Inspire Medical Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted. Inspire develops and commercializes its Inspire neurostimulation system for obstructive sleep apnea (OSA), selling primarily to U.S. hospitals and ambulatory surgery centers, and in select European markets.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $20.9 | $13.1 | $55.1 | $34.0 |
| Gross margin | 83.4% | 81.1% | 82.9% | 79.8% |
| Operating loss | $(8.7) | $(4.6) | $(25.6) | $(15.5) |
| Net loss | $(8.2) | $(4.7) | $(24.2) | $(17.1) |
| Basic and diluted loss per share | $(0.34) | $(0.22) | $(1.02) | $(1.40) |
- Q3 revenue grew 59.8% year over year; nine-month revenue grew 62.0%. U.S. revenue was $18.6 million in Q3 and $48.8 million year to date; Europe contributed $2.2 million and $6.4 million, respectively.
- Gross margin improved, which management attributed primarily to the higher-margin sensing lead introduced in the U.S. in February 2019. Nine-month 2018 margin had also been reduced by obsolete inventory costs.
- Operating expenses rose materially: Q3 R&D increased 104.6% and SG&A 66.6%; nine-month R&D increased 73.3% and SG&A 66.4%. Management cited headcount and commercial expansion, direct-to-patient marketing, product development, clinical studies, and public-company costs.
- At September 30, cash and cash equivalents were $48.0 million and investments were $113.2 million, for total cash, cash equivalents and investments of approximately $161.2 million, versus $188.2 million at December 31, 2018. Current assets were $170.5 million and current liabilities $12.7 million.
- Debt outstanding was $24.5 million, with no remaining borrowing availability. The amended facility has a minimum annual interest rate of 7.6%, interest-only payments through April 1, 2022, and maturity on March 1, 2024. Debt is secured by substantially all assets other than intellectual property; the company reported covenant compliance.
- Nine-month operating cash use was $26.8 million, versus $16.1 million in 2018. Investing cash use was $23.6 million, chiefly reflecting net investment purchases and $2.3 million of property and equipment purchases. Financing provided $1.1 million, versus $120.5 million in 2018, which included IPO proceeds.
Changes, outlook, and risks
- Growth was attributed to market penetration, sales-force expansion, greater physician and patient awareness, more prior-authorization approvals and positive coverage policies, and, to a lesser extent, higher U.S. average selling price. No customer accounted for more than 10% of revenue.
- Management expects continued investment in sales and marketing, R&D, next-generation systems, clinical studies, and expansion into additional markets. It expects net losses for the next several years and substantial additional funding may be required, potentially through equity or debt financing. Management stated existing cash resources should fund operations for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Coverage and reimbursement remain important: U.S. reimbursement is largely through commercial-payor prior authorization, Medicare medical-necessity determinations, and a Veterans Health Administration contract. The company reported positive coverage policies from 45 U.S. commercial payors covering about 145 million lives; it was seeking reimbursement coverage in Japan.
- Key risks include dependence on the Inspire system for revenue, market acceptance and reimbursement, competition, reliance on third-party and often single-source suppliers, inventory obsolescence, product quality and liability, and the need to manage rapid growth. The company noted seasonality in the first and fourth quarters.
- Operating lease commitments totaled $15.2 million, including a new headquarters lease extending through May 2028. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- Whether sales growth and expanding payor coverage continue, and whether reimbursement translates into sustained procedure adoption.
- Whether higher commercial spending and headcount deliver growth while the company remains loss-making and uses operating cash.
- Cash and investment runway, potential need for further financing, and the impact of variable-rate debt and future principal payments.
- Exposure to single-source suppliers, inventory demand and obsolescence, and execution of next-generation product and market-expansion plans.
- The effect of seasonal demand, particularly the company’s reported U.S. fourth-quarter and European first-quarter patterns.