with the MACs as we proceed into the fourth quarter to see what the response is with the 44 states that have these draft policies right now and if we can get an impact in the fourth quarter, or if that will delay into 2020.
So we remain confident in therapy. We significantly increased our guidance, as you mentioned. And – but we still are watching a couple of potential headwinds with the Medicare and we still have a couple key payers that we need to chase down and influence to be able to write policy, including Anthem.
Okay. And I don’t know if you’re – it sounds like you’re answering about Q – the Q4. I’m talking about 2020 and how you’re feeling about next year and any kind of puts and takes that we should think about next year. So just wanted to make sure I was clear, my question, and I did have a couple of follow-ups?
Okay, not a problem. I think in 2020, we are going to continue to run our plan and we’re going to continue to open new centers and continue to add territory managers and grow the business. We’re not putting out 2020 guidance at this time. There’s more things that we need to investigate, including the Medicare that we talked about.
So we’re not going to push in that too far, but we think 2020 looks extremely exciting for the organization. We’re going to continue our hiring. We have a strong balance sheet. We have great evidence showing efficacy and safety of the therapy. And so, again, we’re going to continue to run our program going into 2020.
That’s very helpful. Tim, on Japan, could you elaborate on your comments there? You talked about a mutually agreeable solution and you talked about a limited launch in 2020. Implicit in that, I don’t know, it sounds like there’s some area of disagreement when you talk about a mutually agreeable solution. And just – I’m not sure in the past, if you were thinking about a limited launch. I thought, maybe a more of a full launch in 2020. So correct me if I’m wrong. But just if you could elaborate a little more on what’s going on in Japan, that would be helpful?
Perfect. We don’t have a disagreement in Japan as far as the reimbursement level of Inspire but the issue is we don’t have an agreement. And so we have formally filed what’s called the C2 application to the MLHW, which is the reimbursement arm and – of the Japan government. They are reviewing that file. They’ve asked a series of questions and we have completed the review and completed our updates and it is in their court.
The next step will be to – for us to attend an industry meeting with the MLHW to in more detail discuss the reimbursement in Japan. Really where we stand is, we have provided information of the ASP, the average sales price in the United States and in Europe. And we believe that the consistency with Japan should match that of Europe and United States and we have made that case.
So while we haven’t had any feedback to that yet, we are anxiously anticipating the decision from Japan that could come several months from now. We believe we’ll continue our constructive working with Japan. We do have support from the physician societies to open up the therapy. When we say limited launch, I think it’s consistent with the way that we handled Europe. In that, we will select maybe the first 10 centers in Japan to start. And then just like we do in the United States, have a cadence to keep adding centers and adding the team in Japan as we move forward. But again, we’re not going to make any firm commitments until we have agreement where we stand from a reimbursement standpoint.
Perfect. Just last for me, Tim, any update on my favorite topic, the pediatric Down trial and indication? And I’ll drop. Thanks for taking the questions.
Thank you, Larry. It’s also my favorite and it’s kind of the definition of why we do what we do and taking care of these kids. So as far as the trial goes, we’re on the third trial there and that is to bring the implants to 50 implants. We are expanding the number of participating children’s hospitals in the United States. We’re adding some of the leading hospitals across the U.S., which is wonderful.
The data continues to look very, very strong. We are increasing the number of implants, because as you know, BlueCross BlueShield, a lot of the plans when they wrote positive coverage policies for the adult population. They included this pediatric population with Down syndrome. So we’re getting insurance approvals for these cases and we’re increasing the number of cases in the clinical trial.
That being said, we are in discussion with the FDA. We will be talking to them in the fourth quarter about a pathway forward. And we would like to get this on label in 2020, so we can launch the product. And we need to have discussions with the FDA after reviewing the data on what’s the best approach to be able to do that. So we’ll be working on that in detail in the fourth quarter with the FDA. We’ll be able to report back that in the first quarter during our fourth quarter call.
Thank you for taking the questions, guys.
Thank you, Larry.
Thank you. The next question comes from Richard Newitter with SVB Leerink Partners. Please go ahead.
Hi. Thank you for taking the questions and congrats on the quarter, guys. First question, I’m just wondering, Tim, if you could give a little bit of color on the accounts – the account base and what their utilization averages are at the high-end, the accountability longer that are the higher utilization accounts. I don’t know what’s easiest on a weekly basis, on a monthly basis. What their utilization rate? And what’s the range kind of throughout your different account maturity?
Well, thanks, Rich. It’s a great question and really a focus for our team as we move into 2020. It’s been a focus of our team in 2019, but with the reimbursement, it really allows us to kind of leverage that. Overall, we’re still running at about one implant a month. That’s certainly not where we need to be, but the range is so broad.
So we have several sites that are running, that have done 40 implants already this year and we’ve had several sites that are just doing the first few this year. And then, of course, we have the new centers that could open up on a quarterly basis.
So the goal for 2020 is really be driving centers to the left, meaning, driving higher throughput at those centers, and overall get that metric above one a month. And I think that is – there’s many approaches to do that. The first step is, of course, our outreach programs are driving more phone calls to the centers, and we’re focusing where those calls go to the centers that have systems available to properly treat patients.
Secondly, the reimbursement environment and then moving forward to the Medicare when it comes online in the early next year, is going to really help the frustration level of the ENTs, because it takes so much physician time to be able to fight through the appeals process of those prior optimizations. And secondly, with Medicare, there’s always the risk that they’re not going to – the cases won’t be paid. And both those are resolved with one, the positive coverages; and then secondly, with the LCDs put in place.
Then you start looking at the overall capacity at a center and a lot of centers, the best approach is simply add a second ENT surgeon to really be able to have more surgeon serve the patients and we do run into some capacity, because these surgeons do multiple procedures.
So it’s a multi-prong attack on how to be able to drive this adoption. But again, the key is adding territory managers or adding territories that really help limit the number of centers that territory managers have to be able to drive patient flow and increase utilization at existing centers.
Thanks. I just have two follow ups, relatively quick ones. The first is just piggybacking off an earlier question on 2020. I guess, high level, Tim, is there – you have a number of catalysts or incremental tailwinds that appears heading into 2020 between reimbursement on commercial and Medicare, potentially pediatric Down syndrome, potentially Japan coming online, I guess, is there anything that we should be thinking about offsetting that, all else equal, you shouldn’t see acceleration as we move into next year at a high level?
Yes. I think the catalysts that we have are really, really exciting. And I think the key is making sure the team stays focused, because the broader we get with all those topics that you talk about puts a little bit of risk on the team. I think the limitation is going to come down to center capacity going back to your first question.
And if we’re able to grow the adoption at the centers and grow the number of centers, we’ve already talked about the expansion of our teams and adding the Area Vice Presidents, adding the regional managers, adding the territory to allow focus at the added centers and the added adoption at the centers.
We think everything looks really positive. And the key is really going to be down to staying focused. And that really is going to be that the next year that the talk is going to be conversion of the inbound requests for our therapy and then really just focusing to make sure that we execute on that.
Okay. And one last one, Tim. Just on Japan and the conversations and the discussions going on there for reimbursement, how would you characterize how you feel about timing and the prospects for the reimbursement going your way? I think the last time we asked you that question. You said, no change if anything you felt incrementally a little bit more encouraged about it. How would you characterize that now?
I think the discussions have been very good. I think we have support from the key physician societies, sleep, ENT and cardiovascular. The surgeons in Japan traveled to the World Sleep Conference, which was held up in Vancouver. So they’re educating themselves on the therapy, identified what centers you want to open in Japan, people are excited about it. But it’s just we’re right in the throes of the reimbursement right now.
And they want to make sure that they get a really good deal for the people of Japan and we want to make sure that we get a fair price in line with what we get in the United States and in Europe and to make sure that our investment dollars have a return for our key investors. And so we’re being protective of Japan. And again, it’s also about focus and not distracting our teams in the United States.
So we’re very encouraged with Japan. We really look forward to opening Japan. But we need to make sure the environment is proper for us to do it correctly, and then do it in a controlled manner, such as our patient outcomes in Japan are just as good as they are in the United States as they are in Europe.
Thank you. The next question comes from Chris Pasquale with Guggenheim. Please go ahead.
Thanks. Congrats on the nice quarter, guys. Tim, can you dig in a little bit more on the dynamics with United? That policy became effective August 1. I know there were a fair number of patients in the funnel at that time who may have been resubmitted after the effective date. Do you think you saw a benefit in this quarter from a bolus of patients that went back in after the policy became effective, or is that potentially still to come in the fourth quarter? Can you just talk a little about that?
I think it’s yes and a yes. And so if we go back and look at the third quarter, we did have several reach the second submissions we call it, which would be a patient who may be in the appeal process and then was resubmitted to be able to take advantage of the policy and get a review at an earlier stage in the cycle.
And then previously, in the first-half of the year, about half the patients had to go through the appeal process for the approvals. I’m talking second-level appeal or even EMRs, where we saw the great majority of the approvals in the third quarter all happened at the predetermination level, or the very first level.
So we’re going to continue to see additional benefit in the fourth quarter from two phases. Number one, there will be some secondary submissions that didn’t get completed in the third quarter, that will lead to approval and implant in the fourth quarter.
But it also reduces the risk of submitting united cases. And there’s always a little bit of a reluctance with physicians knowing that if you submit a United Healthcare could take 120 days to get the approval. Well, now you can get that approval quickly because of the positive policy that United wrote. So I think it was a good benefit in the third quarter and really kind of one of the leading factors that allowed us to significantly increase our guidance in the fourth quarter.
Thanks. And then one for Rick. Gross margin has been improving steadily for several quarters now. How much higher can that go? Where do you see that starting to flatten out?
Well, we have increased our guidance on gross margin from the beginning of the year to now where we’re at for 82% to 83%. And for now, we expect it to be in that range. Longer-term, it could possibly tick up another 100 basis points. But right now, our guidance has us at 82% and 83%.
But is there a reason that it should pull back from them? You were almost 83.5 here in the third quarter. Is there a reason it should come down from that level?
No, that’s a full-year gross margin guidance versus a quarterly.
Okay, thanks.
Thank you. The next question comes from Bob Hopkins with Bank of America. Please go ahead.
Oh, great. Thank you and good afternoon.
Hi, Bob.
Hey, Tim, just a couple of quick questions. First, just circling back to Anthem, can you just give us a real sense for your confidence in positive momentum there sometime in the relatively near future. Just how you’re thinking about the progress you’re making with Anthem?
Yes, that’s the elephant in the room. That’s a great question. My confidence is very high. But what – the question I can’t answer for you is the exact date at which Anthem will write that positive policy. And we do know that, they’re reviewing it. They have put out questions to ENTs out in the field. We are able to get approvals at some levels, but most of them at the EMR level, the external medical review, so we remain very confident that Anthem will write positive policy.
I would love to say that we expect that to happen in the fourth quarter. I just can’t say that right now. And obviously, we don’t have direct line of communication with Anthem. There’s a – there’s the wall that naturally is there. But from what we hear from the field and the trends that we’re seeing, we certainly hope it will happen in the near future, but certainly believe that should be in place in 2020.
Okay, great. And then a couple other quick ones. I’m just curious a topic we haven’t talked about in a little bit. I’m just wondering in these centers where the average is one per month, obviously, a lot of opportunity there. And I’m just curious if all the things that could help drive utilization up from one per month, how important is the current reimbursement structure to the physician? Like if that were able to climb higher, would that be something that has a big impact, or is it really more about all the other stuff we’ve been talking about in this call?
I think it will have an impact, although, I think it goes back that might be fourth, fifth place.
Yes.
And I think the other benefits that we’ve been able to overcome with reimbursement, I think drives it a little bit more. This specifically talk about Medicare. The challenge that a lot of physicians have with Medicare is the probability of them getting paid for doing a Medicare case is simply not that high. And if they only get paid on half of their Medicare cases, that certainly is going to limit the number of Medicare cases that they agree that you have to make a living as well.
So I think by giving the positive LCDs, that’s the first step to assure that these physicians will receive payment for the work that they’ve done to prescribe and implant the product for the patient.
The second step is, remember that Category III code we have that 0466T, which is for the pressure sensor. Now that the LCDs are being written. We can now start to see a payment level associated with that Category III code even before that gets converted to a Category I. Now with that, we have been in discussion with the AAO, American Academy of Otolaryngology, which is the ENT society responsible for submitting the code.
So we are looking to get that code converted to a Category I. But some of the private payers we’ve been seeing evidence of surgeons getting paid for that work, as well as with Medicare with the LCDs. So we are going to be able to improve the physician payment, but really the first step is assure that they get paid for the work that they’re doing in the first place.
Okay.
That – the other major factor is these ENTs are very busy doing numerous things. And when you can change the reimbursement environment, instead of expecting to spend 120 days fighting with insurance companies for prior authorization, to getting immediate approvals, whereby once diagnosed and you submit the prior authorization, you can actually schedule the implant knowing that the prior authorization will be coming through.
The frustration and the commitment it takes for physicians to go through that prioritization process, I think is really going to be the number one benefit to really letting them take care of more patients, because now they can take care of patients, not the insurance agents.
Thank you for that. And then last question is, just on Japan long-term, I know I realized there’s a lot of work to be done. But once folks – once the payment is there and you’re happy with the training, I mean, most med tech markets, Japan’s number two market in the world is – long-term, is that the way you look at Japan for your technology, or are there cultural or other issues that might limit the opportunity there?
No, I think I completely agree with that. I think there’s – the three large markets in the world are the U.S., Japan and Germany. The advantage we get in Japan is everything is front loaded, right? We get the regulatory, we fight with the reimbursement upfront, takes a little bit of time and then everything after that is going to be just like a U.S. play, where we start with limited number of centers, make sure that we have proper training and good – very good patient outcomes and then we can grow adoption.
And with the proper reimbursement, I think we’ll be exactly where you just said that, that is the number two opportunity in the world. The sleep apnea prevalence in Japan is very, very high. And we think that there’s a need for Inspire, because they have the same compliance issues with CPAP as it is across the globe.
So we’re being fair – very careful upfront to make sure we set it up properly. But that’s okay, because the primary grow right now is all in the U.S. market…
Yes.
…and we don’t need to rush Japan. We need to set that up properly. But yes, we are very encouraged long-term on the prospects of what Japan will mean in the future.
Great. Tim, Rick, thank you very much.
Thank you, Bob.
Thank you. The next question comes from Kyle Bauser with Dougherty & Co. Please go ahead.
Hi, Tim and Rick, thanks for taking the questions and other great quarter here. Following up on Larry’s question on the pediatric Down syndrome trial, you’re continuing to enroll, I think with the goal to get to 50 patients. And you mentioned you’ll be discussing with the FDA about potential plans for an accelerated timeline. Can you talk about these potential options? And I think the trial has one year follow-up. So would you explore an option with, say, less than 50 patients who have all completed the one year or a situation, where the fall was less than a year, but for all 50 patients, any sort of color here would be great?
Yes. When we talk to the FDA, you really – if you can just set aside Down syndrome for a minute and really what the discussion is, is really, is it safe to implant Inspire in an adolescent? And when an adolescent goes from the ages 12 to 22, is there a lot of growth in the anatomy around where the implant is that really introduces any level of safety risk, and that’s the big argument we’re making with the FDA.
So there’s other therapies that are approved for kids as well. There’s no reason Inspire should not be and there’s not a significant change in anatomy going from 12 to 22. And you’re looking at just the hypoglossal nerve and stimulation around the hypoglossal nerve. So that’s really the core discussion point.
There have been many adults with Down syndrome, who have been implanted with Inspire. Down syndrome is not a special indication for Inspire. It’s not a contraindication. In fact, it’s a good alternative, as a lot of these patients cannot use CPAP and end up with a tracheotomy. So really, it’s about working with the FDA to understand those parameters. And are there additional risks that we can build into a post approval study, that we can sit down with the FDA and say, if you have longer-term risk, we’ll certainly sign up for a post approval study, because with the ADHERE registry and what we’re doing with Inspire Cloud, we collect data on most patients anyways, that’s a fundamental or it’s a foundational aspect of Inspire is to continue to collect data that show continued positive outcomes.
So we think the discussions with the FDA will be very positive. FDA is very motivated, and they’re encouraged from Congress to be able to approve therapies for adolescents, and so people are motivated to get this done.
Got it. No, that’s helpful. And within the 266 centers that are active, how many physicians across those centers are implanting Inspire? In other words, what’s the number of implanters per center and how has that metric changed, if at all? And what’s the range for the number of physicians per count?
Yes. It’s a great question. It’s an estimate, it’s probably a big area of opportunity for us. We’re estimating to 80 – probably about 280 trained surgeons in 266 sites. So you can see there’s even a couple of sites that have three surgeons. So it really is something that we’re going to focus on in the fourth quarter and certainly into 2020 to look at increased capacity at centers.
Got it. And then just quickly, last one, following-up on the positive draft policy from First Coast, and I know this will be finalized early next year. But have you seen any recent success in getting centers to implant in Florida in the Medicare population now that, that First Coast retracted their negative policy?
Yes. That was exciting. So when First Coast wrote their draft LCD, the positive policy, on the same day, they retracted the negative LCD that they already had in place. I need to do a confirmation of that. I believe a couple centers have been paid from prior Medicare cases.
And I know there are, at least, while there’s several centers that have Medicare cases scheduled, and we need to do those early in the quarter, to be able to make sure First Coast will act as good stewards. as they go through this review process. We believe they will. But until we do the implants and get confirmation of payment, I don’t have that as of yet. But that’s something that we’ll track closely in the fourth quarter.
Okay, got it.
Obviously, in Florida, that’s a great land of opportunity, right, with Medicare.
Right, right. Okay. Hey, thanks for taking the questions.
Thank you very much.
Thank you. The next question comes from Ravi Misra with Berenberg Capital Markets. Please go ahead.
Hi, Tim. Hi, Rick, thank you for taking the call.
Hi, Ravi.
Just two question. One on the kind of the weekly web visitors metric that you gave. Just curious to see how the ROI on that has been tracking in terms of kind of how many of those are actually engaged? And then how many of those are you guys converting, or is that just a backlog that’s building? How do we think about this kind of pivot into a more consumer-focused marketing attack?
And then secondly, just on the international revenue, if I can follow-up on maybe Bob’s question or all the other ones that have been going on, on Japan. As we think about the market and how to segment the market, is there anything anatomically that’s different between an American patient or a Japanese patient that would maybe limit the size, given the palate or rates of collapse, anything there? Thanks.
Very good. Question number one. So we know with the branding that we can bring people to our website. We talked about the 3 million engaged visits. Those aren’t just website hits, those are people that actually come on and look at several sites and start to educate. That converts down to 400,000 physician searches. We’ve put some changes into our website to help direct patients to the right area.
In other words, when you go to find a physician in my area, there’s two buttons you can pick. The first one says, I’ve never been diagnosed with sleep apnea before. And the second one is, I have been diagnosed. I tried CPAP, but I’m not able to use it. If you click one of those two buttons, you get a different list of physicians that can help the patients out.
We never want to say no to a patient. We always want to point them in a positive direction. But we want to send them to the right physician. So if you’ve never had a sleep study before and you suspect that, I snore and I should probably be tested. Well, you should probably go see a sleep physician to really be diagnosed with sleep apnea and then try CPAP, annoying a group of those patients will circle around in the future.
But if you’ve already tried CPAP, you can’t try. You’re ready to get further down the line and maybe go to an ENT for a final diagnosis. So that’s our first step. We are starting to educate ourselves further the step from the – finding a physician and actually making. And how do we make it easier for those patients to get an appointment. And a lot of the phone calls is kind of difficult, because we have the centers answer the calls today. And we want to find ways to be more efficient about that and to be able to really help patients get an appointment with an appropriate physician.
So we do track the number of hits. We do track the number of contacts. We track the number of implants. We don’t have the numbers in front of us, but we do manage this by the cost per contact, or cost per lead. We do this is a very metric-driven business. We looked at the details from the first three TV markets. And the results of those were such that we expanded our test to six additional markets. We aren’t – are not ready for prime time and going any national scale. But the TV that we’re doing is very localized and really done in cities that have good qualified centers, have good established reimbursement and have a proven history of being able to manage patient flow.
So that’s kind of how those are selected and it’s very methodical. It’s not just let’s just pick the CD and go for it. Assuming I answered that question, when we go to international, Japan guy, yes, I have to be careful how I say this. But characteristically, Japan and even Europe don’t have the same BMI issues that we have in Wisconsin and Minneapolis.
I loved Rick and I are two states together that we have the BMI issues together, which drives a lot of the sleep apnea. It is more of an anatomical issue that really creates a large opportunity for the patients in Japan. Interesting enough the utilization of CPAP is still limited by compliance. And it’s not that – it’s a little bit that patients don’t want to use CPAP, but it is a continuous flow of pressure into your airway that’s very uncomfortable and you get leaks in the mask, and that’s what’s driving the noncompliance.
So I think there is a great opportunity in Japan and we’re going to continue to focus on it, but we’re going to do it properly and carefully and then same in Europe. We’re going to keep investing in countries that have established reimbursement. We will continue to work with France and UK and Italy and other countries to establish reimbursement. I want to throw the Nordic region into that as well. But really don’t make our deep investments until the reimbursement is in place, such as with Germany, now the Netherlands and we believe Belgium will get reimbursement soon.
Great, thanks. And if I can just ask one last question. I know it’s been a long earnings day for a lot of people. The patients treated for center to the nice step up in the third quarter versus the second quarter and first-half of the year. Should we be thinking of that kind of trend as continuing as we think about our models for the rest of the year and beyond? Thank you.
You bet, Ravi. I think that would be appropriate. I think we need to kind of get away from the prior authorization approval model, because we’re really showing that success with prior authorization approvals, and is really going to be getting into conversion and getting into the implants per center. And I think that is probably a good way to be able to focus the models moving forward.
Thank you. We have reached the end of the question-and-answer session. I will now turn the call over to Mr. Herbert for closing remarks.
Thank you. I just want to close by saying, we remain focused on maintaining a healthy growth rate for our business, while always striving for high-quality and strong patient outcomes. Importantly, market demand continues to expand for innovative and effective solution for patients with obstructive sleep apnea, who are unable to successfully use CPAP, which in turn is driving our strong financial and operating results.
Moreover, an increasing number of commercial plans continue to issue positive coverage decisions and the draft Medicare LCDs recently published should meaningfully benefit our business next year. As always, I’m grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve strong and consistent patient outcomes. The Inspire team’s commitment to patient remains unmatched, and is the most important element to our success.
Thank you all for joining the call today. We certainly appreciate your continued interest and support of Inspire, and look forward to providing you with further updates in the coming months.
Thank you. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.