Inspire Medical Systems, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 2, 2020. Financial statements are unaudited. Inspire develops and sells its FDA-approved neurostimulation system for moderate-to-severe obstructive sleep apnea (OSA), primarily to U.S. hospitals and ambulatory surgery centers.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $35.8 million | $20.9 million | $69.4 million | $55.1 million |
| Revenue growth | 71.8% | — | 25.8% | — |
| Gross profit / margin | $30.6 million / 85.5% | $17.4 million / 83.4% | $58.9 million / 84.9% | $45.7 million / 82.9% |
| Operating expenses | $40.5 million | $26.1 million | $108.1 million | $71.3 million |
| Operating loss | $9.9 million | $8.7 million | $49.1 million | $25.6 million |
| Net loss | $10.4 million | $8.2 million | $49.7 million | $24.2 million |
| Basic and diluted loss per share | $0.39 | $0.34 | $1.93 | $1.02 |
Q3 U.S. revenue was $33.1 million, up 77.6%; Europe revenue was $2.7 million, up 22.8%. For the nine-month period, U.S. revenue rose 30.0% to $63.4 million, while Europe fell 6.2% to $6.0 million. The U.S. represented 91.4% of nine-month revenue.
Research and development expense rose 101.7% in Q3 and 107.3% year to date, mainly reflecting next-generation system development and increased personnel. Selling, general and administrative expense rose 48.1% in Q3 and 43.3% year to date, reflecting headcount, compensation and marketing investment. Q3 gross-margin improvement was attributed primarily to manufacturing efficiencies.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $178.7 million and short-term investments were $55.9 million, totaling $234.6 million in cash, cash equivalents and investments. Total current assets were $266.9 million; total current liabilities were $18.2 million.
- Nine-month operating cash use was $48.9 million, compared with $26.8 million in 2019. Investing activities provided $75.2 million, primarily from investment maturities and sales; financing activities provided $129.5 million, chiefly from the April follow-on offering.
- The April 2020 offering of 2.3 million shares generated approximately $124.7 million net proceeds. Stockholders’ equity was $228.8 million, and accumulated deficit was $229.9 million.
- Outstanding debt principal was $24.5 million (balance-sheet carrying value $24.7 million). The facility has a minimum 7.6% annual interest rate, interest-only payments through April 2022, and maturity in March 2024. No borrowings remain available; the company reported covenant compliance and no financial covenants.
- Management said existing cash resources should fund operations and capital requirements for at least 12 months. The company expects to continue operating losses for several years and may need additional financing.
Material changes, outlook and risks
- Revenue increased year over year despite COVID-19 disruption. Elective procedure postponements began in March; procedure volumes recovered through Q3, and the backlog of postponed cases was largely eliminated. Management warned that renewed COVID-19 outbreaks could again reduce procedure volumes and patient screening.
- Management reported most implanting centers were performing procedures by October 2020, while continuing to identify COVID-19 as a source of uncertainty. It had not experienced supply-chain disruption to date, but relies on third-party suppliers, including single-source suppliers.
- At September 30, 370 U.S. medical centers were implanting Inspire therapy and the company had 98 U.S. territories. It activated 42 centers and created seven territories during Q3.
- As of November 2, the company reported positive coverage policies from 59 U.S. commercial payors covering about 207 million lives; all seven Medicare Administrative Contractors had published final coverage policies in 2020. A new Category I CPT code for hypoglossal nerve stimulation was approved in October 2020; reimbursement survey results were expected in July 2021, with formal code publication expected in January 2022. The company was seeking reimbursement coverage in Japan and Australia after regulatory approvals.
- No numerical revenue or earnings guidance was provided. COVID-19 effects, reimbursement and coverage, market adoption, competition, supplier dependence, inventory obsolescence, and continuing losses and financing needs are key risks. The filing reported no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether procedure volumes, patient screening and revenue recover or are again constrained by COVID-19 and hospital capacity.
- Whether commercial and Medicare coverage translates into procedures, and the timing and effect of new CPT reimbursement levels.
- Whether the company can sustain high gross margins while expanding sales, marketing and R&D spending and reducing operating cash use.
- Cash runway assumptions, potential need for future financing, and the debt’s variable-rate exposure and repayment schedule.
- Supply continuity and inventory risk given reliance on third parties and single-source suppliers; also monitor execution of international reimbursement efforts.