Inspire Medical Systems: Huge Potential

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About: Inspire Medical Systems, Inc. (INSP)
by: The Prospector
Summary

Inspire Medical Systems offers a niche solution to curing sleep apnea.

The company will generate $75 million this year in what it estimates is a $10 billion market. The procedure requires surgery that costs thousands. Medicare and Insurers onboard.

No other device company offers the same technology in the U.S., though a European competitor is going through FDA testing that ends in 2022.

There are several risks with Inspire, but the potential is huge if sleep apnea patients increasingly opt-in to the solution.

Thesis

Inspire Medical Systems (INSP) may be in the early stages of what could be impressive growth story for treatment of sleep apnea.

The company is the first to receive FDA approval for a minimally invasive procedure for the implantation of a device that cures sleep apnea with a technology called closed-loop neurostimulation.

There is a high failure/dissatisfaction rate among CPAP users, and it's this CPAP problem that creates the market opportunity for Inspire. As it stands now, Inspire has a massive potential runway in the U.S. ($10 billion market) and is exploring options for growth in Europe.

This year, the company is on pace to generate $75 million in revenue, which is less than 1% of the potential market. Though the stock trades an extreme multiple relative to current revenue, and the company is not profitable, the potential market is undeniably massive.

Sleep Apnea

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.

CPAP Machine

Aside from traditional CPAP companies, Inspire's competitors include various oral surgeries and oral devices sold by dentists.

Inspire does not have a domestic competitor selling closed-loop neurostimulation technology. Inspire argues that its value proposition is that common CPAP alternatives have limited patient benefit compared to Inspire's technology. Notably, the company argues that oral surgical procedures have limited or unpredictable clinical benefit, are irreversible, and can be painful.

That said, Inspire's closed-loop neurostimulation solution is itself a surgical implant. And it costs a lot of money and typically requires a lengthy prior authorization process to get an insurer to agree to pay for the procedure. Medicare reimbursement for the procedure is nearly $30,000.

Closed-Loop Neurostimulation Implant

The Inspire closed-loop neurostimulation technology was conceived at Medtronic (MDT) in the 1990s before Inspire was spun out from Medtronic in 2007. Inspire went public as a company in 2018 after receiving FDA approval for its sleep apnea device in 2014.

Source

Surgery is required for a patient to use Inspire's technology. The two-hour outpatient surgery requires anesthesia and involves three surgical incisions. The device is operational 30 days after surgery and lasts 11 years on the original battery, which is inside the neurostimulator. After 11 years, the neurostimulator battery would need to be replaced with a new outpatient procedure.

Medicare and many insurance companies will fund the Inspire implantation if a patient can prove, through a prior authorization process, that CPAP for them does not work. I presume that any subsequent surgical procedures to replace the neurostimulator battery would also be covered by insurance.

Source

To date, 375 commercial payors have paid for the Inspire procedure. The company now has coverage policies from 41 U.S. commercial payors, covering 142 million lives. More than 6,000 patients have received Inspire implants thus far.

The company has also made coverage strides overseas. Last year, Japan's Ministry of Health, Labour and Welfare approved Inspire therapy and the company is actively seeking reimbursement coverage in Japan. As of now, nearly 90% of Inspire revenue is from the U.S. with the remainder coming out of Europe.

Market Penetration

In order to gain traction in the sleep apnea market, Inspire's biggest challenge is creating awareness of its product in order to drive demand from patients and knowledge among physicians. The company cites data from 22 studies covering 1,500 patients of the technology's benefit.

As stated previously, the procedure to implant this technology into a patient is not cheap and the company must get buy-in from patients, hospitals, and insurers.

Driving demand from unhappy CPAP patients is the key to Inspire's success. In Q2-19, the company rolled out new patient education initiatives. The company conducted market research earlier this year and decided that it needed to emphasize the comfort and ease that its product would provide patients.

No mask, no hose, just sleep.

The company has launched a new website called inspiresleep.com, which is intended to educate patients and provides easy ways for patients to contact the appropriate healthcare provider. In addition to this, the company continues to attempt to build patient awareness through paid search, radio, social media, and online videos.

Source The company has also received press in the popular media.

From a social media standpoint, its Facebook presence appears to be pretty solid, but its Twitter impact appears to be minimal. The upside to many of its Youtube videos is that they largely consist of patients and doctors discussing the benefits to Inspire's product and these videos appear to have been produced and promoted by the health systems themselves.

Competitors

Domestically, Inspire does not have a competitor that offers the same technology. Its primary competitors are providers of CPAP machines and alternative oral surgeries. The company notes in its 10-K that an international competitor, ImThera, provides a comparable technology and is currently seeking FDA approval for its solution in the U.S. ImThera was acquired by London-based LivaNova (LIVN) in 2017. Details about rival Imthera's solution noted in other articles like this one on Seeking Alpha appear to not have changed.

Source

LivaNova discussed the 2019 ImThera FDA trial study on its Q4-18 earnings call. In short, the ImThera study is not scheduled for completion until December 2022. This means Inspire has at least another three years of non-competitive runway to dominate the market for closed-loop neurostimulation sleep apnea therapy. In addition to ImThera, Inspire believes other technology companies are in the early stages of developing competing technology.

Valuation

Inspire is not profitable and is trading at a steep 22 times forward sales, which is about 4x medical device industry average. That said, the company's revenue growth rate far exceeds the industry average as well. The company is priced for its potential in what could end up being a large market.

The company continues to revise revenue growth estimates upward as it expands its salesforce and attempts to get its devices into more hospitals and generate more demand from patients. Revenue growth was up 77% in 2018 and is expected to approach 50% this year after the company revised annual guidance upward on the Q2-19 call. An investment in Inspire is largely a bet on patient adoption of Inspire's solution. If the company hits roadblocks in patient buy-in, the company's prospects could be greatly curtailed.

Conclusion

Inspire looks like a reasonably speculative bet in a niche market in which it has distinct competitive advantages in the near-term. It remains to be seen what the long-term potential of the company is or when it will become profitable. I have initiated a small position on the promise of the addressable market opportunity and expectations of continued strong sales growth.

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.