Inspire Medical Systems, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2022. Inspire develops and sells its neurostimulation system for moderate to severe obstructive sleep apnea (OSA), primarily to U.S. hospitals and ambulatory surgery centers. The statements are unaudited.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $109.2 million | $61.7 million | $270.0 million | $155.0 million |
| Gross profit | $89.4 million | $53.1 million | $226.0 million | $132.9 million |
| Gross margin | 81.9% | 86.0% | 83.7% | 85.7% |
| Operating expenses | $106.6 million | $62.9 million | $273.3 million | $170.9 million |
| Operating loss | $17.2 million | $9.8 million | $47.3 million | $38.0 million |
| Net loss | $16.8 million | $10.3 million | $48.0 million | $39.7 million |
| Net loss per share, diluted | $0.60 | $0.38 | $1.73 | $1.46 |
Cash flow and liquidity. For the first nine months, operating cash use was $7.7 million, versus $20.9 million in 2021; investing cash use was $16.6 million, including $10.5 million for strategic investments and $6.1 million for property and equipment. Financing provided $227.8 million, chiefly from a follow-on stock offering. At September 30, cash, cash equivalents and investments totaled $427.5 million; working capital was $446.3 million. The company reported $19.4 million of loan principal paid in August and no outstanding credit-facility borrowings at quarter-end. Operating lease liabilities totaled $9.1 million.
Material changes and management commentary
- Q3 revenue rose 77.0% year over year; nine-month revenue rose 74.2%. Growth was driven mainly by U.S. market penetration, new territories, and increased physician and patient awareness. U.S. revenue was 97.3% of Q3 sales and 96.5% of nine-month sales.
- Gross margin declined year over year, primarily due to higher component costs and $2.8 million of inventory obsolescence charges associated with product introductions. The company also recorded a $1.0 million accrual for obsolete component parts. Management expected Q4 2022 margin to improve from Q3, while remaining affected by elevated component costs, and said longer-term margins were expected to return to prior levels.
- Operating expenses increased substantially: Q3 R&D rose 118.4% and SG&A rose 60.8%. Management cited headcount, stock-based compensation, product development, direct-to-consumer marketing, national TV advertising, and expansion of the Advisor Care Program. It expected R&D and SG&A spending to remain significant and SG&A to rise further in the remainder of 2022 and fiscal 2023.
- The August follow-on offering issued 1.15 million shares at $215 per share and generated $243.8 million net proceeds. The company also prepaid its credit facility, including fees, and ended the quarter debt-free under that facility.
- Management stated available liquidity and expected operating cash flows should fund operations and planned capital expenditures for at least 12 months. It cautioned that longer-term cash needs depend on market acceptance, commercialization investment, new-market entry, competition, and other factors; further financing may be sought.
Outlook, risks and contingencies
- Medicare’s proposed 2023 reimbursement included a hospital rate of $29,932, a decrease of less than 1% from 2022, and an ASC rate of $25,744, up 4%. Proposed physician payments were lower; final CMS decisions were expected in November 2022. The filing does not provide the final 2023 rates.
- Management reported COVID-related disruption to clinician and patient access and continuing, though less significant, adverse revenue effects in 2022. It noted uncertainty around future pandemic impacts.
- Many suppliers are single-source. The company reported pandemic-related supply disruptions, inflationary component costs, and risk of inventory obsolescence, while stating it had avoided significant supply or inventory disruption to date.
- Other key risks include reimbursement and market acceptance, competition, ability to scale sales and operations, product quality and liability, regulatory approvals, foreign exchange, and reliance on its Inspire system for revenue. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in contractual obligations. It reported effective disclosure controls.
Important facts for investors to verify
- Whether revenue growth and territory/center expansion continue, and whether growth remains concentrated in the U.S.
- Whether gross margin recovers as management expected, including the effects of component costs and product-transition reserves.
- Final Medicare reimbursement rates for 2023 and the pace of commercial-payor coverage and international reimbursement.
- Cash use, planned spending, and the return or potential impairment of the $10.5 million strategic investment.
- Ongoing dilution and compensation cost: the offering increased shares outstanding, and stock-based compensation was $37.0 million for the first nine months of 2022.
- Potential effects of supplier concentration, COVID-19, inflation, foreign exchange, and inventory obsolescence on supply, sales, and margins.