Inspire Medical Systems, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Inspire develops and commercializes its Inspire neurostimulation system for obstructive sleep apnea. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Revenue is primarily from U.S. hospital and ambulatory surgery center customers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $151.1 million | $91.4 million | $279.0 million | $160.8 million |
| Gross margin | 83.9% | 84.5% | 84.2% | 85.0% |
| Operating loss | $16.6 million | $14.0 million | $36.1 million | $30.1 million |
| Net loss | $12.0 million | $14.5 million | $27.4 million | $31.2 million |
| Operating cash flow | Not stated separately | Not stated separately | $3.7 million | $(18.7) million |
- Q2 revenue increased 65.3% year over year; six-month revenue rose 73.5%. U.S. revenue was 95.8% of Q2 sales and 96.5% of six-month sales.
- Revenue growth reflected greater utilization and market penetration, expansion into new territories, increased physician and patient awareness, and, to a lesser extent, U.S. price increases. U.S. sales territories reached 261 and implanting medical centers reached 1,045 by June 30.
- Gross margin declined year over year as sensor manufacturing costs, lower yields before process enhancements, and component costs weighed on results; price increases partly offset these pressures.
- Operating expenses rose substantially: Q2 research and development increased 112.1% and selling, general and administrative expenses increased 46.9%. Higher headcount, stock compensation, product development, and direct-to-consumer advertising contributed.
- Cash and cash equivalents were $467.1 million at June 30, versus $441.6 million at year-end 2022; working capital was $493.4 million. The company had no outstanding debt. It reported $23.4 million of operating lease liabilities.
Changes, outlook, and risks
- Management expects 2023 gross margins of 83%–85%, citing component costs and manufacturing costs, partly offset by pricing. It expects R&D and SG&A spending to increase, and anticipates further 2023 capital expenditures.
- Management said existing cash and cash equivalents, investments, and operating cash flow should fund operations and planned capital expenditures for at least the next 12 months, while noting future cash needs depend on market acceptance, commercialization, expansion, competition, and other factors.
- In June 2023, the company submitted an FDA PMA supplement for its next-generation system and received FDA approval for an expanded indication increasing the upper AHI limit to 100 and the BMI warning threshold to 40. A proposed 2024 Medicare hospital implantation rate of $30,355 was a 3% increase over 2023; the proposed ASC rate was $25,470, up 1%. These rates were not final at filing.
- Supply disruptions and component shortages continued, though constraints eased somewhat in the first half. Many suppliers are single-source; management maintains higher inventory to mitigate disruptions, exposing the company to obsolescence risk. Inflation, labor and materials costs, interest rates, and foreign exchange may also affect results.
- The company amended its headquarters lease in May 2023, increasing leased space to approximately 106,000 square feet and extending the noncancelable term through May 2035; the modification added $15.1 million to the right-of-use asset and lease liability.
- The company remains loss-making, with an accumulated deficit of $351.6 million, and states it may incur losses for several years. Cash balances exceed insured limits at certain financial institutions. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether revenue growth and procedure utilization continue, particularly given the concentration of sales in the U.S. and dependence on reimbursement and market adoption.
- Final 2024 CMS reimbursement decisions and the effect of proposed payment changes on hospitals, ASCs, and physicians.
- Progress on the next-generation system, FDA review, and planned product or geographic expansion.
- Whether gross margin remains within management’s 2023 range amid component costs, manufacturing yields, inflation, and supply constraints.
- How rising R&D, commercial, advertising, and stock-based compensation expenses affect operating losses and cash generation.
- Inventory levels and obsolescence exposure, reliance on single-source suppliers, and access to uninsured cash deposits.