Inspire Medical Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Amounts below are in U.S. dollars. The company develops and sells its Inspire neurostimulation system for moderate-to-severe obstructive sleep apnea (OSA).
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10.9m | $6.0m | $21.0m | $11.3m |
| Revenue growth | 81.0% | — | 85.0% | — |
| Gross margin | 80.8% | 77.2% | 79.0% | 77.3% |
| Operating loss | $(5.6)m | $(4.4)m | $(10.8)m | $(8.5)m |
| Net loss | $(5.9)m | $(4.8)m | $(12.4)m | $(9.2)m |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(12.6)m | $(9.4)m |
U.S. revenue was $9.5m in Q2, up 95.8%; Europe contributed $1.4m, up 20.0%. For the first half, the U.S. generated 87.1% of revenue and Europe 12.9%. The filing attributes growth to market penetration, broader sales coverage, greater physician and patient awareness, more prior-authorization approvals, and higher average selling prices following the U.S. fourth-generation system launch.
Operating expenses rose 59.9% in Q2 to $14.5m, led by selling and marketing, which increased 65.0% to $10.7m. General and administrative expense increased 150.3% to $2.0m, partly reflecting public-company costs and added personnel. R&D was broadly flat at $1.7m. For the first half, selling and marketing increased 68.2% to $20.6m and G&A increased 98.5% to $3.4m.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $121.9m and short-term investments were $2.1m, totaling $124.0m. Total current assets were $133.0m; current liabilities were $9.3m.
- First-half operating cash use was $12.6m, versus $9.4m in 2017. Investing activities provided $5.0m, primarily reflecting net proceeds from short-term investments. Financing provided $120.4m, principally $112.0m of IPO proceeds and $8.0m of new borrowing.
- Credit-facility principal outstanding was $24.5m. The facility bears interest at the greater of 7.95% or LIBOR plus 6.9%, is interest-only through March 1, 2019, and may extend its interest-only period to March 1, 2020 if trailing-12-month revenue at December 31, 2018 is at least $25.0m. The debt is secured by substantially all assets other than intellectual property. The company reported covenant compliance and no financial covenants.
- Management believes existing cash resources will fund operations for at least 12 months, but says further financing may be needed. Accumulated deficit was $137.4m.
Material changes and notable events
- The May 7 IPO issued 7,762,500 shares at $16.00 per share and generated approximately $112.0m in net proceeds. Outstanding preferred shares converted into 12,111,706 common shares; preferred stock warrants converted to common-stock warrants.
- Gross margin improved year over year, partly because 2017 included inventory charges related to the fourth-generation system launch.
- Sales, marketing and administrative spending expanded alongside commercialization and public-company costs. Sales, marketing and reimbursement headcount increased to 105 from 64 a year earlier; total employee headcount rose to 133 from 87.
- Inventory purchase commitments were $16.3m at June 30, up from $9.0m at year-end. The company noted reliance on third-party suppliers, including single-source suppliers.
- Aetna began covering Inspire therapy in July 2018, bringing the number of commercial payors with secured positive coverage policies to seven. Japan approved the therapy in June 2018; the company said it would seek reimbursement coverage there.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects continued revenue growth efforts, further investment in sales and marketing, product development and clinical studies, and operating losses for the next several years.
- Management cites first- and fourth-quarter seasonality: U.S. demand may be stronger in Q4 after insurance deductibles are met, while European Q1 demand can be affected by coverage-status decisions and hospital budgeting.
- Key risks include uncertain adoption and reimbursement, payor coverage changes, competition, product and regulatory risks, and reliance on third-party suppliers and manufacturers. The company also warns that inventory forecasting errors may cause obsolescence or limit its ability to meet demand.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements. The company reported effective disclosure controls as of June 30, 2018. It expects to complete its accounting for the 2017 U.S. tax legislation during 2018; no material measurement-period adjustments had been made through June 30.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, especially given the company’s stated seasonality and concentration in one product.
- Whether additional payors adopt coverage and whether reimbursement authorizations translate into sustained procedure and system sales.
- How the company’s operating cash use compares with its stated minimum 12-month liquidity outlook and planned spending growth.
- Whether the $25.0m trailing-revenue threshold for extending the debt interest-only period is achieved, and the resulting principal-payment schedule.
- Whether supplier capacity, the $16.3m purchase commitments and inventory reserves remain appropriate as demand and product generations change.