Inspire Medical Systems: More Positives

Thesis

Inspire Medical Systems (INSP) exceeded growth estimates in Q3 and raised full-year revenue growth guidance and gross margin improvement. Shares responded positively on the news, appreciating 5%. The stock, which is slightly below its 52-week high of $72, trades at a highly optimistic price/sales premium based on the market potential for Inspire's sleep apnea surgical procedure.

While Inspire is not profitable, it reported several positive developments in the quarter. The company continues to gain traction with health insurers, procedure growth is strong, and the prior approval process waiting period for patient access to the procedure is compressing. I remain long Inspire.

The Q3 Positives

Inspire is the sole company in the U.S. with FDA approval for a minimally invasive procedure for the implantation of a device that cures sleep apnea with a technology called closed-loop neurostimulation. Sleep apnea affects 100 million people around the world and 17 million people in the U.S. The most common treatment for sleep apnea is the CPAP machine. Of those using a CPAP machine, 35-65% of users have problems using it correctly or simply find it uncomfortable. Inspire's device is an alternative for patients unhappy with CPAP.

Source

In Q3, the company reported continued strong sales growth of 60%. This is a slight growth decrease sequentially from Q2 and Q1 of this year. Gross margin was up both sequentially and yoy to 83.4%. While the financials are impressive, the company made progress in other key areas, as noted in subsequent sections below.

Health Insurers Are Buying In

One of the major challenges the company has faced is getting buy-in from health insurance companies. A year ago, Inspire's product was available to just 25 million health plan members. As of this quarter, the number has jumped to 145 million across 45 different health plans. The company is working to expand coverage further.

Source

In addition to commercial plan progress, Inspire continues to expand access to new Medicare regions. Medicare coverage is determined regionally by the fiscal intermediaries managing each region. In Q3, six fiscal intermediaries, also known as Medicare Administrative Contractors, issued draft local coverage determinations (LCDs). These six MACs oversee 30 million Medicare members in 44 states. Just one remaining MAC, Wisconsin Physician Services (4 million lives), is yet to publish a draft LCD for coverage of Inspire therapy. Final LCDs could be issued in 2020.

Prior Authorizations Increasing And Becoming Easier

Using the Inspire device requires a minimally invasive surgical procedure. Health insurers don't want to pay for the procedure unless it is medically necessary. Generally speaking, doctors want to avoid the pain and administrative misery of the PA process when possible.

Source

In Q3, 672 patients received PAs for the procedure, an 80% increase yoy and a 16% increase sequentially. More importantly, the burden of obtaining PAs is decreasing. The median wait time for a PA this year has been reduced to 25 days vs. a median PA wait time of 100 days in 2018. This is the result of Inspire working with health plans to develop positive coverage policies. The better a health insurer understands the medical necessity of Inspire's solution, the easier it is to get procedure approval.

Patient, Provider Education Gaining Traction

The company's promotional site for Inspire - inspiresleep.com - has generated more than 3 million visits nine months into 2019, an 84% increase vs. 2018. More than 30,000 physician contacts have been made through the site, an increase of 40% vs. 2018. In addition to the website, the company will be rolling out TV ads in select markets.

Source

Valuation

Inspire is not profitable, is growing like crazy, and has no competitors domestically. It is trading at a steep 21x forward sales, which is about 4x medical device industry average. However, sleep apnea is a problem for many and the company estimates the market opportunity at $10 billion. The company continues to build momentum and procedure growth is likely to continue.

Conclusion

An investment in Inspire Medical Systems is a speculative bet on a sleep apnea alternative that is gaining traction and has massive market potential. I remain long.

Disclosure:

I am/we are long INSP.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.