Inspire Medical Systems, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Inspire develops and commercializes its Inspire neurostimulation system for obstructive sleep apnea (OSA), selling primarily to U.S. hospitals and ambulatory surgery centers, with sales in select European markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $18.0 million | $10.9 million | $34.3 million | $21.0 million |
| Gross margin | 82.8% | 80.8% | 82.6% | 79.0% |
| Operating loss | $8.2 million | $5.6 million | $17.0 million | $10.8 million |
| Net loss | $7.7 million | $5.9 million | $15.9 million | $12.4 million |
| Basic and diluted loss per share | $0.32 | $0.43 | $0.67 | $1.66 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $23.8 million | $12.6 million |
- Q2 revenue increased 64.9%; first-half revenue increased 63.4%. U.S. sales were $15.8 million in Q2 and $30.1 million in the first half; Europe contributed $2.3 million and $4.2 million, respectively.
- Gross margin improved year over year, which management attributed primarily to the higher-margin new sensing lead introduced in the U.S. in February 2019. The prior-year first-half margin was also affected by excess and obsolete inventory costs.
- Operating expenses rose substantially: Q2 research and development (R&D) increased 64.0% and selling, general and administrative (SG&A) increased 59.1%; first-half R&D rose 57.3% and SG&A rose 66.3%. Drivers included hiring and compensation, stock-based compensation, direct-to-patient marketing, and public-company, facilities, regulatory and reimbursement costs.
- At June 30, cash and cash equivalents were $51.3 million; short- and long-term investments totaled $113.5 million. Together, cash and investments were approximately $164.7 million, versus $188.2 million at December 31, 2018. Current assets were $177.2 million and current liabilities $8.7 million.
- First-half investing cash outflow was $23.1 million, primarily reflecting net purchases of investments and $1.2 million of property and equipment. Financing provided $0.9 million. Cash and cash equivalents declined by $46.0 million in the first half to $51.3 million.
- Debt was $24.5 million at June 30, with no additional availability under the facility. The March 2019 amendment extended the interest-only period to April 2022 and maturity to March 2024; the stated minimum interest rate is 7.60%. The facility is secured by substantially all assets other than intellectual property. The company reported compliance with covenants and no financial covenants.
Changes, outlook and risks
- Revenue growth reflected greater market penetration, expanded sales territories, physician and patient awareness, more prior-authorization approvals and additional positive U.S. coverage policies. The filing says about 375 commercial payors had reimbursed treatment through prior authorization and 35 U.S. payors had positive coverage policies covering approximately 125 million lives.
- Management expects continued investment in sales and marketing, R&D, next-generation systems, clinical studies and market expansion. It expects losses for the next several years and may need additional funding. Management nevertheless stated that existing cash resources should fund requirements for at least the next 12 months.
- No specific revenue, earnings or margin guidance was provided. Management noted historical first- and fourth-quarter seasonality, including possible U.S. fourth-quarter demand effects from insurance deductibles and European first-quarter demand effects from coverage and hospital budgeting.
- Key risks include dependence on the Inspire system, commercial adoption and reimbursement, continued operating losses and potential financing needs, competition, reliance on third-party and often single-source suppliers, inventory obsolescence, and the ability to expand sales and maintain product quality. Interest-rate, credit, currency and inflation risks are also discussed. Cash balances exceeded insured limits and were held with one U.S. financial institution.
- Commitments include a new headquarters lease beginning December 2020 and running through May 2028, with disclosed future operating lease payments of $15.4 million. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Whether revenue growth and expanding payer coverage translate into sustained procedure adoption and collections, particularly as prior-authorization processes and reimbursement vary.
- The durability of gross-margin gains from the new sensing lead, including future manufacturing costs and any inventory obsolescence.
- Cash consumption and funding needs: first-half operating cash use was $23.8 million, while management’s liquidity statement covers at least the next 12 months.
- Debt terms, variable-rate exposure, repayment schedule and the effect of the extended interest-only period and long-term lease commitments.
- The pace and returns of rising SG&A and R&D spending, including marketing, staffing and next-generation product development.