Inspire Medical Systems, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Inspire develops and sells its FDA-approved neurostimulation system for moderate-to-severe obstructive sleep apnea. Revenue is primarily from sales to U.S. hospitals and ambulatory surgery centers.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $127.9 million | $69.4 million | +84.3% |
| Gross profit / margin | $108.0 million / 84.4% | $59.4 million / 85.6% | Margin down 1.2 percentage points |
| Operating expenses | $127.5 million | $75.4 million | +69.0% |
| Operating loss | $19.5 million | $16.1 million | Loss widened $3.4 million |
| Net loss | $15.4 million | $16.7 million | Loss narrowed $1.3 million |
| Net loss per share, diluted | $0.53 | $0.61 | Improved $0.08 |
| Cash used in operating activities | $1.3 million | $12.7 million | Use decreased $11.4 million |
Q1 2023 gross margin was pressured by higher component costs and manufacturing transition costs, partly offset by higher volumes, manufacturing efficiencies, and U.S. price increases. R&D rose 115% to $25.5 million, and SG&A rose 60% to $102.0 million, reflecting increased headcount, stock-based compensation, advertising, and commercial expansion. Stock-based compensation expense was $18.2 million, versus $9.7 million a year earlier.
At March 31, 2023, cash and cash equivalents were $442.1 million, short-term investments were $9.9 million, and working capital was $473.7 million. Total liabilities were $67.2 million; the company had no outstanding borrowings under its former credit facility, repaid in August 2022. Cash and cash equivalents increased $0.5 million during the quarter; investing activities used $3.8 million, mainly for property and equipment, while financing provided $5.6 million, primarily from stock-option exercises.
Material changes and operating progress
- U.S. revenue increased 87.4% to $124.5 million; international revenue increased 15.4% to $3.4 million. The U.S. represented 97.3% of revenue.
- Management attributed growth mainly to increased utilization, penetration in existing territories, expansion into new territories, and greater physician and patient awareness; a price increase also contributed.
- The company added 17 U.S. sales territories, bringing the total to 242, and activated 68 implanting centers, bringing the total to 973. Ambulatory surgery centers were 24% of U.S. implanting centers.
- In March 2023, the FDA approved Inspire therapy for certain pediatric patients with Down syndrome.
Outlook, risks and contingencies
- Management expects 2023 gross margins of 83%–85%. It expects R&D and SG&A spending to rise further, alongside capital expenditures for production equipment and other needs.
- Management believes existing cash, cash equivalents and investments, together with operating cash flow, should fund operations and planned capital expenditures for at least 12 months. Longer-term cash needs depend on market acceptance, commercialization spending, expansion into new markets, and other factors; additional financing may be considered.
- Key risks include dependence on one principal product, reimbursement and market adoption, competition, reliance on third-party and often single-source suppliers, supply constraints, inflation and labor costs, and potential inventory obsolescence. Supply constraints eased somewhat in Q1, but management continued to report component shortages and supply-chain challenges.
- Cash balances exceed insured limits at certain financial institutions; access to uninsured funds could be affected by a bank failure. Interest-rate changes may also affect investment income.
- The company reported no material legal proceedings and no material changes to the risk factors in its 2022 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rapid revenue growth continues and is supported by procedure utilization, new centers, and durable reimbursement coverage.
- Whether gross margins remain within management’s 83%–85% 2023 expectation despite component inflation and manufacturing transition costs.
- Whether rising R&D, SG&A, and stock-based compensation can be managed while the company continues to report operating losses.
- Whether supply constraints, inventory levels, and product transitions affect sales, costs, or obsolescence charges.
- How concentrated U.S. revenue and uninsured cash deposits, along with international currency and reimbursement exposures, evolve.