Inspire Medical Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Inspire develops and commercializes its FDA-approved neurostimulation system for moderate to severe obstructive sleep apnea (OSA), selling primarily to U.S. hospitals and ambulatory surgery centers (ASCs), and in select European markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $53.0 million | $12.2 million | $93.3 million | $33.5 million |
| Gross profit / margin | $45.4 million / 85.8% | $10.2 million / 84.0% | $79.8 million / 85.5% | $28.3 million / 84.3% |
| Operating loss | $12.5 million | $22.8 million | $28.2 million | $39.3 million |
| Net loss | $13.1 million | $23.1 million | $29.3 million | $39.3 million |
| Basic and diluted loss per share | $0.48 | $0.88 | $1.08 | $1.56 |
Q2 revenue increased 334.7% year over year; first-half revenue increased 178.3%. U.S. revenue was $49.4 million in Q2 and $87.1 million in the first half, representing 93.2% and 93.4% of revenue, respectively. Europe contributed $3.6 million and $6.2 million.
- Expenses: Q2 research and development (R&D) was $9.3 million and selling, general and administrative (SG&A) was $48.7 million. First-half R&D was $17.4 million and SG&A was $90.6 million. SG&A growth reflected expanded staffing and marketing, including direct-to-consumer advertising and the Advisor Care Program.
- Cash flow: First-half operating cash use was $20.5 million, versus $40.0 million in the prior-year period. Investing activities used $0.5 million; financing provided $7.0 million. Cash and cash equivalents declined by $14.0 million to $176.5 million.
- Liquidity: Cash, cash equivalents and investments totaled $217.8 million at June 30, 2021, versus $234.4 million at December 31, 2020. The company said existing resources should fund operations and capital requirements for at least 12 months.
- Debt: Notes payable totaled $24.9 million, including $3.1 million current and $21.8 million non-current. The $24.5 million credit facility carries a minimum 7.6% annual rate, has interest-only payments through April 2022, and matures March 2024. The company reported covenant compliance; the facility has no financial covenants.
Material changes and business developments
- Revenue recovery reflected comparison with COVID-19-disrupted 2020, as well as market penetration, new territories, greater physician and patient awareness, and additional positive coverage policies. Management said surgical volumes generally returned to pre-pandemic levels by the end of Q1 2021, but regional COVID-19 resurgences continued to pose disruption risk.
- In Q2, the company activated 63 centers, reaching 535 U.S. implanting centers; ASCs were 19% of U.S. centers, compared with 10% a year earlier. It had 130 U.S. sales territories.
- Japan’s national health insurance listing added Inspire therapy in June 2021; the company planned initial Japanese implants by year-end. Australia had approved the therapy, while reimbursement coverage was still being pursued.
- New U.S. CPT codes for hypoglossal nerve stimulation procedures were scheduled to take effect January 1, 2022. July 2021 proposed physician fees were approximately $870 for implantation and $114 for drug-induced sleep endoscopy, subject to CMS review and expected final decisions in November. Proposed 2022 facility reimbursement increased about 3% for hospitals but decreased about 28% for ASCs; the company intended to discuss claims data with CMS.
- The company received FDA approvals in March 2021 for a new physician programmer and an improved one-incision-reduction implant procedure, and CE Mark approval in May for the two-incision procedure.
Outlook, risks and contingencies
The filing gives no numerical revenue or earnings guidance. Management expects continued net losses for the next several years and anticipates substantial investment in commercial expansion, R&D, clinical work and new markets. It also expects SG&A and R&D to increase as the business grows. Management cited COVID-19-related procedure delays and access limitations as ongoing uncertainties, while noting no supply-chain disruption had occurred to date.
- Key risks include dependence on the Inspire system, market adoption and reimbursement, COVID-19 impacts, single-source suppliers, inventory obsolescence, competition, regulatory and product-quality matters, and the need for future financing. The filing says risk factors were not materially changed from the 2020 Form 10-K.
- Inventory rose to $13.3 million from $8.5 million at year-end; management maintains elevated inventory to guard against supply interruptions and noted the related obsolescence risk.
- The company reported no material legal proceedings or material off-balance-sheet arrangements. It recorded a full valuation allowance against deferred tax assets and reported $0.1 million of gross unrecognized tax benefits.
Important facts for investors to verify
- CMS’s final 2022 physician, hospital and ASC reimbursement decisions, especially the proposed ASC rate reduction.
- Whether procedure volumes, center activation and revenue growth persist beyond the comparison with COVID-affected 2020 periods.
- Cash use, spending growth and the adequacy of liquidity relative to management’s stated 12-month runway.
- Inventory growth, supplier concentration and any resulting obsolescence or supply constraints.
- Final reimbursement and launch progress in Japan and Australia, and execution of planned commercial and product-development investments.