Inspire Medical Systems Inc (INSP) 2018 Q4 法說會逐字稿

Good day, and welcome to the Inspire Medical Systems Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. Following the speakers' remarks, we will have a Q&A session. At this time, I would like to turn the conference over to Mr. Bob Yedid. Please go ahead, sir.

Thank you for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer, and Rick Buchholz, Chief Financial Officer. Earlier today, Inspire released financial results for the fourth quarter and full year ended December 31, 2018. A copy of the press release is available on the company's website.

I'd like to remind you on the call that management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including our discussion of operating trends and our expectations of future financial performance including full year 2019 guidance and our expectations with regard to near and long-term growth potential of our business, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements.

See our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the SEC today, for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. The conference call contains time-sensitive information and is accurate only as of the live broadcast today February 26, 2019.

And with that, 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 am pleased to welcome you to our Fourth Quarter and Full Year 2018 Earnings Call. We ended the year with significant operational and financial momentum that has carried us over into the start of 2019. I'll provide you with the details about what is driving our continued strong performance, and our CFO, Rick Buchholz, will follow with a comprehensive review of our fourth quarter and full year 2018 financial results. Following this, we'll open up the call for your questions.

As I like to do at the outset of these calls, I want to reinforce our mission at Inspire, which is to deliver positive and consistent patient outcomes for those with untreated obstructed sleep apnea and increase the awareness and adoption of Inspire therapy in the United States and Europe as well as in new regions such as Japan.

Before we get to the operational results, I would like to touch on the successful follow on offering we completed in December 2018, which creates $69.8 million of net proceeds for Inspire. Importantly, this financing will enable us to hire additional sales and marketing personnel, primarily in the US, and to expand commercial programs in Europe and in Japan. In addition, we will accelerate our investment in product development to further enhance our technology platform. We are grateful for the support of all of the investors who participated in the offering and we remain focused on creating long-term shareholder value.

Regarding our performance in 2018, we continue with our balanced commercial growth strategy which is primarily focused on the US market with the objective of first, increasing patient flow at existing centers, and secondly, training and opening new implanting centers. In addition to our focus on the US market, we intend to continue growing the adoption of Inspire therapy in Europe, directing our commercial activities on those countries that have established reimbursement, primarily Germany and the Netherlands. Our European team will also continue to pursue reimbursement in other key European countries.

As we previously discussed, we have regulatory approval in Japan. Further, we have updated our regulatory filing to include the new Inspire IV Neurostimulator and the new sensing lead. We are also working with the reimbursement authorities in Japan and are encouraged by the progress to date. With all that said, we anticipate the first implants of Inspire therapy in Japan to occur in the second half of 2019 and target a formal launch in 2020. We are also beginning the process of expanding into other countries in the Asia Pacific region.

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

We added 22 new US centers during the fourth quarter, ending the year with a total of 206. Through all of 2018, we had an increase of almost 50% over the 139 centers we had at the end of 2017. Regarding territory managers, we added 6 during the fourth quarter, ending 2018 with a total of 46. For the year, we added 18 new territory managers representing a 64% increase over the 28 territory managers we employed at the end of 2017. We began 2019 with 9 regional managers, a newly added level of sales management, and have hired additional field critical representatives to help with case coverage. We expect that these new centers and territory managers will have a positive impact on our overall growth. With our progress in reimbursement as we will discuss shortly, we are increasing our goal of opening new centers at a rate of 12 to 14 per quarter versus our 2018 goal of 10 to 12 new centers, and increasing our goal of adding 4 to 5 territory managers per quarter, an increase from our 2018 goal of 3 to 4.

Moving on to market access, also known as reimbursement, this continues to be a priority for the team and is an area where we have recently achieved significant progress. In the United States, we continue to have 2 key reimbursement strategies. Expanding written positive coverage policies and concurrent with this process, continuing to obtain individual prior authorizations. As we previously announced in January, the major reimbursement related achievement occurred when Evidence Street issued a favorable assessment of Inspire therapy. Evidence Street is the corporate technical assessment group of Blue Cross Blue Shield Association. This is a national federation of 36 Blue Cross and Blue Shield companies that when combined is one of the leading health associations in the United States covering 97 million lives. This assessment has already had a meaningful impact on generating positive coverage decisions. In just the last 7 -- in the first 7 weeks since receiving the favorable assessment, positive coverage policies of Inspire therapy have been issued by 8 Blue Cross Blue Shield health plans covering approximately 16.6 million lives. We expect that the additional regional Blues policies will be issued throughout 2019.

Adding to the growing list of positive coverage policies beyond Blue Cross Blue Shield, we are pleased to announce today that Emblem Health has issued a positive coverage policy of Inspire therapy, which takes effect April, 2019. Emblem Health, New York's largest not for profit health plan, covers approximately 3 million members across New York, New Jersey and Connecticut. The national coverage policy from Aetna issued in 2018 continues to have a positive impact on our approval rates and reducing the review cycle times, a key trend which we expect to continue, especially with the recent receipt of positive coverage policies from several Blues plans. Although we are obviously excited about the momentum with these new policies, I would like to remind you that we expect that it will take at least 5 to 6 months to begin to see a meaningful impact from these coverage policies as it takes time to work through the implementation process with the payers and the implanting centers.

With regards to prior authorizations, our overall prior authorization approval rate in 2018 is approximately 55% which was notably higher than the approximately 50% we experienced in 2017. The average time to approval was reduced to below 90 days in 2018 versus 124 days in 2017. As we continue to develop additional coverage policies, we expect that the average time to prior authorization approval, as well as approval rates, will continue to improve. We also believe that with the more streamlined process enabled by positive coverage policies, many centers are submitting prior authorizations on their own. In these cases, we do not have full exposure to these submissions. Therefore, in the short term we will continue to report on these metrics but our long-term goal is to reduce the burden of individual prior authorizations. Thus, these metrics will become less meaningful in evaluating as far as overall progress going forward.

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

In terms of prior authorization approvals, 395 patients received a prior authorization approval in the fourth quarter of 2018 and a total of 1,230 patients received approvals for the full year 2018. This compared to the 583 prior authorization approvals in 2017, which represents a 111% improvement year-over-year. As I mentioned, we will continue to monitor these metrics and report on them as long as they remain a relevant data point for assessing the performance of our business.

Regarding CPT coding, we have a brief update on the application to convert the Category III add-on code to a Category I code. Remember that this add-on code is only for the implant of our sensing lead. The CPT meeting was held a few weeks ago in Scottsdale and our application was on the agenda. After several discussions just prior to the meeting, it was determined that there was still confusion amongst the AMA committee members over this code application and further, the utilization numbers with this Category III code did not match the actual growth of Inspire implants. This is likely because centers do not consistently report the Category III code if there is no payment associated with it at this time. Therefore, it was determined to be best to table this discussion for the time being and the application was withdrawn prior to the formal presentation and discussion. We do not believe this will have any impact on the adoption growth of Inspire therapy, particularly in light of the progress we have achieved with the development of the positive coverage policies. We'll continue to keep you informed on the status of this code moving forward.

Moving onto clinical evidence, we will continue our aggressive efforts to build a therapy dossier through the publication of clinical data. As an example, in the fourth quarter, we announced a publication of data from the first 508 Inspire therapy patients included in the 2,500-patient ADHERE registry. That data demonstrated that Inspire therapy is an effective treatment option with high patient satisfaction and low likelihood of adverse events. We expect several additional publications will be issued throughout 2019 and we remain committed on the ongoing evaluation of Inspire therapy with the intention of continuous improvement and consistency of the already strong patient outcomes.

Another key aspect of our US commercial strategy is our direct to patient initiatives, which includes our social media strategy. This strategy has been successful in reaching and educating prospective patients of all Inspire therapy and we continue to ground these efforts to correspond with the growing number of US implanting centers. These initiatives have led to an increase in web activity in 2018 as compared to the prior year. For the full year 2018, we averaged approximately 46,000 web visitors each week and had approximately 1.3 million engaged visitors. Moreover, we had about 425,000 physician searches, which resulted in roughly 22,000 contacts with healthcare providers. We remain focused on identifying improved methods to educate patients and finding more efficient tools to connect potential patients with healthcare providers.

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

Now switching gears to discuss our new activities, our product development team continues to work to improve the patient experience while maintaining and enhancing therapy outcomes. We recently announced the FDA approval of our new sensing lead in the US. We launched this new sensing lead at several medical centers in the US and we'll be expanding this launch in the next month. This sensor was previously launched in Europe in 2018 and we have received very good feedback from the physicians to date. We also have projects ongoing to improve the physician programmer, the patient remote control, and longer term, we have initiated the design activity for our Inspire V Neurostimulator. Later in 2019, we will report on the key design features that will be incorporated into this new product. This will be a multiyear effort to develop the Inspire V device and gain regulatory approval.

As you can see, we are very excited about our long-term outlook. Specifically looking forward to 2019, I am pleased to provide you with our initial full year revenue guidance in the range of $67 million to $70 million, representing an increase of 32% to 38% over full year 2018. Although we are not providing quarterly guidance, the fourth quarter of each calendar year is typically the busiest for med tech companies as patients in high deductible health plans seek to schedule procedures prior to their deductibles resetting at the start of the year. This often results in seasonally weaker period in the first quarter. We do expect that there may be some seasonality in Inspire's business during the first and fourth quarters of the year, although in past years, this seasonality has been masked by strong growth triggered by the addition of new territory managers and centers as well as the underlying adoption of Inspire therapy.

In summary, we are excited by our continued progress and enter 2019 with significant momentum in our business. To reiterate what I have said before, our primary goal is to generate the highest therapy outcomes possible for patients. We continue to execute a focused growth strategy aimed at increasing the number of implanting centers, territory managers and territories on a quarterly basis. Along with further advancements in reimbursement that build upon our recent positive coverage decisions, 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 his detailed review of our financials.

Thanks, Tim. We are extremely pleased with our financial performance in the fourth quarter of 2018. We continue to demonstrate strong execution across our business and remain focused on expanding our team to support the growing demand for Inspire therapy in the United States and Europe.

For the fourth quarter ended December 31, 2018, total revenues were $16.6 million, which is a 66% increase over the $10 million generated in the fourth quarter of 2017. US revenue in the fourth quarter was $14.8 million, a robust increase of 77% from the $8.4 million generated during the same period of the prior year. This growth was due to continued market penetration in existing territories, the expansion of our US sales reps in new territories, increased physician and patient awareness of our Inspire systems and a greater number of prior authorization approvals. Our US average selling price remained consistent at $23,300 for both the fourth quarter of 2018 and 2017.

In the fourth quarter, European revenue increased 11% to $1.8 million from $1.6 million in the fourth quarter of 2017. Approximately 85% of the increase was volume driven, primarily by the activation of new sites in Germany and the establishment of reimbursement in The Netherlands, while 15% was attributed to a price increase with the introduction of the new neurostimulator in Europe in the second quarter of 2018. During the fourth quarter, the European average selling price was $21,500, compared to $21,100 during the fourth quarter of 2017.

Our geographic mix of revenue in the quarter was 89% in the US and 11% in Europe, with a slightly greater revenue concentration in the US market as compared to the second and third quarters of 2018.

The gross margin in the fourth quarter was 80.7%, compared to 81.1% in the fourth quarter of 2017. The fourth quarter 2018 gross margin was impacted by an accounting change as our third-party logistic costs are now included in cost of sales. This lowered our gross margin by 100 basis points in the fourth quarter of 2018.

Total operating expenses for the fourth quarter 2018 were $18.3 million, an increase of 53% from $11.9 million in the fourth quarter of 2017. The majority of the operating expense increase was driven by our continued salesforce expansion including sales leadership and sales support functions. The increase in OpEx was also due to increased R&D spending and increased general corporate costs associated with being a public company.

Our net loss for the fourth quarter was $4.8 million compared to a net loss of $4.3 million in the fourth quarter of 2017. The diluted net loss per share for the fourth quarter of 2018 was $0.22 per share. For the full year 2018, our total revenue was $50.6 million, a 77% increase over the $28.6 million of revenue generated in the full year 2017.

The US revenue in 2018 was $44.4 million, and increased 83% over 2017. European revenue in the full year of 2018 was $6.2 million, an increase of 45% over 2017.

As of December 31, 2018, cash, cash equivalents and short-term investments totaled $188.2 million compared to $16.1 million at the end of 2017. This strong cash position reflects the completion of Inspire's IPO in May 2018 and our follow on offering in December of 2018, which in aggregate raised a total of $181.8 million of net proceeds. The weighted average number of shares for the fourth quarter was 21.8 million shares and as of December 31, 2018, there were 23.4 million shares outstanding reflecting the additional shares sold by the company in our follow on offering in December. We anticipate the weighted average number of shares for the first quarter will be approximately 23.5 million.

Turning to guidance for 2019, based on our strong results and our positive outlook, we are expecting our full year 2019 revenue to be in the range of $67 million to $70 million, which represents growth of between 32% and 38% over the full year 2018 revenue. We also anticipate that gross margins for 2019 will be in the range of 79% to 81%.

In summary, we are very pleased with our financial performance in the fourth quarter of 2018 and we are well positioned to make the necessary investments to support our growth objectives in 2019. Barbara, please open up the call for questions. Thank you.

(Operator Instructions) We will take our first question from Richard Newitter. Please go ahead.

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

Thanks, Rich. We have several factors that really play a role in our guidance for 2019. First of all, we had a really strong 2018, which we're very excited about. And we will continue to work our cadence if you will. We will continue to work on prior authorization submissions while in parallel we'll work to expand our coverage policies. And so with that, we've increased our hiring cadence of territory managers, 4 to 5 on a quarterly basis. And increased our number of centers that we plan to add, as we mentioned. So we've also gotten recent news in getting 8 Blue Cross Blue Shield plans coverage since we received the positive assessment on January 7th from Evidence Street. But we know it does take time to find those patients, to make sure we have centers up and running in those coverage policy areas if you will, as well as making sure we have territory managers in those areas as well. As Tim mentioned, it might take 5 to 6 months with getting those policies to really take hold throughout 2019.

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

Fantastic. Thanks, Rich. So the -- Aetna, as you recall, wouldn't prior authorize prior to issuing the positive coverage policy back in July of 2018. And then we had those resubmissions that dominated a lot of the approvals. In fact, a third of our growth in the third quarter of last year was Aetna. And so we track that closely. And so I think Aetna right now, it's a rough number, but it's probably in the lower mid-teens percentage of approvals is what Aetna is today. And that's pretty good because that's a stark increase over the prior year, which was basically zero because Aetna wouldn't do any prior authorization. The good news with Blue Cross Blue Shield is they have been approving, albeit they have been taking patients through second level appeals, even third level appeal which we call the EMR, external medical review. But what these new coverage policies are going to do is significantly reduce the time for those prior authorization approvals. And so the team is working very closely, we also have several consultants working with other Blues regional plans to get those policies written such that in the back half of the year that we could drive down that review cycle time and really have an impact on the year. That's what we pushing for as kind of the key driver, the cadence that we want to implement. But it's really, it comes at about the timing for those Blues plans to write the policies, get them implemented, and get them active with the centers.

(Operator Instructions). We will take our next question from Chris Pasquale with Guggenheim. Please go ahead.

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

Thanks, Chris. The Aetna, once the policy came out, remember it took us a little bit of while with the logistics because they had to update their policy and then they had to update the codes within the policy. And then we needed that to trickle down to the centers. By about the middle of the third quarter, we pretty much had that stabilized and we were able to submit. And the net result of that was a third of our growth in approvals was Aetna cases in the third quarter. We continue to see that cadence happen now. We believe that most of the Aetna cases get approved in on average less than 5 days, because they are all approved at the prior authorization phase and they are not required to go through approval. And we kind of look back at the fourth quarter and estimate that the number of approvals from Aetna make up about 15% of our approvals in the quarter. So it does have a significant impact. We're going to continue to drive that going forward and it's really exciting for Aetna and the Aetna patients. And that policy I think really had a positive influence on Evidence Street, which in turn of course has such influence over all the Blues plans. So it's really putting the wheels in motion and really getting the policy train moving.

Thanks. Then you started to touch on this with the answer to Rich's question, but I think there's a little bit of confusion given that Aetna was not paying for cases at all. So it was kind of going from nothing to something. And some of these other plans were, albeit through a protractive process. Just how incremental these positive coverage decisions really are. Can you spend a minute on how having coverage impacts some of those things like physician engagement, patients' willingness to go to even begin the process and things like that where you're seeing the benefit even though these plans maybe were technically paying for the procedures previously?

Absolutely. Let me answer that a couple different ways. First, let's go to the centers and look at with the physicians. Now our support team does everything we can to streamline the process, but the centers are the ones that really have to submit the prior authorizations. And the physicians are the ones that have to fight for the patients with the insurance companies. So it's really important that this streamlined process is going to make it easier for these physicians and it's going to reduce the fatigue on these physicians. Because working with the patient to go through working with an insurance company to go through 3 levels of appeal, and as we mentioned the time to approval went from 124 days to less than 90 in just one year. And we believe that number 90 is going to significantly reduce again here in 2019. And the benefit from that is going to reduce amount of physician fatigue in dealing with the insurance and prior authorization. That's not what physicians want to do. They want to treat patients. The second part is, even patients themselves, when they come to our website, and if you go to our website and you stay there very long, you're going to see a little chat line pop up and ask if you have any questions in regard to Inspire therapy. And the number one question that we get asked is, does my insurance company cover this? And so it's important to be able to let patients understand that yes, insurance companies will cover this. But as you remember, Rich, we went through some of the cadence of the number of dropouts that we had through the appeal process. And again, that's patient fatigue where it takes so long to get an insurance approval, they are fatigued and they withdraw themselves from the process. And these coverage policies are going to have a significant impact on reducing that dropout rate because patients can now get approved in just a few days. So just like we did with that, now we're going to continue to monitor the impact that these Blues plans will have in the next few quarters. But more importantly, we will also be putting the pressure on other insurance companies to in fact write positive coverage policies.

We will take our next question from Jon Block with Stifel. Please go ahead.

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

Fantastic. There's several questions in there, so let me kind of walk through those in detail. Let's go back a little bit to Evidence Street. And Evidence Street came out with a favorable assessment and when they did their review, they only included the first FDA approval later for Inspire. And you've got to go way back, but our initial approval was for an AHI range of 20 to 65. And subsequently, we had a PMA supplement that lowered that AHI down to 15. Evidence Street didn't incorporate that into their review. So our Kathy Sherwood has been working with Evidence Street to make sure that they have that necessary information. Evidence Street has recognized that and we think that they are going to come back with an update maybe midyear that will get that AHI back down to 15. It was not their intention to just slide to that 20, but they wanted to include the full indication for the FDA. So we expect that that will come back down to 15. The second step on that, what you're seeing with a lot of the Blues policies is they are coming out with a BMI of 32. Now Evidence Street as itself came out and they had a BMI of less than 35. So some the Blues have tightened up the parameters there. And we continue to work with our investigators to look at the data for patients between BMI of 32 and 35. We'll continue to publish data on that. From our standpoint, we're very excited to have these policies and with the BMI of less than 32. That happens to match the BMI that we used during the Star trial, which is the pivotal trial in the New England Journal of Medicine. But since then, we've moved that BMI higher up. It's important to note that the FDA, when they approved Inspire therapy, did not put a BMI limitation on Inspire therapy. So that is something new from the insurance companies. But we will work with each of them and we believe in time we'll be able to expand that and it won't have a significant impact in the short term on the company. The third item in there was the pediatric population. This is something that's very rare that an insurance company actually steps up and writes positive coverage for a population whereby we do not even have FDA approval yet. So we're being very careful with that. We are communicating with the FDA, we do have an ongoing trial of 50 patients at 15 leading children's hospitals in the United States for a pediatric population with Down Syndrome. And what we're very encouraged by is the Blue Cross Blue Shield organization really taking notice and investigating that population and in fact writing positive coverage policy for them. Okay, now I'm shifting over back to your first question on Emblem Health. Emblem Health, they did put the proper AHI range in which is 15 to 65. This initial policy does have a BMI of less than 32, but they did not include the pediatric population, which is just fine. Again, we don't have FDA approval on that to market that therapy yet anyways. So we will continue to work with Emblem to be able to support their population and we'll continue to show them data that it is a viable therapy for patients with a BMI greater than 32.

Okay, you did a much better job of answering that than I did of asking it, so thank you. The second question, just in the K you have varied advertising expenses here was $7.8 million, it was up from $5.5 million last year. But you've got almost $190 million in cash, you're starting to get some of these payers coming onboard. Can you just talk about the outreach and increasing awareness? Are we going to see sort of a methodical increase to advertising expense? Or is that something, Tim, with the balance sheet and the payers coming onboard that you can start to accelerate pretty meaningfully? Thank you.

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

We will take our next question from Lawrence Biegelsen from Wells Fargo. Please go ahead.

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

Absolutely. Thanks, Larry. We did submit it. It was on the agenda. We were working very closely with the American Academy of Otolaryngology, which is the ENT Society and they did submit the application. They did have strong representation at the meeting in Scottsdale to be able to present it. They did have time to discuss it with the AMA Committee meeting members prior to the meeting and there was questions still outstanding of the purpose of the code, the understanding of the code. And then they looked at the statistics and the metrics in the usage of that code as compared to the growth rates projected and discussed by Inspire, and there's a discrepancy in the numbers. Again, I mentioned earlier, we think the key reason is a lot of centers just don't file that code because as a Category III code, there really isn't any payment. So that creates a little bit of a challenge. So Category IIIs in itself create a little bit of problem both with the system as with payments and working to convert those are always difficult. So the AAO proposed that, and we concurred, that the right thing to do is, let's back up again and spend a little bit more time educating and not trying to force this through and having this code rejected because then we have difficulty rebounding and bringing it back through. So they withdrew the code and we'll come back and resubmit it to the AMA. In the meantime, we'll continue to educate the AMA members on the importance of it. From the hospital standpoint, it has no impact on their payment level. Their payment level is all based on the primary code, which is 64568 and the national average Medicare payment this year is $27,700. So it's a good payment level to support not only the device cost, but the capitated cost for performing the procedure. The only person who is affected by this nonvote if you will, or the code not being converted today, is the physician or the surgeon payment. And so they are still being paid their normal surgical fee for 64568, but the Category III code will be slightly delayed again. And we thought that that might increase the payment about $600 to $800 per procedure. Again, it's only the surgeon payment. We don't believe it's going to have a significant impact as the majority of our procedures to date are performed at high academic centers or the large private centers whereby the surgeons are salary based anyways. So we're going to continue to work with the ENT Society, but don't think it's going to have any impact.

Thanks for that. Just curious, when do you plan, you said you're going to resubmit, Tim. When do you plan to resubmit? And then what does the guidance assume about additional payer coverage in 2019, bigger ones like Humana and United? Where are you on those 2? And just lastly, Tim, reimbursement in Japan, how is that going? Remind us again of the timing there. Thanks for taking the questions.

Thank you, Larry. I think I got all those. So there is one more submission left for this cycle. I think there's actually 2, but we won't be ready for the first one. We're going to continue to work with the AEL and we will be ready for I think it's a November submission. I'll have to track that. It may be likely that we're going to wait until the next cycle before we resubmit that. As far as guidance goes, we like our guidance setup using our prior authorization model and as I mentioned, it's going to take 5, 6 months to be able to get these policies active, working through the logistics of the payers and the centers. And we're going to continue to work our cadence to drive more and more positive coverage policies throughout 2019. Kathy has her team along with 3 contractors with assignments to all the individual Blues plans as well as some of the larger plans. So we are in communication with some of our favorites, with United and Cigna and Humana and the other non-Blues large players. And we are working with all parties to make sure that they are educated on the clinical evidence we have published and we continue to publish additional information. So our guidance really isn't driven a lot by assuming more coverage policies are in play, but we are assuming and expecting that we will get more coverage policies this year, which will really have more of an impact in 2020 and beyond. Did I answer all 3 of those questions? What was the third one?

That's it, I'll take it offline.

Japan.

Appreciate it. Yeah, if you didn't mention it upfront in the prepared remarks, otherwise we can take it offline.

Let me comment on Japan. We do have the approval in Japan but that approval was for our original products. And so now what we have, we submitted our regulatory submission to include the new Inspire IV Neurostimulator and the new sensing lead that was just approved by the FDA recently. And we did have an interactive review and questions from PMBA, which is the FDA of Japan. We believe that review is going positively and expect approval sometime this year. And with that, we'd like to do our first implants with the new products. Secondly, we are working in concert with the societies in Japan. There are 3 societies actively working on Inspire, sleep, ENT and cardiovascular. They have formed a committee with the oversight from PMBA, again that's the FDA of Japan, to help launch Inspire and to establish therapy guidelines. Those guidelines have been drafted. We expect to see some of those results in the near future and the submission is twofold. One side is from the company and the other side, I'm talking the regulatory -- I'm sorry, reimbursement submission, are from both sides. And we expect that to be submitted to the MLHW, which is the reimbursement authorities in Japan. And they have also been active. So we do expect to do the first implants, but we're really looking to do a formal launch in 2020.

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

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

Absolutely, Isaac, thank you very much. We do think Aetna had a positive impact. As we mentioned before, a third of our prior authorization growth in the third quarter were from Aetna and those kind of reflect more in fourth quarter implants. And we did have a significant number of approvals in the fourth quarter some of which have been implanted, again going back to our discussion about the patients with high deductible plans working to get their cases done before their high deductibles reset at the beginning of the year. So Aetna is included in our guidance. We do think Aetna is going to continue to have a positive impact going forward. From the Blues standpoint, remember when we talked last, we didn't have evidence until just the beginning of January, and then from there the next step was to be able to work with individual Blues plans to write policies. And by writing those policies, once we get the policies, then we have to work to get them logistically implemented into our organization and active with our implanting centers. So we do think it's going to be, take a little bit of time to make it happen. Now the next key step to this, Isaac, is looking at developing positive coverage policies with some of the key Blues policies in some of our higher implanting territories. And we are working hand in hand with our consultants and with the medical directors in the Blues policies to have these put in place. Once we have those in place, that is going to have a significant impact, but we don't have those yet. And so those patients are still working through the prior authorization process and again, at least our review cycle is less than 90 days now as compared to 124 previously, and I think when we get nearer to later in the year, you're going to see that number significantly reduced. And that's going to be the impact, that's going to be the answer to the question that you're asking. We do think it's going to have a positive impact. Blues policies are not in as part of our guidance right now because we have a lot of work to do to get those implemented and to get additional policies expanded.

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

No. It's very important for us, Isaac, to put out guidance that we have strong confidence in. We know we can grow this business with our prior authorization model and we know we can get those patients approved albeit they have to go through quite an extensive cycle time. And we also don't quite know the impact of the time it's going to take to get those positive coverage policies upfronting and active. As well as additional coverage policies in some of our high implanting areas. So we didn't include a lot of risk in our guidance based on the assumption that we will get those policies in place. Instead, we put forward numbers that we're confident in that we can drive with our prior authorization process.

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

Yeah, we expect to be in the range of 79% to 81%, Isaac. And depending on the acceptance of the sensing lead in the U.S., which initially in Europe it's been strong and been well received, we expect to be at the higher end of that gross margin throughout 2019.

We will take our next question from Kyle Bauser from Daugherty & Company.

Hi, Tim and Rick. Congrats on the quarter. So apologies if you already covered this, but can you talk about the size of the opportunity for the upcoming expanded indication for pediatrics in Down Syndrome in terms of prevalence and instance? And also, talk about your market development efforts and if they will be modified for these cohorts at all. Can you leverage the same physician call points? Will direct to consumer efforts be modified, etc.?

Great question. Tricky to answer. We are doing our assessment of how large that population is. We think it might be 100,000.

Between -- from a dollar standpoint with our ASP, Kyle, we estimate, the market is wide, but between $100 million to $200 million additional market opportunities beyond our $10 billion market opportunities that exist now.

Let me comment on that. So those are preliminary market numbers we're just putting out. It's a different dynamic with this population in that unfortunately, these kids have a hard time. They just can't use CPAP. So the compliance rates with CPAP is very, very low. And we also have a very organized group with the parents of these pediatric cases. So I think the market or our ability to communicate with this population is going to be quite different. And it's not going to be just like the adult population. So we will continue to develop that. Right now, we are still in a clinical study. We are developing 15 leading children's hospitals to do these clinical studies. What's important about this clinical activity, it is actually developing an installed base to be able to take care of these kids once the therapy is approved by the FDA. And what's really encouraging is that Blue Cross Blue Shield has already written it in as part of their Evidence Street guidelines and several of the policies have already picked up coverage for this population. So it's not as large of a population at all compared to the adult untreated obstructed sleep apnea market, but it's a very important population and one of those why we do what we do reasons. But as we get closer to working with the FDA and looking at the timing of such said approval, we will be doing a lot more work on the whole market size and what we do to make our investments accordingly into that market and how do we communicate with the parents of this population who are very well organized as are the pediatric ENTs that are those that kind of serve that population.

Thanks, that's helpful. Then regarding the Inspire app that you're developing which we'll be able to communicate with the system via Bluetooth and then allow you to view the data in the cloud, you talked about how you will be able to see trends between hospitals to find out which ones are doing really well. Can you kind of quantify how you'll measure the success? Of course, the average nightly use time of the system seems like it would be a good obvious metric, but I'm curious what sort of other performance metrics from the app we might be able to capture to identify these high performing centers?

I think our engineers are jumping up and down that you asked that question. Thank you. It's an important initiative to us that we have launched Inspire Cloud, as you know. It is our cloud based patient management system. Right now, the only input into the Inspire Cloud is from the physician and from the physician programmer. And what we're doing is we're just starting that platform and now we're going to start developing tools to be able to add additional information into the Inspire Cloud, which is going to ease the physicians' ability to really manage their patients. One key step on that as you mentioned is we are currently developing the Inspire app which will be on a patient's cellphone and they can track their own progress and they can see what their therapy goals are and how they are responding to those goals. And the next step after that is to be able to interface that device with Inspire Cloud and be able to have physicians see real time how their patients are doing by uploading that data to the cloud and having the physician be able to see how his one patient is doing or how all of their patients are doing. And more importantly, they can identify and see a broader group of patients and see how their patients are comparing to other therapy, other patients. And what it's all about is really driving patient outcomes. We like to say around here that we are outcome obsessed. And we really want to keep driving outcomes and make sure that we drive consistent positive outcomes and continue to improve. Inspire Cloud and this app is just one more tool to be able to track and follow the progress of our patients.

We will take our next question from (inaudible).

Hi, Tim. Hi, Rick. Can you guys hear me okay? Thanks for taking the call. Just a couple of questions. One on the guidance, just you spoke about this compression of time to approval and then you also kind of mentioned this concept of patient fatigue. I'm just curious, with some of these payer conversions, are you able to maybe reengage some of those patients and get them reenergized for this? And how does that factor in if at all for the guidance for 2019? Then maybe just my last follow-up would be, just on the sensing lead, could you just help us understand, is this something that makes it -- I understand the kind of lower profile makes it more comfortable for the patient, but is it something that it's able to reduce OR times or kind of inefficiencies in the procedure itself?

Certainly. First off, on your first question, really Aetna is kind of the example. Now Aetna is a little bit more of an example in that Aetna didn't previously prior authorize. So in the third quarter we had a bolus of new resubmissions from Aetna patients which in fact were approved and that did have impact on revenue and it's great that we are able get those patients implanted and that's wonderful for the Aetna patients and wonderful that they were able to get the therapy. And we do think to a lesser extent it's going to have an impact on the Blues because remember, the Blues were approving, and I used to always talk about 2 numbers and the other number being, if we could get patients all the way through the process, we could get 74% of them approved. But our overall net approval rate was only 55%. The gap is the patient fatigue or the patients that drop out. As we develop positive coverage policies with every payer, that gap is going to be minimized because we're going to reduce patient fatigue because the majority of patients will be approved in very short order to you used the term compression of time which is exactly what we're looking for. We want that 90 days to approval to continue to go down and make it easier for patients to get the therapy. Your second question on the 4340 sensing lead, which previously launched in 2018 in Europe and then we just launched it in just a few centers of far in the United States and we'll be expanding that in the next month, it is a lower profile product. The stimulation lead, the stimulation lead body, or the wire if you will, we use that same design in the new sensor and gives us the low profile that would also provide us with operational efficiencies. So we think that's a twofold. So it's smaller, it's more comfortable. There's -- we'll show you pictures, there's a presentation that's going to be uploaded on our website you can download, there will be a picture or it, that shows areas of blue, actually dyed areas where physicians can handle the lead. So we think it's going to make it easier for the physician to implant and thereby will reduce OR time slightly, but really be a more robust product going forward. So feedback from Europe has been very strong and we're very encouraged by getting it started here in the United States. But let me summarize this. Thanks, everybody, for your questions. Just one closing comment. We remain very pleased with the robust pace of growth we are demonstrating in our business while maintaining high quality and strong patient outcomes. Importantly, market demand continues to grow for our innovative and effective solution for patients with obstructed sleep apnea who are unable to successfully use CPAP. I remain grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, continued motivation to achieve strong and consistent patient outcomes. The Inspire team's commitment to patients is unmatched. Thank you all for joining the call today. We certainly appreciate your continued interest in Inspire and look forward to providing you with further updates throughout 2019.

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