Inspire Medical Systems, Inc. (INSP) Earnings

Management highlights

- Coding and Reimbursement Update * Short-term: New C codes for INSPIRE V are now in place, with hospital and ASC reimbursement rates unchanged. The C codes have been adopted into the WISER system for the six applicable states, reducing coding uncertainty. Only two Medicare Administrative Contractors (MACs) currently require the -52 modifier for CPT code 64582, with payment reductions ranging from 0% to 30% of the $723 national average Medicare payment; the company is actively educating customers on proper documentation to minimize reductions. * Mid-term (2027 proposed rates): CMS has proposed a 12% increase to hospital outpatient reimbursement for INSPIRE V to $35,414, and a 15% increase to ASC reimbursement to $31,722. Physician reimbursement is proposed at $699, a 4% year-over-year decrease driven by a reduced RVU rate. Final rates will be published in November 2026. * Long-term: The company has submitted a revised application for a new Category 1 CPT code for single-lead INSPIRE systems, which will be reviewed in September 2026. The revised application addresses coding issues for replacement subcodes, adds joint industry stakeholder support, and includes additional clinical evidence; if approved, the code is on track for a January 1, 2028 implementation. - Strategic Initiative: Project Horizon * A new strategic growth plan designed to accelerate revenue growth by optimizing organizational structure and consolidating production in the supply chain to create $30 million in annualized growth investment capacity. Total pre-tax restructuring charges of $20 million to $25 million are expected, 90% of which will be recognized in Q3 2026, with approximately $16 million to $20 million in non-cash impairment charges and the remainder for employee separation costs. Most actions will be completed in Q3, with all substantially complete by the end of 2026. Reallocated capacity will be invested in initiatives to improve patient flow, expand patient access, and drive growth. Two initial initiatives with early positive results are prior authorization support tools in the SleepSync platform and the Inspire Connect post-implant patient support program. - Clinical and Innovation Updates * Full results from the Singapore INSPIRE 5 trial were presented at the June 2026 American Academy of Sleep Medicine Conference, confirming the safety and efficacy of the new accelerometer-based sensing technology. Multiple new peer-reviewed studies demonstrate long-term cardiovascular benefits of INSPIRE therapy, including reduced hypoxic burden, and lower odds of stroke, myocardial infarction, atrial fibrillation, acute heart failure, and hospitalization compared to CPAP. The published Predictor Study identified BMI and neck circumference as predictors of complete concentric collapse, potentially allowing many patients to be screened for eligibility without drug-induced sleep endoscopy, reducing diagnostic burden and costs. Development of INSPIRE 6 continues on schedule in 2026. - Governance * Casey Tansey retired from the Board of Directors after 18 years of service; Mike Carroll, a veteran medical device industry executive, was appointed to the Board to replace him.

Guidance

- Full-year 2026 revenue guidance is revised to $835 million to $875 million, an upward adjustment reflecting better than expected Q2 performance, with total estimated adverse impact from coding/reimbursement disruption and the WISER program reduced to $120 million to $130 million for the full year, down from prior expectations. The adverse impact is expected to decrease sequentially through the second half of the year as customer education and familiarity with new coding processes improves. - Full-year 2026 adjusted operating margin guidance is set at 4% to 6%. Diluted EPS is expected to range from a loss of $0.42 per share to earnings of $0.17 per share, and adjusted diluted EPS is expected to range from $1.05 to $1.45. The wide guidance range reflects ongoing volatility from coding and reimbursement uncertainty. - The effective tax rate is expected to be 95% to 100%, and the adjusted effective tax rate is expected to be 30% to 35%. Capital expenditures are projected to be between $35 million and $40 million for the full year. - Q3 2026 revenue is expected to decline 8% to 10% year-over-year (a larger decline than Q2's 7.6% drop, though revenue is expected to increase sequentially from Q2). Q3 adjusted operating income is expected to be approximately break-even, as higher sequential revenue is offset by a step-up in marketing expense. - Management expects Project Horizon investments to primarily drive growth starting in 2027, with the company on track to return to growth next year as coding clarity improves and proposed CMS reimbursement increases take effect. No formal 2027 guidance has been provided at this time.

Segment performance

Inspire Medical Systems does not break out separate product segments in this call. Overall Q2 2026 revenue was $200.6 million, a 7.6% year-over-year decrease driven by coding and reimbursement disruption. INSPIRE V represented the majority of implants performed in the quarter, with a small share remaining for INSPIRE IV. Replacement procedures for older devices are starting to ramp but remain a relatively small portion of total business in 2026. International revenue saw a strong step-up in the quarter, driven primarily by growth in core continental European markets, with recent countrywide reimbursement approval in France supporting future expansion, alongside contributions from Germany, Austria, Switzerland, the UK, Japan, and Singapore.

Risks & headwinds

- Ongoing coding and reimbursement uncertainty continues to disrupt customer procedure volumes and create near-term revenue headwinds, with uncertainty around the magnitude of residual impact through the second half of 2026. - Proposed 2027 Medicare reimbursement rates are not final, and actual rates may differ from current projections when published in November 2026. - The revised Category 1 CPT code application is still pending review by the AMA CPT editorial panel, and approval is not guaranteed. - Future patient procedure volumes depend on customer adoption of new coding processes and payer confirmation of proper reimbursement, which continues to progress with uncertainty around the speed of recovery. - The WISER program's long-term status is uncertain, with ongoing industry discussion of potential elimination, creating continued uncertainty for the six affected states. - The high forecasted effective tax rate is driven by the relatively small pre-tax income base, meaning discrete tax items can have a large, volatile impact on quarterly and full-year results. - There is uncertainty around the magnitude of backlog conversion after earlier coding-related procedure delays, and visibility into second half performance remains limited.

Analyst Q&A

• Q: What is the utilization impact of the 0-30% doc fee cut in the two affected MAC regions, and what percentage of centers are up to speed on new billing processes? /

  A: When centers and surgeons provide the required documentation for the modifier, payment reductions are minimized. Most reductions occur when hospitals bundle payments and do not submit required separate documentation. The company is prioritizing education starting with its highest-volume centers, which represent a disproportionate share of revenue. It is currently working through the top 25% of centers and expects to educate most centers in the third quarter.

• Q: What does Project Horizon entail, and when will the redeployed $30 million in capacity drive growth? /

  A: After years of rapid organizational growth to meet rising demand, the company conducted a full review to identify operational efficiency gains, particularly from supply chain consolidation. Most of the redeployed funds will be invested in patient flow improvement initiatives. The majority of growth impact from these investments is expected to appear in 2027, with limited impact in the back half of 2026.

• Q: How is backlog trending after earlier coding-related channel freezes, and what is the status of the WISER program? /

  A: Backlog built up as centers paused procedures amid coding uncertainty, but the company is now seeing improving trends, including increasing prior authorization submissions. As centers gain comfort with new coding and confirm they receive proper reimbursement, they are returning to normal utilization levels, allowing the company to work through backlog. While there is discussion of potential elimination of WISER, the company has incorporated the new C codes into the system and is prepared to operate in the WISER environment regardless of its long-term outcome.

• Q: How will the company leverage the new Predictor Study and cardiovascular outcomes data to drive utilization? /

  A: The Predictor Study allows the company to immediately start expanding screening: patients with BMI below 32 and favorable neck circumference can potentially skip drug-induced sleep endoscopy, streamlining access to care. For cardiovascular data, additional independent research and publications are ongoing from leading U.S. academic institutions. The company will gradually educate cardiovascular physicians and societies on the long-term benefits of Inspire Therapy, opening a new potential channel for patient access, with more data expected to roll out over time.

• Q: Is Project Horizon consolidating manufacturing to single-source to cut costs? /

  A: The company’s products are already single-sourced. The restructuring is focused on building a more secure, scalable supply chain with higher quality and improved efficiency as the company looks to add new manufacturing sites, rather than eliminating dual sourcing. More detail will be provided in the near future once plans are finalized.