Update on INSP

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.

Company Strategy
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.

  1. 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.

  2. 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.

My thoughts

  1. 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.

  2. 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.

  3. 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.

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After doing some research regarding INSP, here are some points of due diligence regarding their product versus the current offering (CPAP) on the market.

  1. Inspire therapy is not a one-stop shop, surgery + process is a long one

Found this from a former sleep tech that has done Inspire titrations:

"Our hospital has had some successes, but I think I’d be remiss to not mention the trouble for the patients who have issues being adequately treated. There are times where we will go to the limit and there will be no effect on the apnea, sometimes seemingly making it worse. In that case, the patient will be scheduled for an Advanced Titration, where the patient is sent in for another endoscopy to reevaluate the airway and Inspire sends out their technicians for a second titration, where they fiddle with some more complicated settings beyond voltage. I don’t entirely understand them, so I won’t talk about them, but basically Inspire has a lot of settings that can be tweaked to try to open up the airway. There are cases where we’ve done all that we can, but patients will still have an AHI greater than 5. In those cases, the doctors try to work with the patient to maximize their sleep health where they can.

In my professional opinion, Inspire therapy should be the last option, failing everything else. It is a semi-permanent device that you put in your body and you will feel a bump on your chest where the body of the stimulator is placed, much like a pacemaker or a defibrillator. I’ve heard that Inspire is in the process of making MRI-safe devices, but I don’t know if they’ve already been rolled out or are still being figured out. As previously mentioned by other redditors, they have a ten-year battery lifespan, and will have to be replaced. You will have to have a remote with you and if you lose it or break it, you can get another one sent to you under warranty or pay like some hundreds of dollars to get a new one."

From <https://www.reddit.com/r/SleepApnea/comments/743wnp/my_docto…

From this testimony, it seems like inspire therapy shouldn’t be regarded as a better alternative to the CPAP but as a last resort that sometimes works sometimes doesn’t. Again, my conclusion is based on a source that I found from over a year ago. In addition, with such a high sales growth as OP mentioned, they seem to be doing something right.

  1. TAM

Inspire therapy only suitable for those who

  1. Cannot use CPAP (can’t tolerate it)
  2. BMI less than 33

Since 2/3 of people with sleep apnea are overweight or obese (http://healthysleep.med.harvard.edu/sleep-apnea/living-with-… is the still TAM at $10 bn or is it a fraction since a large part of the market might not be qualified for the operation to begin with. Maybe I’m being paranoid. Not sure.

  1. CPAP is still incredibly effective for those who can still use it, perhaps more than INSP.
    a. http://www.cpaptalk.com/viewtopic/t113001/AHI-NUMBER–Before…
    b. Talks of people lowering AHI from over 50 to .5 (Apnea Hypopnea Index - number that classifies severity of sleep apnea)
    c. STAR trial results in INSP’s 10k indicate that 1 year following the treatment, AHI levels are around 9, which is still a very high AHI level (normal level is less than 5) that might require CPAP.

  2. Not sure how they recognize revenues; since these are expensive operations (50k+), I would like to know more about how revenue is recognized. The 10k notes that revenue is recognized based on ASC 606 but doesn’t seem to provide further details.

Thanks for the deep dive OP. I’m still a student in college and was introduced to TMF boards only a few months ago. I’ve benefitted significantly from the analysis/advice from you all in the way I have started to analyze businesses.

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2. TAM

Inspire therapy only suitable for those who

1. Cannot use CPAP (can’t tolerate it)
2. BMI less than 33

Since 2/3 of people with sleep apnea are overweight or obese (http://healthysleep.med.harvard.edu/sleep-apnea/living-with-…… is the still TAM at $10 bn or is it a fraction since a large part of the market might not be qualified for the operation to begin with. Maybe I’m being paranoid. Not sure.

c. STAR trial results in INSP’s 10k indicate that 1 year following the treatment, AHI levels are around 9, which is still a very high AHI level (normal level is less than 5) that might require CPAP.

I didn’t go into much detail on this, but you are right in that the implant is only for those people who cannot use CPAP. In fact, the implants are only approved by the FDA for this use case. But this is already calculated in the TAM of 10 Billion. They arrive at this number by considering the annual rate of prescriptions of CPAP machines, the percentage of people who cannot successfully use them, and the percentage of people whose anatomy is not correct for the device. This is on page 8 of their presentation:
http://d18rn0p25nwr6d.cloudfront.net/CIK-0001609550/25225e5f…

The STAR trial did show AHI around 9 after 1 year, although it was closer to 6 after 5 years. Anyway, again, this is for people who are not successfully using CPAP, so this is still a huge benefit compared to their baseline.
4. Not sure how they recognize revenues; since these are expensive operations (50k+), I would like to know more about how revenue is recognized. The 10k notes that revenue is recognized based on ASC 606 but doesn’t seem to provide further details.
I don’t think I know enough about accounting to answer this.
-lemur

This is a very interesting discussion for me in that I am a CPAP user. I was fed an Inspire advert (how I was targeted for this ad is an interesting question which I won’t delve into, but it appears that someone, somehow got access to private medical records).

Anyway, I asked my sleep therapist about it, rather than him telling me there was an alternative therapy. His attitude was somewhat reserved and cool. He referred me to a surgeon who is experienced with this device. I have not yet followed up on that referral, but my guess is that I am not a viable candidate. First, I am using a CPAP successfully. Second, I’m overweight, maybe not prohibitively, but overweight nonetheless.

My interest was spurred by the fact that I travel out of the country for months at a time and hauling this piece of equipment everywhere, finding distilled water, even setting it up in proximity of an electrical outlet is often a pain. It would be a lot more convenient to have this thing inside my body.

I don’t relish the idea of being an early adopter of a non-critical medical device. I’m going to sit on the sidelines and let this thing mature a couple more years. As for the investment opportunity, well you just can’t buy every promising new stock. I’m going to sit on the investment sidelines as well. There’s no recurring revenue with this thing. If revenue is going to double, they have to sell twice as many units next year as this - OK, maybe not exactly linear, but close enough.

I’ve looked at this and considered a holding. What held me back was:

  1. I don’t think their TAM is that large (although it is under recognised, underserved and growing).

  2. They don’t seem to be scaling that quickly for such a small company and the growth seems entirely sales force addition generated rather than a demand whirlwind

  3. Slowing down to 30% growth before hitting a 100m run rate and or becoming profitable seems a pretty early point in the story to be on the growth glide path

  4. The business model has no follow on sales potential or razor/blade like consumables. Once implanted that demand is off the TAM until the battery runs out in 10 years.

  5. For demand generation it requires a complicated patient referral funnel it isn’t like emergency heart surgery or primary care drugs.

Some of my thoughts - I really wanted to like this one more than I do.

Ant

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