It’s been about 9 months since MountainTom brought INSP to the board (thanks Tom!). I took a small position then, and I’d like to try to do an in-depth update on the company.
They went public in early 2018, so I am reporting the y-o-y comparisons they provided in their 2018 filings to get the 2017 numbers.
First, a brief description of what they do: Inspire makes implantable medical devices (neurostimulators) to treat sleep apnea. Essentially, the device detects that you are trying to breathe but cannot because your airway musculature is relaxed and blocking the airway. It then stimulates the throat muscles to contract, thus clearing the airway. They make the only FDA-approved device of this type, and it is indicated in only certain situations (non-central apnea, in cases where the patient is not successfully using a CPAP machine). TAM is estimated at 10 Billion in the US. Price to sales is currently 25.
Now, a look at revenue:
Millions Year Q1 Q2 Q3 Q4 2017 5.3 6.0 7.3 10.0 2018 10.0 10.9 13.0 16.6
So 2018 revenue grew about 77% over 2017, and was 66% in Q4. (Note that Q3 and Q4 tend to be slightly seasonally high for them while Q1 is seasonally low for them, due to insurance deductables being met/unmet).
Gross profit margin hovers around 80% every quarter, and management guided for this same figure for 2019.
R&D costs continue (as they improve devices and continue clinical studies), but seem to be pretty constant.
R&D, Millions: Year Q1 Q2 Q3 Q4 2017 1.6 1.7 1.2 1.7 2018 1.7 1.7 1.8 2.2
They have posted a net loss every quarter (4-5 million, at least for the last 2 years) due SG&A costs.
As they have a monopoly in the US which is likely to continue for at least 3 years due to the need for FDA approval by any competitor, their strategy is to rapidly establish themselves in the market to take advantage of the monopoly. This involves the following 2 main prongs: 1) Grow awareness of their product; and 2) Make their product affordable through insurance.
They grow awareness of their neurostimulators primarily by working with physicians to make sure they know about this treatment option and to train them in the surgery. Their reason for going public was to get the money to hire more salespeople and thus rapidly spread the business. This is what they did over the last year; the 77% revenue growth in 2018 was associated with a 66% growth in sales reps in the US and a 48% growth in centers where the surgeries are performed. Management expects growth in the sales force to continue steadily in 2019.
They also grow awareness of their product by directly targeting ads to potential patients. Additionally, their continuing studies on patient outcomes help to address physician concerns and win acceptance of the procedure.
A major obstacle is getting insurance to pay for the procedure. They have a contract for patients in the VA hospitals and on Medicare, and they won coverage for Aetna patients last year. At the end of 2018, there were coverage policies by 18 US payors covering 45 million people. Impressively, this has already increased greatly so far in 2019: 31 payors representing 70 million people now offer coverage for the surgery in the US (many of these being the Blue Cross/Blue Shield organizations in various states). People not automatically covered may nonetheless be able to get the procedure paid for. In this case, Inspire works with patients to get approval from their insurance companies, and has a 16-person team devoted to this. They note that they have brought down the time for approval in these cases from 124 days (2017) to 89 days (2018), and have helped get prior-authorization from 330 payors. But obviously, it’s much better to just have the insurance payors on-board to begin with, as it means less hassle for the company, for patients, and for physicians.
The company also has smaller operations in Germany (6 sales reps) and the Netherlands, and is entering Japan in late 2019.
Inspire makes a useful product. It solves a previously unmet need (non-compliant CPAP patients), has demonstrated efficacy (hugely reduced apnea-hypopnea index), and customers love it (patients have something like 96% satisfaction rate). Although it requires a surgery for implantation, for a lot of folks, the result is way easier to use that putting on the noisy CPAP mask every night. I think many products/companies succeed by making life easier for /taking advantage of laziness in their customers. This product fits the bill.
The rapid increase in sales this year show that something is working. It could be driven in part by the increased sales/marketing effort, and also the increased insurance coverage (70 million people is 20% of the population, and coverage is growing), and the continued release of longer-term studies on efficacy. It also reinforces my first point: they have a good product that people want as long as they know about it and can get it paid for.
On future growth: Management guided for revenue to increase 32-38% in 2019 vs 2018, a large decrease in growth rate compared to the last year. I’m not sure what exactly to think here. Are they low-balling? They did note that some of the recent insurance coverage announcements won’t really have an effect until the latter half of the year. Even if growth is ‘only’ 35% in 2019, will growth rate pick up the following year? It seems that as they increase the number of surgical centers and physicians on-board, they create a kind of land-and-expand effect. Except that they are not upselling to other products; rather, once they establish with a physician (land), that physician may continue to make surgeries (i.e. sales) for many patients into the future (expand). They only have to make the ‘sell’ once.
Earnings are currently negative, but that should be expected for a rapidly growing company investing in expansion. I think that they should be able to decrease sales costs in the future to achieve positive earnings.
I am interested in hearing your thoughts, particularly given their P/S of 25.
Disclaimer of sorts
One reason this stock intrigued me was because the senior author of several of the efficacy/safety studies is a doctor I know; I worked in his research lab ages ago. At first, I thought that might be a benefit, by giving me an inside scoop. But I’ve come to realize that it really provides no particularly useful information (other than the fact that he is a really great guy, exceedingly smart, and dedicated – i.e. a typical scientist), and creates an emotional connection to the company that could be a liability for me. I hope by making this fact public I will make you all aware of this potential bias, as well as help me be honest with myself.