Inspire Medical Systems, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. Inspire develops and sells an implantable neurostimulation system for eligible patients with moderate to severe obstructive sleep apnea (OSA). The system monitors breathing and stimulates the hypoglossal nerve to help keep the airway open. The company reports one operating segment. Its device accounted for substantially all revenue.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $233.4 million | $115.4 million | +102.3% |
| Gross profit / margin | $200.1 million / 85.7% | $97.8 million / 84.7% | Margin +1.0 percentage point |
| Research and development | $37.4 million | $26.1 million | +43.1% |
| Selling, general and administrative | $202.6 million | $127.9 million | +58.4% |
| Operating loss | $39.9 million | $56.2 million | Loss narrowed |
| Net loss | $42.0 million | $57.2 million | Loss narrowed; basic and diluted loss per share was $1.54 versus $2.19 |
| Net cash used in operating activities | $20.1 million | $53.0 million | Cash use declined |
| Cash, cash equivalents and investments | $224.4 million | $234.4 million | Down $10.0 million |
| Working capital | $227.2 million | — | Down $21.9 million year over year |
| Debt outstanding | $24.5 million | — | Principal payments begin April 2022; maturity March 2024 |
Revenue increased primarily on greater penetration in existing territories, expansion into new territories, and increased physician and patient awareness. The comparison also reflects COVID-19 disruption to elective procedures in 2020. U.S. revenue was $221.0 million, or 94.7% of the total; revenue outside the U.S. was $12.4 million, or 5.3%. Gross-margin improvement was attributed to higher volume and manufacturing efficiencies.
Year-end cash and investments included $214.5 million of cash and cash equivalents and $9.9 million of long-term investments. The company used $4.7 million for capital expenditures in 2021. It had $114.6 million of supplier purchase commitments, primarily for inventory, and reported no material off-balance-sheet arrangements. Cash provided by financing activities was $14.9 million in 2021, mainly from stock-option exercises and employee stock purchases; 2020 included $124.7 million in net proceeds from a follow-on offering.
Material changes and business developments
- U.S. revenue rose 108.3%; non-U.S. revenue rose 33.9%. International revenue’s share decreased from 8.0% to 5.3%, despite growth in dollars.
- Operating expenses rose 55.9%, reflecting investment in commercial infrastructure, research and development, headcount, and advertising. Advertising expense increased to $47.8 million from $26.4 million.
- The company added 50 U.S. sales territories and activated 259 centers during 2021, ending the year with 157 U.S. sales territories and 684 U.S. implanting centers. ASCs made up 22% of U.S. implanting centers, up from 16%.
- Japan’s national insurance listing included Inspire therapy in June 2021; the first Japanese implants took place in February 2022. New U.S. Category I procedure codes and 2022 Medicare reimbursement rates took effect January 1, 2022.
- The FDA approved a new physician programmer and the two-incision implant procedure in 2021, and approved a Bluetooth-enabled patient remote in December. The two-incision procedure also received European CE marking.
Outlook, commentary, and key risks
Management expects net losses for the next several years and anticipates higher selling, general and administrative expenses in 2022, continued significant research and development spending, and further capital expenditures. It states that cash, cash equivalents, investments, and expected operating cash flow should fund operations and planned capital expenditures for at least 12 months from the report date. This is not a specific revenue or earnings forecast; the filing provides no clear numerical guidance for 2022 revenue or profitability.
Management said COVID-19’s impact on revenue diminished during 2021, but remained adverse and uncertain. Resurgences could again constrain procedures, patient screening, hospital capacity, or access to clinicians. The company also reported minor COVID-related supply disruptions, without significant supply or inventory issues to date. It cited feedback suggesting the 2021 Philips Respironics CPAP recall may have increased patient inquiries, but said it could not quantify the effect.
- Commercial and reimbursement: Growth depends heavily on adoption of a single product, physician training, and adequate coverage and reimbursement. Some regional commercial payors still consider the therapy investigational; prior authorization approval historically applied to approximately 70% of U.S. commercial implant requests.
- Competition and clinical evidence: Alternatives include other neurostimulation devices outside the U.S., surgery, oral appliances, and improved PAP treatments. The company notes that long-term effects beyond 10 years are not known.
- Supply, inventory, and execution: Certain components are sourced from single suppliers. Higher safety-stock inventory supports availability but increases obsolescence risk; inventory was $17.2 million at year-end, with a $0.3 million reserve.
- Debt and funding: The $24.5 million credit facility is secured by substantially all assets other than intellectual property, has variable-rate interest, and requires a 3.5% final payment fee. The company reported covenant compliance and no remaining availability under the facility.
- Regulation and other exposures: The filing highlights FDA and international compliance, transition to the EU Medical Devices Regulation, product liability and warranty claims, privacy and cybersecurity, intellectual property, and healthcare fraud and abuse risks. No material legal proceedings were reported.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Inventory valuation reserves were identified as a critical audit matter. Management and the auditor concluded internal controls were effective as of December 31, 2021.
Investor facts to verify
- Whether procedure growth, patient demand, and active implanting centers continue to expand, and whether reported growth is being compared against COVID-disrupted 2020 results.
- Whether commercial coverage and prior authorization outcomes improve, and whether 2022 procedure codes and reimbursement rates support hospital and ASC economics.
- How much of future growth comes from the U.S. versus international markets, including Japan, and whether Australia secures reimbursement.
- Whether operating expense growth, cash use, and capital spending remain consistent with available liquidity; monitor debt principal payments beginning in April 2022.
- Whether supplier capacity, inventory quality, and the $114.6 million of purchase commitments align with actual demand.
- Whether COVID-19, the CPAP recall, regulatory changes, clinical evidence, or emerging competitors materially affect procedure volumes or adoption.