Inspire Medical Files For U.S. IPO

Summary

• Inspire Medical intends to raise $86 million in an IPO of its common stock.
• The firm sells an implantable device for the treatment of obstructive sleep apnea.
• INSP is growing topline revenues well but is still far from profitability.

Quick Take

Inspire Medical Systems (NYSE:INSP) intends to sell shares of its common stock for gross proceeds of $86.3 million from a U.S. IPO, according to an S-1 registration statement.

The firm develops innovative therapeutic devices for the treatment of obstructive sleep apnea [OSA]. Currently, the company sells a proprietary Upper Airway Stimulation [UAS] therapy for patients who suffer from OSA.

INSP is growing topline revenues quickly in a moderately growing market space.

I’ll provide a final update when we learn management’s pricing and valuation assumptions.

Company

Maple Grove, MN-based Inspire Medical Systems was founded in 2007 to develop implantable neurostimulation technologies to treat Obstructive Sleep Apnea. The company’s proprietary Inspire system is the ‘first and only FDA-approved closed-loop neurostimulation technology which provides a safe and effective treatment for moderate to severe OSA.’

Management is headed by President and CEO Timothy Herbert who has been with the firm since 2007. Prior to Inspire, Herbert served in various management positions such as product development, clinical research, sales, marketing, etc. with Medtronic (MDT).

The company’s lead system, Inspire therapy, is designed to reduce OSA severity and improve quality of life for patients living with OSA (a generic form of apnea caused by airway blockage). Inspire is focused on patients in the US who suffer from moderate to severe OSA.

Investors in Inspire included Amzak Capital Management, Medtronic, TGap Ventures, GDN Holdings, U.S. Venture Partners, OrbiMed, Kleiner Perkins Caufield & Byers, Synergy Life Science Partner, Johnson & Johnson, and Aperture Venture Partners.

Technology

Inspire Medical Systems has developed the first fully implanted neurostimulation FDA approved device for the treatment of Obstructive Sleep Apnea. The Inspire system incorporates neurostimulation technologies and a proprietary algorithm that stimulates key airway muscles based on a patient’s unique breathing patterns.

Below is a brief overview video of how Inspire therapy works:

(Source: Inspire Medical Systems)

The Inspire system is a closed-loop solution that uses a proprietary algorithm to continuously monitor a patient’s breathing patterns. The system delivers mild stimulation to the hypoglossal nerve to maintain an open airway during sleep.

Controlled by a small handheld sleep remote, the device allows the user to turn the therapy on before bed and off after waking up. It can be paused and stimulation strength can be increased or decreased.

Along with the remote, the Inspire system also consists of three implantable components, which include a pressure sensing lead, a neurostimulator and a stimulation lead.

Four sponsored and more than six independent clinical studies have shown that Inspire therapy provides statistically significant and sustained reduction in the severity of patients' OSA, improvement in sleep-related quality of life and reduction in snoring, as well as high patient compliance rates and a strong safety profile.

Inspire sells its Inspire system to ‘hospitals and ambulatory surgery centers, or ASCs, in the United States and in select countries in Europe through a direct sales organization.’

Market

According to a 2018 market research report by Grand View Research, the global sleep apnea devices market size was valued at $5.1 billion in 2016 and projected to grow at a CAGR of 7.7% over the forecast period from 2012-2022.

The main factors driving market growth are the rising awareness among patients, growing geriatric population, increasing prevalence of sleep apnea, and the need for efficient diagnosis and treatment of apnea.

By region, North America is the most mature market with a revenue share of 38.9% in 2014. Growth is expected to continue with a large patient base and established presence of manufacturers.

The Asia Pacific market is expected to be the fastest growing market over the forecast period from 2012-2022 at a CAGR of 8.8%.

Competition

Major competitive vendors that are operating in the global sleep apnea devices market include:

• BMC Medical Co.
• GE Healthcare (GE)
• Fisher & Paykel Healthcare (OTCPK:FSPKF)
• Curative Medical
• Cadwell Laboratories ResMed
• Invacare Corporation (IVC)
• Braebon Medical Corp
• ImThera Medical
• Philips Respironics (PHG)
• Curative Medical
• Nihon Kohden (OTC:NHNKF)
• Compumedics (CMP)

Although Inspire is currently the only such technology approved for commercialization in the United States by the FDA, outside of the U.S., ImThera markets an open-loop neurostimulation device. Inspire believes that other companies are developing similar devices.

Financials

INSP’s recent financial results can be summarized as follows:

• Growing topline revenue although at a decreasing rate of growth.
• Increasing gross profit dollars.
• High and increasing gross margin percentage.
• Decreased cash used in operations.

Below are the company’s financial results for the past three years (Audited GAAP):

(Source: Inspire Medical S-1)

Revenue ($)

• 2017: $28.6 million, 74% increase vs. prior
• 2016: $16.4 million, 105% increase vs. prior
• 2015: $8 million

Gross Profit ($)

• 2017: $22.5 million
• 2016: $12.5 million
• 2015: $5.2 million

Gross Margin (%)

• 2017: 79%
• 2016: 74%
• 2015: 65%

Cash Used In Operations ($)

• 2017: $15.8 million cash used in operations
• 2016: $18.0 million cash used in operations
• 2015: $22.3 million cash used in operations

As of December 31, 2017, the company had $8.96 million in cash and $16.6 million in total liabilities.

IPO Details

Inspire Medical Systems intends to raise $86.3 million in gross proceeds from an IPO of its common stock.

None of the firm’s existing shareholders have expressed an interest in buying additional shares at the IPO price. Most life science companies have at least one existing shareholder that will support the IPO and the lack of such a supporter is a question mark.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering to hire additional sales and marketing personnel and expand marketing programs both in the United States and in Europe, to fund product development and research and development activities and the remainder for working capital and general corporate purposes.

Management’s presentation of the company roadshow isn’t available yet.

Listed bookrunners of the IPO are BofA Merrill Lynch, Goldman Sachs & Co., Guggenheim Securities, Stifel, and Wells Fargo Securities.

Expected IPO Pricing Date: Not on calendar.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.