Inspire Medical Systems, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial figures below are in U.S. dollars; amounts are rounded to millions unless stated otherwise. Inspire develops and sells its neurostimulation system for moderate-to-severe obstructive sleep apnea (OSA).
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $91.4M | $53.0M | $160.8M | $93.3M |
| Gross profit / margin | $77.2M / 84.5% | $45.4M / 85.8% | $136.6M / 85.0% | $79.8M / 85.5% |
| Operating expenses | $91.2M | $58.0M | $166.7M | $108.0M |
| Operating loss | $(14.0)M | $(12.5)M | $(30.1)M | $(28.2)M |
| Net loss | $(14.5)M | $(13.1)M | $(31.2)M | $(29.3)M |
| Basic and diluted loss per share | $(0.53) | $(0.48) | $(1.13) | $(1.08) |
For the six months, operating cash use was $18.7M, versus $20.5M a year earlier. Investing activities used $12.9M, including $10.3M for strategic investments and $2.6M for property and equipment. Financing provided $3.7M, including $3.1M of debt payments. Cash and cash equivalents declined $27.9M to $186.6M.
At June 30, cash, cash equivalents and available-for-sale securities totaled $196.3M; working capital was $216.3M. Total assets were $292.0M and stockholders’ equity was $227.0M. Debt outstanding was $21.4M, with $12.3M current and $9.8M non-current; the facility matures in March 2024 and has no remaining borrowing availability. The company was in covenant compliance. The filing reports no material off-balance-sheet arrangements.
Changes and operating drivers
- Revenue grew 72.6% in Q2 and 72.3% year to date. U.S. revenue drove most of the increase, rising 78.1% in Q2 and 77.1% for the six months; the U.S. represented 96% of year-to-date revenue.
- Management attributed growth chiefly to greater penetration in existing territories, expansion into new territories, and increased physician and patient awareness. A U.S. list-price increase began affecting some customers in May 2022 and is being phased in through early 2023.
- Gross margin fell 1.3 percentage points in Q2 and 0.5 points year to date, primarily reflecting higher component costs amid inflation and supply-chain pressures, partly offset by volume, manufacturing efficiencies and initial pricing benefits.
- Operating expenses increased substantially: year-to-date R&D rose 51.4% to $26.4M and SG&A rose 54.8% to $140.3M. Drivers included hiring and compensation, stock-based compensation, product development, and marketing. Stock-based compensation expense was $22.4M for the six months.
- Inventory increased to $21.9M from $17.2M at year-end, and accounts receivable increased to $40.4M from $34.2M. The company said it held additional inventory as a supply buffer; its inventory-obsolescence reserve was $0.4M.
Outlook, risks and other notable items
- No numerical company revenue or earnings guidance is provided in the filing. Management expects SG&A and R&D spending to remain significant or increase during the rest of 2022, including investment in sales capacity, advertising, Inspire Cloud and next-generation systems. Management believes existing cash and investments, together with operating cash flow, should fund operations and planned capital spending for at least 12 months.
- Management cautioned that second-half 2022 gross margin could be lower due to component costs and possible inventory-obsolescence charges associated with product transitions, including new silicone leads and the Bluetooth-enabled remote; timing and charges are uncertain.
- COVID-related resurgences continued to affect access to clinicians and patients, though management said the Q2 impact was less significant and surgical volumes had generally returned to pre-pandemic levels by the end of Q1. It also reported minor supply disruptions and identified reliance on single-source suppliers and inventory obsolescence as risks.
- In July 2022, the FDA approved additional full-body MRI scan conditions for Inspire therapy. Japan’s first implant occurred in February 2022 and Singapore’s in May 2022; Australian reimbursement coverage was still being pursued.
- CMS’s proposed 2023 hospital reimbursement rate was $29,932, down less than 1% from 2022; the proposed ASC rate was $25,744, up 4%. Proposed physician payments decreased. Final decisions were expected in November 2022.
- The company cited possible sustained patient interest related to the Philips CPAP recall, based on patient-support feedback and other indicators, but said it could not quantify the effect. It also noted seasonality, foreign-exchange exposure, and the possibility that spending could outpace revenue growth.
- Net operating losses and research-credit carryforwards may be subject to ownership-change limitations; the company had not completed a detailed Section 382 analysis. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether rapid U.S.-led growth continues and converts into improved operating leverage, given the widening operating and net losses.
- Whether component inflation, supply constraints, product transitions or obsolete inventory further pressure margins.
- Cash burn and investment needs relative to the company’s $196.3M of cash, cash equivalents and securities, and the scheduled debt amortization and March 2024 maturity.
- Final 2023 Medicare reimbursement decisions and their effect on hospital, ASC and physician economics.
- The nature, risks and performance of the $10.3M strategic investment; the filing describes it as an equity security without a readily determinable fair value but provides limited detail in the supplied text.
- Whether the reported COVID recovery, CPAP-recall-related patient interest, and expansion into new territories and markets persist.