Inspire Medical Systems, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Inspire develops and sells its neurostimulation system for moderate-to-severe obstructive sleep apnea (OSA), primarily to U.S. hospitals and ambulatory surgery centers. Its business depends substantially on the Inspire system.
Financial results
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $16.25 | $10.04 | +61.8% |
| Gross profit / gross margin | $13.40 / 82.4% | $7.75 / 77.2% | Margin +5.2 percentage points |
| Research and development | $2.60 | $1.73 | +50.5% |
| Selling, general and administrative | $19.57 | $11.21 | +74.5% |
| Operating loss | $(8.78) | $(5.20) | Loss increased $3.58 |
| Net loss | $(8.27) | $(6.50) | Loss increased $1.77 |
| Operating cash flow | $(10.94) | $(6.42) | Cash use increased |
Basic and diluted net loss per share was $(0.35) in 2019 and $(5.05) in 2018. The periods had substantially different weighted-average share counts following the 2018 IPO, so per-share comparison is not directly meaningful.
Liquidity, debt and cash flow
- At March 31, 2019, cash and cash equivalents were $101.9 million and short-term investments were $75.1 million, totaling approximately $177.0 million. Total current assets were $188.5 million; current liabilities were $7.8 million.
- Cash and cash equivalents increased $4.7 million during the quarter. Operating cash use of $10.9 million was more than offset by $16.0 million of net investing cash inflow, mainly maturities and sales of short-term investments.
- Outstanding credit-facility borrowings were approximately $24.5 million; no additional facility borrowings were available. The March 2019 amendment extended the interest-only period to April 2022 and maturity to March 2024, reduced the final payment percentage to 3.5%, and set a minimum interest rate of 7.6%. The debt is secured by substantially all assets other than intellectual property; the company reported covenant compliance.
- Management stated existing cash resources were expected to fund operations for at least 12 months. The company also noted it may seek additional equity or debt financing.
Material changes and management commentary
- U.S. revenue was $14.4 million, up 64.2%; Europe revenue was $1.9 million, up 46.0%. Management attributed growth to market penetration, expanded sales coverage, awareness, and more prior-authorization approvals.
- Gross margin improved primarily due to the U.S. introduction of a higher-margin sensing lead in February 2019. The prior-year margin was affected by excess inventory ahead of a new-generation system launch in Europe.
- Operating expenses grew faster than revenue. SG&A growth reflected higher headcount, compensation and stock-based compensation, public-company costs, direct-to-patient marketing, and reimbursement-related consulting. R&D spending increased, including development of the next-generation system.
- Interest income rose with the company’s cash and investment balances; interest expense was lower than the prior-year period, which included a fair-value charge on preferred-stock warrants.
- The company expects continued investment in sales, marketing, research and development, and expects net losses for the next several years. It described first- and fourth-quarter seasonality. No quantified revenue or earnings guidance was provided.
Risks, contingencies and other items
- Growth depends on market acceptance, reimbursement and coverage, and expansion of implanting centers. Inspire reported positive coverage policies from 32 U.S. commercial payors and reimbursement through prior authorization for approximately 350 commercial payors; it was seeking reimbursement coverage in Japan.
- The company relies on third-party suppliers, many of them single-source, and holds higher inventory to mitigate supply interruptions, creating potential obsolescence or expiration risk.
- Other disclosed risks include continued operating losses and possible financing needs, competition, product liability and quality issues, regulatory approvals, and variable-rate debt. Cash and investments were held with one U.S. financial institution, and balances exceeded insured limits.
- No material legal proceedings or material changes to the previously disclosed risk factors were reported. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
- ASC 606 was adopted January 1, 2019; management reported no material impact on revenue amount or timing.
Investor facts to verify
- Whether reimbursement coverage and prior-authorization approvals continue to expand, and how they translate into procedures and revenue.
- Whether revenue growth and improved gross margin persist, including the effects of product mix, seasonality, and inventory obsolescence.
- Operating cash burn relative to the stated 12-month funding outlook and any need for additional financing.
- Debt interest costs, repayment obligations, prepayment terms, and compliance with facility covenants.
- Sales concentration by geography, dependence on the Inspire system and single-source suppliers, and the effect of stock-based compensation on dilution.