Inspire Medical Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Inspire develops and sells its FDA-approved Inspire neurostimulation system for moderate to severe obstructive sleep apnea (OSA), primarily to U.S. hospitals and ambulatory surgery centers (ASCs). The company operates as one reporting segment.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $40.4 million | $21.3 million | +89.0% |
| Gross profit / margin | $34.4 million / 85.2% | $18.1 million / 84.6% | Margin +0.6 percentage points |
| Operating expenses | $50.1 million | $34.5 million | +45.1% |
| Operating loss | $(15.7) million | $(16.4) million | Loss narrowed $0.8 million |
| Net loss | $(16.2) million | $(16.2) million | Nearly unchanged |
| Basic and diluted loss per share | $(0.60) | $(0.67) | Improved |
| Cash used in operating activities | $(10.4) million | $(14.8) million | Use decreased $4.4 million |
U.S. revenue was $37.8 million, up 96.0%; Europe revenue was $2.6 million, up 24.6%. U.S. sales represented 93.6% of revenue. Gross margin improvement was attributed primarily to manufacturing efficiencies and higher sales volume. Research and development expense rose 49.9% to $8.2 million; selling, general and administrative expense rose 44.2% to $41.9 million, including higher compensation, stock-based compensation and marketing spend.
Financial position and liquidity
- At March 31, 2021, cash and cash equivalents were $182.3 million and short-term investments were $43.8 million, totaling $226.1 million. This compares with $234.4 million at December 31, 2020.
- Total assets were $273.4 million; current assets were $260.8 million and current liabilities were $19.4 million.
- Notes payable were $24.8 million carrying value; outstanding principal was $24.5 million. The facility bears interest at a minimum annual rate of 7.6%, has interest-only payments through April 1, 2022, and matures March 1, 2024. The company reported covenant compliance and no financial covenants.
- Operating cash outflow was $10.4 million; investing cash outflow was $1.3 million, principally property and equipment purchases; financing provided $3.6 million from stock-option exercises. Cash and cash equivalents declined $8.2 million during the quarter.
- Accumulated deficit was $253.6 million. The company said existing cash resources should fund operations and capital requirements for at least 12 months, while noting it expects losses for the next several years and may need additional financing.
Material changes, outlook and risks
- Revenue growth reflected increased market penetration, new territories, broader physician and patient awareness, and additional positive coverage policies. The company activated 47 centers in the quarter, bringing U.S. implanting centers to 472; ASCs were over 15% of U.S. centers.
- COVID-19 continued to disrupt procedures, patient screening and access to clinicians, including during Q1 2021. Management expected pandemic resurgences to continue to adversely affect procedure volumes and revenue. No supply-chain disruption had been experienced to date, but the company relies on third-party and, in many cases, single-source suppliers and holds higher inventory to mitigate interruption risk.
- Management expects research and development and selling, general and administrative costs to increase as the business expands. Advertising expense was $9.0 million versus $6.4 million a year earlier; Q1 spending included new TV advertising and expansion of the Inspire Advisor Care Program.
- New Category I CPT codes for hypoglossal nerve stimulator services were scheduled to take effect January 1, 2022; Medicare reimbursement levels were expected to be surveyed and announced in July 2021. Japan completed its reimbursement review in April 2021, with formal national payment listing expected in June 2021. Australia had approved the therapy, but reimbursement coverage was still being pursued.
- The company received FDA approvals in March 2021 for a new physician programmer and an improved implant procedure; it reported CE Mark approval for the two-incision procedure in May 2021. It continues development of next-generation systems and expansion into additional markets.
- The filing reported no material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether procedure volumes and revenue growth persist as COVID-19 disruptions and postponed cases evolve.
- Whether higher commercial and personnel costs can be matched by revenue growth while narrowing operating losses and cash burn.
- Reimbursement timing and economics for the 2022 U.S. CPT codes, Japan listing, and potential Australian coverage.
- Supplier concentration, inventory levels and potential obsolescence as product generations change.
- Debt service terms, future financing needs and management’s estimate that current liquidity covers at least 12 months.