Inspire Medical Systems, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Inspire Medical Systems is a medical technology company focused on the development and commercialization of innovative, minimally invasive solutions for patients suffering from obstructive sleep apnea (OSA).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Inspire Medical Systems is a medical technology company focused on the development and commercialization of minimally invasive solutions for patients with obstructive sleep apnea (OSA). Their primary product is the Inspire system, an implantable neurostimulation device designed to treat moderate-to-severe OSA in patients who cannot or do not want to use Continuous Positive Airway Pressure (CPAP) therapy.

  • Technology and Approach: The Inspire system involves a small, battery-powered neurostimulator placed under the skin in the upper chest area and a breathing sensor lead under the intercostal muscles. These are connected to leads that stimulate the hypoglossal nerve, which controls tongue movement.
  • Target Market: Patients with moderate-to-severe OSA who are unable to achieve adequate results or do not tolerate CPAP therapy.
  • Revenue Streams: Revenue is primarily derived from sales of their Inspire systems and from related services. Their systems are sold directly to hospitals and ambulatory surgery centers in the U.S. and select countries in Europe and Asia.
  • Market Trends: The global sleep apnea market is a large and growing market, driven by increased awareness of OSA, an aging population and the growing number of diagnosed patients.

Moat Analysis: 3/5

  • Intangible Assets (Brand/Patents): Inspire has obtained a wide array of patents in the field of OSA, the medical technology industry generally has a high barrier to entry. However, due to constant innovation, they may become obsolete. The brand itself is relatively new and not as strong as brands like Medtronic in other sectors. This represents a moderate moat.
  • Switching Costs: Patients who have found success with the Inspire system are likely to be extremely reluctant to switch to another form of treatment, giving Inspire some customer lock-in. They have also established a patient support network that adds to the switching costs for patients.
  • Network Effects: These aren’t present. No network effect is applicable to medical devices like Inspire as of now. A patient’s choice of treatment is unlikely to influence others.
  • Cost Advantages: Inspire doesn’t have much of a cost advantage other than efficiency in their sales force. Their product is quite difficult to replicate and manufacture, so they have a slight cost advantage there. They don’t have any significant production advantage over their peers.

Overall Moat Rating: We will assign a narrow but sustainable moat due to customer switching costs and intangible assets from product complexity and patent protection. A competitive landscape is still present in this sector, and they are susceptible to new tech or new products, therefore wide moat isn’t an ideal rating. Thus, a moat score of 3/5 is warranted.

Risks to the Moat and Business Resilience:

  • Competition: The OSA treatment market has established alternatives like CPAP, Oral Appliance therapy and emerging ones as well. If any of them show greater efficacy than Inspire, it could negatively impact future profitability of the company.
  • Technological Disruption: A technological breakthrough in the treatment of OSA could make their system obsolete. If new technology such as drugs or better non-invasive tech is released, Inspire will face a hard time staying in business. This is one of the biggest risk they face.
  • Regulatory Changes: Regulatory changes and restrictions from the FDA and other international agencies can affect approval timelines for the system. Changes in reimbursement policies by governments and payers may decrease the affordability of Inspire, ultimately reducing demand. This represents a high risk that could damage value.
  • Clinical Trial Failures: The current version of the Inspire system is being pushed to get approved for a milder version of OSA. If the results from such trials are not in line with expectations, then there could be a significant sell off in their shares, and further research and development could become expensive.
  • Supply Chain Issues: They face risk of issues caused by a few single source suppliers for critical components. Any disruption or degradation of the relationship could result in negative implications. These are all quite high given the limited sources available for them to pick from.
  • Acquisition risks: As management indicated in the earnings call, future revenue growth relies on acquisitions. Thus, there’s a risk if the company has poor performance from such acquisitions. They may end up overpaying, and they will be exposed to integration risk.

Financial Analysis:

  • Revenue Growth: The company has shown consistent growth in recent years as adoption of their technology increases. Year-over-year revenue increase has been excellent over the past few years.
    • For the three months ended June 30, 2024, they made $195.2 million, a 46% increase YoY, which is more than the $133.9 million earned in the previous year, 2023.
    • For the six months ended June 30, 2024, they made $359.6 million, a 39% increase YoY, which is more than the $258.3 million earned in the previous year, 2023.
  • Profitability: Gross margins are strong, indicating good pricing power. Operating expenses have been a source of concern for the company, with heavy investments made towards sales and marketing activities.
    • Gross margin in the latest quarterly report is 84.3% for the three months ended June 30, 2024. There was an increase in gross profit, from $103.1 million to $164.6 million, representing a strong increase of approximately 60% YoY, while gross margin remains constant at 84%.
    • Operating expenses for the latest quarter have seen a 35% increase YoY, with R&D expenses seeing the smallest increase out of all opex elements.
  • Net Losses: Company is currently unprofitable as a net loss has been recorded for Q2. This is attributed to higher operating expenses. They have reported a net loss of -$18.4 million which is down from -$27.3 million in the past year. This loss is largely due to a $14.4 million interest expense.
  • Cash Flows: The company has a decent cash position and generated $57.5 million in cash flows from operations in Q2, and $117.3 million in YTD cash flows.
  • Capital Structure: The company uses both debt and equity to finance the company, with long-term debt standing at $47 million.

Understandability: 3/5

  • Product Complexity: The company’s product requires an understanding of a medical procedure and underlying technology. It is still fairly straightforward.
  • Business Model: The core business model of selling a device to help patients with OSA is straightforward, but understanding the nuances and competitive landscape could prove a little complicated.
  • Financial Statements: The financials are fairly easy to understand and analyze. It’s a medtech company, so growth is their main objective. However, a deeper look into non-operating expenses is often needed.
  • Management: They have a great track record of innovating and bringing new products to market, and are focusing on increasing sales and margins.
  • Overall, the business is relatively easy to understand, but needs due diligence to fully understand different aspects. Thus, a 3/5 rating is warranted.

Balance Sheet Health: 4/5

  • Liquidity: The company has a healthy cash balance and short-term investments with adequate liquidity to fund day-to-day operations. They have $147.5 million in cash and short-term equivalents. They have $87.5 million in short-term investments, all adding up to a respectable amount of $235 million.
  • Solvency: While the company holds some debt, it is manageable and represents a relatively small portion of their asset base.
    • Long term debt is at $47.2 million.
  • Assets: Primarily consist of cash and equivalents, investments, receivables, inventory and property and equipment.
  • Liabilities: Consist of accounts payable, accrued expenses, deferred revenue and long-term debt. They appear to be in check and in reasonable ratios with respect to total assets.
  • Overall Assessment: The company has a good liquidity position and very manageable long-term debt. Hence a score of 4/5.

Recent Developments and Management’s Response

  • Q2 2024 Earnings: Inspire reported strong revenue growth, exceeding analysts’ expectations. They are also on track to complete the enrollment for their next-generation FDA-approval. They continue to gain market share in the U.S., European and Japan markets.
  • Guidance: Management seems optimistic with respect to their growth and expect 2024 revenue guidance to be between $716 to $726 million, which is approximately 30% growth YoY. This is a very important factor for investors to know.
  • Debt Levels: They have been taking on debt for expansion, which could be a concern in the future. However, it remains a manageable level of debt, and the strong revenue growth will pay it off easily.
  • Future Risks: As per their 10-K report, they face a lot of risks. The company’s future success is heavily influenced by its intellectual property protection, which includes patents. There are other risks pertaining to legal matters, product liability, the healthcare industry as a whole and also the financial environment.

Based on all of the information above, Inspire Medical Systems does have a fairly strong moat, good balance sheet position but needs a lot of effort and resources to generate enough growth to satisfy stakeholders. It needs a lot of observation in terms of competitive landscape, as it might see more competition in the future. It can also be quite unpredictable in the stock market.