Inspire Medical Systems Inc (INSP) 2022 Q3 法說會逐字稿

Good afternoon. My name is Dillen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems Third Quarter 2022 Conference Call. (Operator Instructions)

I'll now hand the conference over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference.

Thank you, Dillen, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the 3 and 9 months ended September 30, 2022. A copy of the press release is available on our website. On this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including, without limitation, those relating to our operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2022 financial and operational outlook and improvements in market access are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. Please see our filings with the Securities and Exchange Commission, including our 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 speaks only as of the live broadcast today, November 1, 2022. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Thank you, Ezgi, and thanks, everyone, for joining our business update call for the third quarter of 2022. We are excited to again report on a very strong quarter with significant progress across all elements of our business. As always, and right up front, we again reiterate our commitment to patient outcomes to ensure that each patient has the best possible experience with Inspire therapy.

During today's call, we will highlight many key accomplishments that demonstrate our ongoing focus to the patients, including improvements in access to therapy, technology advancements introduced and in development and planned activities to broaden the population that can benefit from Inspire.

With that, let's review our results. In the third quarter, we generated revenue of $109.2 million, representing a 77% increase compared to the third quarter of 2021. We remain confident in the outlook of our business for the remainder of 2022, and therefore, we are increasing our full year revenue guidance to a range of $384 million to $388 million from our previous guidance of $354 million to $362 million. This guidance represents an increase of 65% to 66% over full year 2021 revenue of $233 million.

Our growth continues to focus on and is driven by utilization improvements at existing sites as well as the activation of new centers. We will continue this balanced approach to growth and highlight that in the third quarter, utilization improved significantly at existing centers and was the leading factor in growth during the quarter. We further increased our capacity by adding 59 new implanting centers, ending the period with a total of 844 centers. At the end of the third quarter, ambulatory surgical centers made up 23% of our U.S. centers. We will continue to monitor and ensure that the field team is focused on accounts that can provide the greatest benefit to the patients moving forward, and we continue to expect to add between 52 and 56 centers in the fourth quarter.

Regarding the U.S. sales team, we created 18 new sales territories in the third quarter, bringing our total to 209. For the fourth quarter, we continue to expect to add 11 to 12 new territories. We also increased the number of field clinical representatives by adding 9, ending the third quarter with 109.

During the remainder of the year, we will continue to scale our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. This builds upon the changes that were implemented in the first quarter when we expanded our U.S. sales leadership team, which now includes 32 regional managers, an increase of 2 as compared to the second quarter and 8 Area Vice Presidents. We expect increased productivity from the team, resulting in additional Inspire procedures while maintaining and improving patient outcomes.

Paramount to this is improving our ability to assist interested patients with making a connection with a qualified healthcare provider. Importantly, our outreach programs continue to be very effective in generating interest in Inspire therapy primarily through the inspiresleep.com website.

For the first 9 months of the year, the number of visitors to our website was over $10 million, an increase of 98% year-over-year. And from these visits, we had approximately 60,000 physician contacts. Of note, these physician context represent calls and e-mails to our Advisor Care Program or directly to a physician's office and do not include participation in community health talks or referrals directly from a patient's healthcare provider.

In the third quarter, we refined our national television advertising campaign to improve reach in a more efficient manner. Through our ACP, we closely monitor the success rates of connecting patients with health care providers and are continuing to develop and implement technology advancements to further streamline this process.

From the U.S. reimbursement perspective, we do not expect any major changes when the final OPPS rules are released today. The most pressing topic was the addition of a Level 6 neuro APC or Ambulatory Procedure Code, which was proposed to be implemented back in July. But if this were reversed, we would expect that Inspire would be included as part of this new APC.

From a site of service or physician reimbursement, we had very little change from the July proposed rule and do not expect any material changes when the final rule is released.

Moving on. Our international business continues to make strides. Although during the quarter, we experienced a 14% decrease in revenue from the third quarter of 2021, driven largely by unfavorable exchange rates. During the quarter, international revenue was less than 3% of global revenue, reflecting the significant growth in the U.S. market. There are many positives in our international business and I'd like to start by highlighting France. Following many years working with the French authorities, we have been approved for country-wide reimbursement at rates consistent with those established in other countries around the world. Therefore, we are in the final process to have Inspire listed on the French registry as early as the beginning of 2023, and the team is preparing for commercial launch in that country.

In Singapore, we are building momentum with additional procedures that are flagship centers which are on track to become regional centers of excellence. The adoption in Japan remains slow, but we are energized by the recent activity primarily with the scheduling of procedures at new sites. Further, we have hired a full-time country manager in Japan to oversee activities and support the growth of awareness and adoption of Inspire therapy.

Turning to R&D. We are very excited about our new Bluetooth-enabled patient remote, which we recently launched. This new remote is a key part of our next generation -- of our next-generation Inspire digital platform branded SleepSync, which enables remote therapeutic monitoring due to the new patient remote and a web-based patient management portal. Please note that we previously described the SleepSync as Inspire Cloud. We expect the SleepSync Digital Health platform will become an important tool for physicians to monitor patient experiences and outcomes. Before year-end, we plan to submit our upgraded physician programmer for FDA review. This new programmer connects with SleepSync and is key to the next step of providing remote patient programming.

Also in the third quarter, we began the commercial launch of our new silicone-based stimulation and sensing leads, which provide improved manufacturability, easier system implantation, increased long-term performance and enhanced reliability. Longer term, we continue to work on the design of our fifth generation Inspire neurostimulator. The Inspire device will eliminate the pressure sensor and incorporate sensing inside the neurostimulator using an accelerometer to measure respiration. We have strong confidence with the current design and are moving into qualification testing and continue to target FDA approval in late 2023.

Finally, we continue to conduct research and clinical trials to increase the number of patients who can benefit from Inspire therapy. To this end, 2 key regulatory submissions were sent to the FDA to expand the Inspire indication. First, we submitted a request to approve Inspire for the pediatric population with Down's Syndrome. We have been working with the physician for quite some time to collect sufficient clinical evidence to support approval for this important group of kids.

The second request is to increase the upper limit of our indication to include patients who have an apnea-hypopnic index of up to 100 events per hour. The current indication is approved for patients with an AHI of up to 65 events per hour. In this same submission, we also requested approval to modify the warning for patients with a body mass index of up to 32. And with our current data, we submitted a request to the FDA to increase the BMI warning to patients with a BMI of up to 40.

With this second submission, the FDA provided a breakthrough device designation thereby reducing expected review time. In summary, we continue to experience significant momentum in all key aspects of our business. And our focus on patient outcomes and physician education to support our confidence in the continued growth of Inspire. Our core focus for 2022 remains increasing utilization at our existing centers as well as increasing capacity by opening and training new centers. The continued expansion of our call center and investment in our DTC campaign support these initiatives.

Finally, the many R&D achievements during the first 9 months of the year highlight our commitment to improving patient outcomes and enhancing both the patients and healthcare providers experience with Inspire therapy. We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term shareholder value.

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

Thank you, Tim, and good afternoon, everyone. Total revenue for the third quarter of 2022 was $109.2 million, a 77% increase from the $61.7 million generated in the third quarter of 2021. On a sequential basis, revenue grew 19% compared to $91.4 million in the second quarter of 2022. U.S. revenue in the third quarter was $106.3 million, an increase of 82% from the $58.3 million in the prior year period. The growth in the U.S. reflects several factors including higher utilization at existing centers, the addition of new implanting centers, expanded direct-to-consumer marketing and a higher number of territory managers.

On a constant currency basis, outside the U.S. revenue declined 2% year-over-year. While on a reported basis, revenue decreased 14% from the prior year period to $2.9 million due primarily to a 12% reduction in foreign currency exchange rates. The U.S. average selling price in the third quarter was 24,400 compared to 23,900 in the prior year period. The increase reflects our price uplift that began in May. We expect U.S. ASP to steadily climb throughout the remainder of 2022 and into 2023. As the price increase is implemented with our various hospital systems, we expect the U.S. ASP to approach 24,900.

The ASP outside the U.S. was 20,500 during the quarter compared to 23,500 in the third quarter of 2021, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the third quarter decreased to 81.9% compared to 86% in the prior year period primarily due to inventory obsolescence charges and higher costs of certain component parts. As we previewed on our second quarter call, the introduction of the new silicone leads and the new Bluetooth-enabled patient remote resulted in an inventory obsolescence charge of $2.8 million, which we booked fully in the third quarter. We do not anticipate additional inventory charges related to these new product introductions and therefore, expect gross margin in the fourth quarter to be higher than the third quarter, though still impacted by higher cost of certain component parts.

For the full year, we continue to expect gross margin between 83% to 85%. Longer term, we expect gross margin to return to prior guidance levels of about 85%. Total operating expenses for the third quarter were $106.6 million, an increase of 70% as compared to $62.9 million in the third quarter of 2021. This increase was due to the expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued growth and to make investments in key areas of our business.

Net loss for the third quarter was $16.8 million compared to $10.3 million in the prior year period. The net loss per share for the third quarter was $0.60 compared to the net loss per share of $0.38 in the third quarter of 2021. The weighted average number of shares outstanding for the third quarter was [28.2 million]. We anticipate that the weighted average number of shares for the fourth quarter will be approximately [28.9 million].

Moving to the balance sheet. We ended the quarter with cash and investments totaling $428 million. During the quarter, we completed an equity offering with net proceeds of $244 million and paid off our $20 million of outstanding debt. As of September 30, we had no remaining debt. This strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers and training and opening new implanting centers.

In conclusion, our strong performance and recent implant trends provide us with confidence in the outlook for the remainder of the year. With that, our prepared remarks are concluded. Dillen, you may now open the line for questions.

(Operator Instructions) And I show our first question comes from the line of Travis Steed from Bank of America.

Congrats on a great quarter again. I guess looking ahead, maybe just to talk about puts and takes on 2023 would be helpful at this point. If 50 to 60 new centers add per quarter, is the right way to think about it, and we should see continued increases in utilization as well. I know the Street at 35% revenue growth right now. And just curious if that's a place you're comfortable with at this point as well.

Travis. I think, next year, we're still -- while we're still worrying about Q4 right now. But looking forward, I think that Q1, of course, we'll expect our normal seasonality. The good news is we shouldn't see COVID this year. So we're encouraged by that. But yes, we still with the high deductible insurance plans in the fourth quarter, we always expect the normal seasonality as we move into Q1. We'll continue to drive utilization. We think we have further upside there. Just we need to continue to work capacity and efficiencies and help the patients flow through the centers, but we need to continue to keep adding additional centers too. So we'll keep that balanced growth from that standpoint. We'll continue to add territory managers in line with the cadence for which we've been running for many years now. And the exciting news is we'll continue with our improvements in product development and releasing new technologies, specifically around the SleepSync system.

Okay. That's fair. Any comment on where the Street is at today would be helpful as well. Just a follow up to that. And then I had a question on OpEx, which has been growing roughly in line with revenue growth. Just I guess the question is can you keep spending at this level? And why not as we move forward, we'll start to see a little bit of divergence between revenue growth and OpEx and a little bit better operating margins.

Absolutely. We'll get into the Q1 annual revenue plan at a later date. But getting into the OpEx, R&D was high in the quarter because we had several very key accomplishments, primarily with the silicon-based needs, with the new remote and as well as progress with the Inspire 5 device moving into qualification and more of a timing and some of the R&D charges. So we think we'll be able to manage that moving forward. But again, we had a great quarter with significant accomplishments with the R&D line.

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

Great. Tim, maybe just help us out a lot of good detail in the press release sort of around your initiatives to expand the market, but can you just give a little bit more granular on the next steps on the move from the BMI, call it, up to 40 in any timing with the FDA? And then I'm just also curious, any feedback from the industry, the industry response and the want to move the BMI from 32 to 48, are you hearing any feedback from the ENT is going down that road? And then I've just got a shorter follow-up.

Absolutely. I think the primary -- or the first submission with the pediatric population with Down's Syndrome has been long coming. As we discussed before, we wanted to work with the FDA and the physicians to get a broader indication, but we don't think that's fair for that population. And we did have the evidence to be able to support that. Credit goes off to Mass Eye and Ear for their persistence and collecting this clinical evidence that has gone to the FDA. So we're very excited about being able to help the kids.

The AHI is a good win, right? Because patients with AHI above 65 up to 100 really don't have any other options. And we would try to work with those patients to try and get a prior authorization approval off label, but that's always up to the scrutiny of the insurance payers. And certainly, it's a problem with Medicare. So we think that's going to be a very streamlined, straightforward approach.

Going to BMI, we'll be a little bit careful with that. Now remember, that's not an indication that's only a warning. And for a patient with a higher BMI, they still cannot present with complete concentric collapse at the level of the South pallet. And we use our sleep endoscopy to be able to conduct that. So we will work with the ENTs to continue to make sure that they screen those patients. And I think to your point a little bit, we don't want to just blind to send every high BMI patient through -- we'll be very careful about managing that. But it certainly does open the door to expand the coverage with Medicare as with the commercial payers to get above a BMI of 32 or BMI of 35.

Understood. Very helpful. And then to shift gears, Rick, for you, I'm guessing someone's going to ask this, so let me take a shot. The 4Q -- or the guidance, pardon me, for 4Q implies sort of mid-single-digit to high single-digit sequential growth. Just looking back historically and throwing out 2020, you're usually mid-20s percent 3Q to 4Q. Just help us out here, just a function of typical Inspire conservatism? Or is there anything to call out of what you may have seen exiting 3Q or into the month of October that gives you a little bit more pause.

Really no pause, Jon. I mean we haven't changed our guidance strategy. We're excited about the future of continuing to focus on increasing utilization at existing centers and adding new centers and as well as the other drivers we talked about, we've tried to improve our conversion with ACP and various initiatives that we are implementing there. So we're excited at the opportunity, but we always put forth guidance that we can stand behind.

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

Congrats on a nice quarter. Maybe to start, this -- going back on my math, it looks like your best quarter of units per rep, utilization per center clearly, all the trends are moving in the right direction. But I was wondering if you could put a finer point on what you're seeing on the ground. Is this across the board? Are you seeing utilization picking up at most of the centers? Is it just limited to a handful of centers that's moving the needle? Just sort of the -- how it fills out across the user base would be helpful.

Yes, I don't think any single digit number of centers would ever be able to move the dial that we're seeing. It's an across-the-board focus and it's multifactorial. I think the -- going back to the 2 incision, going back to the new CPT code with stable reimbursement, consistent payment levels and allowing surgeons to dedicate more of their time to be able to provide Inspire implant is what's really driving the utilization. We've always had the patience through our outreach programs, but we did not have the ability to take care of all those patients with the capacity that we had.

We're at the point now where we're able to set expectations with these newer centers and kind of go back and look at all the centers that we've opened over the last 2, 3 years, with the expectations of being productive accounts and doing multiple cases in a month because that's what drives proficiency and it also drives improved patient outcomes because the whole practice is more efficient in managing the patients, being able to notice any kind of changes in programming techniques and just making -- just improving the proficiency of the process.

So it's been a long-term initiative. It's not a step function increase. This utilization has been stepping up from Q1 to Q2 to Q3, and we're going to continue to focus on patient flows with the centers and continue to add OR block time and overall capacity.

Great. Maybe a follow-up to that. You've now annualized the big CPAP recall or at least the start of it you've had, what, 10 months now of your national advertising program, how much of a durable tailwind do you think this is? Do you think the interest will continue to grow over this time? And any kind of metrics you could put on how well the national advertising program has paid back for you and if any way to size the benefit of the CPAP recall.

Yes. Again, we're going to be consistent with what we said about the CPAP recalls. We don't think it has a significant impact. We know there's patients that are coming through the pipeline that have been affected by that. But we don't think it's a key tailwind or future headwind for our business. We know that there is a significant amount of patients who are simply unable to benefit from CPAP and who are coming through the outreach program and coming through the Advisor Care Program and looking for Inspire. So we think that's really important.

I think from the beginning of the year when we started the national television campaign, we saw a real strong bolus of interest because the beginning of the year, we are out in every market in the United States, and that's a lot of markets that haven't seen any messaging from Inspire in the past.

Since then, we go to a rotational program in various regions still nationally. But most recently, we're starting to go to a more advanced count that we're going to higher level programming. As an example, you may see us on the Today Show, on Good Morning America, on sporting events. And that becomes a little bit more efficient in being able to get our messages out and get patients to our website. And then finally, to improve capacity, it's all about SleepSync in improving our tools to allow physicians to manage more patients efficiently. So it's a combination of all the programs that's really showing the return and what gives us optimism going forward.

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

Tim and Rick, I'll echo my congratulations on another really, really strong quarter here. Tim, I guess I'd love to get your latest thoughts on the ApneaMed data we saw this quarter. I know it's early, but I'd love to hear your views of what we should be -- what you think about that?

Absolutely. It's kind of difficult to interpret because the data that was released really wasn't too extensive. It was just kind of high level feedback, just talking about the primary outcomes, but it did appear that they had some success in certain populations. And we're not quite sure what the Venn diagram intersection is between indicated patients for a future ApneaMed versus where Inspire is. So we're confident that in the end, a pharmaceutical to treat sleep apnea will really be a positive for us. I think we need to kind of highlight that it's still many, many years before the final indication will be identified and certainly before any kind of pharmaceutical solution would be approved by the FDA. But we think it's more to the mild to slightly moderate that would be -- tend to be more complementary to Inspire, which is more moderate to severe patients. But again, it's encouraging for the overall field. It's encouraging for the sleep apnea patients. I think it will create an extensive amount of awareness for which we will be there to be able to take care of the patients who are looking for and indicated for Inspire.

And just a quick -- one quick one for me. On the last call, when I asked about the AHI and the BMI increase, you said it would increase the total market by about 20%. I don't think Down's was included in that. But is that still how you're thinking about those 3 indications increasing the total addressable market by about 20%.

I think so. But that, again, is our target. Our TAM or target market, and that is such a large number. It really gets down to how do we reach those patients, how do we build capacity to serve that population. But it certainly is an expansion right along the lines that you highlight there, Larry.

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

Congrats on the nice quarter. I wanted to start off by asking about ASCs. And if I heard correctly, I think you said 23% of your U.S. centers are now ASCs. Do you have a procedure volume mix that you can share between the 2 different settings of care. Curious if you're seeing better throughput in 1 setting versus the other? And then just as we look ahead, how do we think about where the ASC mix could go in the future, both number of centers and volumes?

Absolutely. I think the number of ASCs was really a good avenue during the COVID challenged time frame for physicians to open up an additional site of service to be able to take care of the patients because they can control the scheduling, they're a little bit better and provides another level of flexibility. And again, goes to the opportunity to increase capacity at centers. So there is some flexibility in the scheduling there. Don't have the exact number of procedure mix that are conducted in the ASCs versus a hospital setting or outpatient part of a hospital session, but I think it's probably slightly less than the 23% of our overall number of centers.

Got it. And then I guess just as you look ahead, Tim, any color on kind of how that mix could evolve? And then I had one quick follow-up.

Absolutely. We did get the final reimbursement numbers that were published right during our call. And the good news for us is the ASC payment, the national average Medicare payment was increased to over 25,000. And last year, it was below 25,000, like 24,800. So that's a little bit of positive momentum from that standpoint. And hospital payment is just down less than $100 or less than several hundred dollars. So really good news from a reimbursement standpoint. By the way, they did not publish a new Level 6 APC. But I think, overall, the reimbursement is becoming such that it is going to be acceptable for ASCs to be able to provide the therapy, especially when you look at the commercial Medicare mix, and so it's just -- it continues to open a door for us to add more ASCs.

And in the future, I think it will be the appropriate place to do the Inspire procedure, especially when we go to Inspire 5 when we're tacking body eliminate one of the needs, the sensing need and incorporating that inside the can. So I think it will be an ongoing trend for years to come.

Very helpful, Tim. And it's actually a nice segue into the follow-up. Just on the Gen 5 stimulator. I think I heard you say it's still tracking to late '23. I was hoping you could just kind of flesh out in a little bit more detail exactly where that system is. Today, what's needed to do prior to submission and just kind of how to think a little bit more about timelines in granular detail.

Absolutely. We have to complete the qualification testing. The production qual, so we have a lot of testing to do. We have to complete all the productive test equipment and have that all validated and have the entire package ready to go to the FDA and the FDA gets a significant amount of time to review this package, especially being a Class III active implantable medical device. So we come a lot very good. It's going to be tight to get this package submitted in the beginning of the year to target the approval late in 2023, but we're still working very diligently to be able to do that, but we do -- we're confident in the current design, but we have to do all the proper steps to make sure that qualification testing is all completed correctly, properly and documented and then package and sent to the FDA for their review.

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

[I want to] see it from your numbers, but I'm curious to what extent you're running into any issues with staffing at hospitals or physicians' (technical difficulty) it's something we hear a lot about on your peers' calls but not yours. Could center productivity be even better than we're seeing in staffing was better? Or have you just figured out ways to work around it without really riding the business back?

Well, a couple of things. We certainly -- one of our staffing challenges is having people at the office directly accept phone calls from an Advisor Care program, right? The ENT office just don't have people sitting there answering the phones. So we're looking at developing techniques and technologies to improve our connection with ENT offices. That's probably our biggest staffing challenges. Hospitals, ASCs have staffing challenges. There's no question about it. The good news is, as you know, we have line effect to our patients. We're scheduling out probably 4, 5 weeks in advance. So we're just a little ahead of the game to be able to get our case schedule and to be able to take advantage of the open block times when we have them.

The second advantage we have is if a physician has 2 cases scheduled in a day with the reduced OR time they can oftentimes kind of add in a third case in that same day. So we just have different levels of flexibility to be able to improve the utilization. But as I mentioned before, capacity continues to be our lit manufacture and we need more OR time. We're working with the ENTs to get that. And we're also looking at opening additional centers and one of the avenues is to continue to open ASCs that give the ENTs an additional side of service. But you're correct, no, we don't specifically cite OR staffing as an issue.

That's helpful. And then the guidance for this year called for a ratio of center ads to rep hires of about 5:1. So far, you're running at closer to 3:1. Just curious why that's been a little different than you thought? Is it a function of just opportunistic hiring and you're seeing a lot of great candidates to add to the sales force? Or were you expecting to add more sites than you have so far?

I guess it's a combination thereof. It is being opportunistic and planning forward. But with that, we've been able to increase the utilization at existing sites, such that we can purposely lower the number of centers that each individual territory manager manages and allowing them to become more productive. And then as we did the price increase, remember last quarter, we were slightly in the midrange for opening new centers. And I think that was maybe a little bit of an effect on it. But for the most part, it's just being opportunistic and forward planning.

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

Congrats on another great quarter. I wanted to focus a little bit on the P&L. Your R&D came in a bit higher than we modeled. SG&A was a such lower and on the margin as a percentage of sales as well. So just how should we think of these 2 items going forward? Should we think of R&D staying at elevated levels? I know you have a lot going on with your Gen 5 and remote patient monitoring into next year. And then I have a follow-up on gross margin.

Yes. I think R&D is a little bit of a timing in the third quarter because we completed several projects. But that being said, we have a lot of activity with the whole SleepSync digital system that's going to really help utilization down the road. The Inspire V is right in the middle of the qualification testing, and we're building up all the qualification units or it is an expensive time of that overall project.

So it's going to stay a little bit higher right now, but it's important to -- for the future prospects with the patient. So we're going to continue that activity. And then gross margin, as Rick talked about earlier, we did the write-off of the excess inventory from the silicon base leads and the Bluetooth remote.

Okay. I guess before you need the gross margin, though, on the SG&A side, I mean, you generated a little more leverage, I think, than usual there. Our lowest margin with the exception of 4Q '21 that I can see for SG&A. So do we just kind of think of R&D remaining a bit elevated and you're starting to get some leverage on SG&A? Or should R&D remain elevated and SG&A comes back? And then I do have a follow-up on the gross margin.

Yes. Rich, it's Rick. Yes, we have demonstrated some improvement in leverage, but we're not really focused on profitability. We know it's important. But I would maintain -- we will continue those investment levels for R&D going forward, but we will continue to get some improvement on the SG&A line as we continue to expand our commercialization because we're so early in those efforts. We want to focus on the top line.

Okay. Great. And then just on gross margin. Rick, just could you comment a little bit on the supply chain and what you may be having to do in the spot market or your chip component parts? How much safety stock do you guys carry on hand? Is this the right level? And when you talk about returning to 85% gross margin as you move into 2023 or eventually, what's being contemplated in there, if anything, for potential supply chain disruption?

Right. So we talked about this in our Q2 call that we would, potentially sometime in the second half of the year, have some obsolescence charges with the introduction of our new products. And that occurred in the third quarter. We don't expect to have additional charges in the fourth quarter. And so the money charge was about 260 basis points. But in addition, there are some higher prices for other components. But also we're trying to have a larger number of days of inventory on hand. It's challenges, but we're continuing to fight through it, and our team -- they're monitoring it closely and managing the issues on a daily basis.

So with that said, gross margin will be higher in the fourth quarter. And we're still sticking with our guidance of 83% to 85% for the full year. And then that, coupled with the continued increase in our ASP from our price uplift, that longer term, we expect to be around 85%.

And I show our next question comes from the line of Phil Coover from Goldman Sachs.

A few cleanup items, if I could. I didn't hear much about the MRI compatible approval that happened early in the quarter. I know backlog kind of lead times for patients are a little bit extended right now. But is that something you heard feedback on from the sales force and kind of what's the early indication of the benefit that you're going to see there?

Yes. Thanks for bringing that up. Great success for the team to be able to get the full body MRI really puts ease of mind to the patients concerned about having a future MRI. And I think it's probably still pretty early in that the timing it takes for us to schedule the cases is such that those patients will be just coming through in the near future. But very, very promising, and we're doing additional work even expand that further. We'll certainly be inclusive with Inspire V when that is approved, but very important approval and does really help patients and patient flow.

That's really helpful. And any kind of line of sight or quantification of the amount of patients that are going to be coming through relatively short order? Is that a noticeable impact on 4Q? Or is it kind of a longer-term.

I think it's a longer term to really have a big impact because the significant number of patients we have in the pipeline through our direct-to-consumer approach. So it's hard to kind of distinguish specifically which ones were holding back because of MRI, but it's certainly a positive going forward.

Okay. That's helpful. Not too much discussion on the international side. I know that currency is a headwind, but it looks like implants might have been down a little bit as well. Just any comments on Western Europe, anything onetime or vacation. I know it was talked about a lot at the end of 2Q. Anything you call out in Western Europe or the commercial efforts internationally?

No. I mean, in the first quarter, we did have COVID hit us pretty strong in the first quarter. We saw a good rebound in the second quarter to cover a lot of the first quarter cases. Third quarter always has a European vacation. I think Europe probably has it right more than the U.S. So there's always a seasoned seasonality with that. I think the key is in Germany, we did have new guidelines come out in regards to where oral appliances are between CPAP and Inspire and our teams kind of working with the physicians to be able to get the proper documentation in place to be able to take that out. But I think Germany is still doing very, very well. It still makes up the bulk of our business. But we're seeing really good activities in the Netherlands. We're opening up additional centers. As we've mentioned, France is a highlight with their new reimbursement. We've opened up the U.K. and are training additional centers there. And then not to mention Switzerland, Austria and just a lot of strong activity there.

So the German situation sounds more like a potential deferral kind of air pocket situation with the oral appliances. Is that fair?

Exactly. Those patients are still there. We know oral appliance indication does not match Inspire. Inspire treats the -- again, the moderate to severe. And that's not a group that can be treated with oral appliances. So again, it just takes time to be able to work through the documentation. But again, I don't think Germany was off that much anyway, but that's one of the challenges that we have to work with all of our sites there.

And I show our last question comes from the line of Suraj Kalia from Oppenheimer.

Congrats on a great quarter. Tim, you mentioned out of the new sites and paraphrasing here, you are all pushing to have them do multiple cases per month. Tim, maybe if you could characterize the 844 overall installed base, what percent of those are currently doing multiple cases per month?

That's a really good question. We don't have the specific numbers in front of us, but we know that the top quartile, those are the centers that are doing 100 implants per year. The next quarter is those that are doing, probably, about 2 per month. So hard to kind of argue how many of those, but in the area of you could just kind of call them quadrants, right? And are half of them being productive and the other half on their way there.

Got it. Tim, in terms of DTC, I know I had asked this question many quarters ago. I'd love to get your perspective now. How do you all now define the ROI of your DTC effort in a given region. And specifically, I'm also trying to look, are there any regions where there is demonstrated self sustainment in that region, i.e. you don't need to do any advertising or target that region. It's a well-oiled machine and it's on its own.

Yes, we do have examples of that because as we continue to grow their brand, and really tie in with all the sleep physicians to be in partnership with the ENTs and we start to get more of a natural physician referral. There are certain areas that do demonstrate that. That being said, Suraj, we still do national TV. So it's really kind of hard to isolate specific areas to be able to do that evaluation. But we do know that's an important part.

The other side of direct to consumer is patients may see an ad, they will come to the website. They will be educated but they won't necessarily go through the Advisor Care Program because they want to speak to their doctor first. And so there is a lot of patients that will indirectly come through the branding and be able to be part of a direct referral from a physician or from a sleep physician, even private practice.

So I think you'll see that trend continue to change. We're very happy with the return. We know it's driving flow to the website. We know it's influencing patients. It's also influencing private practice physicians in their education of Inspire and the awareness of the brand and it's influencing sleep physicians because that's such an important part of our business going forward.

Tim, are there any staffing issues specifically on the sleep lab side of the equation that you could talk about?

Thank you, Suraj, and thank you for asking that question. Yes, there is. And the key is we need to develop tools to make it easier for the sleep physicians to manage more patients that, by definition, is what we brand SleepSync. And this is the patient portal that allows them to be able to work remotely with patients because the new remote allows us to upload data from the implant, product implant, remote via the patient's smartphone to the SleepSync system, and we are working towards getting to remote patient programming to really make it more efficient for a sleep physician to be able to manage more patients. And then finally, we partner with 2 of our minority investments, Ognomy, EnsoData. And these are players that help build efficiencies with sleep because not only do we need to work capacity with the ENTs, but we also need to work efficiencies with the sleep physicians.

Thank you. I show no further questions in the queue at this time. This concludes the Q&A session for the conference. I'd now like to turn it back to Tim for any closing remarks.

Just one last final comment. We want to thank you all for joining the call today. As always, we're grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work and continued motivation to achieve success in consistent patient outcomes. The Inspire team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts as we remain focused on further expanding our business in the U.S., Europe and Asia. For all of you on the call, we appreciate your continued interest and support of Inspire and look forward to providing you with further updates in the months ahead. Please stay safe and healthy. Thank you very much.

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