Inspire Medical Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Inspire sells its FDA-approved neurostimulation system for moderate-to-severe obstructive sleep apnea to hospitals and ambulatory surgery centers, primarily in the U.S. and select European markets.
Financial highlights
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $21.3 million | $16.3 million; up 31.4% |
| Gross profit / margin | $18.1 million / 84.6% | $13.4 million / 82.4% |
| Operating expenses | $34.5 million | $22.2 million; up 55.5% |
| Operating loss | $16.4 million | $8.8 million |
| Net loss | $16.2 million; $0.67 per diluted share | $8.3 million; $0.35 per diluted share |
| Operating cash flow | $(14.8) million | $(10.9) million |
| Cash, cash equivalents and investments | $141.9 million at March 31, 2020 | $155.7 million at December 31, 2019 |
| Debt | $24.5 million outstanding | Interest-only payments through April 1, 2022; maturity March 1, 2024 |
At March 31, current assets were $155.4 million and current liabilities were $13.7 million. Cash and cash equivalents were $76.1 million, short-term investments $59.6 million, and long-term investments $6.1 million. Net cash increased $53.3 million in the quarter, mainly because $67.2 million of net cash was provided by investment activity, including investment maturities and sales; operations used $14.8 million. The company remained loss-making, with an accumulated deficit of $196.4 million.
Changes and operating developments
- U.S. revenue rose 34.3% to $19.3 million; Europe revenue rose 9.4% to $2.1 million. U.S. sales represented 90.3% of revenue.
- Gross margin improved by 2.2 percentage points, which management attributed primarily to manufacturing efficiencies.
- R&D expense more than doubled to $5.4 million, reflecting next-generation system development and higher employee costs. SG&A increased 48.5% to $29.1 million, driven by compensation, headcount and marketing. Advertising expense was $6.4 million versus $3.5 million.
- Revenue growth and procedures were disrupted by COVID-19: substantially all scheduled procedures were postponed beginning in the second week of March, with additional authorized cases unable to be scheduled. Management said the pandemic had already adversely affected quarterly revenue.
- The company activated 28 U.S. medical centers in the quarter, bringing the total to 327, and added nine territories, bringing the total to 82.
Outlook, risks and unusual items
- Management expected COVID-19 to continue reducing revenue through fewer procedures and patient screenings. It anticipated a post-pandemic backlog and possible capacity constraints at providers, hospitals and surgery centers.
- Management expected continued net losses for the next several years and substantial funding needs. It stated that resources available at the time were expected to fund operations for at least 12 months; the filing also reports a subsequent equity offering.
- On April 16, 2020, after quarter-end, Inspire sold 2.3 million shares at $58 per share and received approximately $124.7 million in net proceeds.
- The company reported no supply-chain disruptions to date, but relies on third-party suppliers, many single-source, and noted risks of interruption and inventory obsolescence. Other risks include reimbursement and market adoption, competition, and ongoing operating losses.
- As of May 5, 2020, 53 U.S. commercial payors had positive coverage policies covering approximately 165 million lives. All seven Medicare Administrative Contractors had drafted positive policies; five had published final policies covering 37 states. The company was seeking reimbursement in Japan.
- In April 2020, the FDA approved an expanded age range for Inspire therapy to include patients aged 18–21. The filing gives no numerical revenue or earnings guidance.
- Debt bears a variable rate with a minimum basic rate of 7.60%; the facility is secured by substantially all personal property other than intellectual property. The company reported covenant compliance and no financial covenants.
- No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How COVID-19 affected procedure volumes, revenue, patient screenings and recovery timing after quarter-end.
- Whether the post-quarter $124.7 million offering proceeds, together with cash and investments, adequately fund the company’s loss trajectory and planned spending.
- Whether sales growth, reimbursement coverage and newly activated centers translate into sustained procedure and revenue growth.
- Whether higher operating expenses—particularly marketing, headcount and R&D—support growth while losses and cash burn remain elevated.
- Debt-service terms and exposure to variable interest rates, alongside reliance on single-source suppliers and potential inventory risks.