2023-08-16 20:31:37 ET
Summary
- Inspire Medical Systems has performed well in 2023 with its hyperglossal nerve stimulation design for sleep apnea sufferers.
- The company plans to release a version without a sensor lead in 2024, making the procedure even easier for physicians.
- Inspire is focused on creating high-quality software to improve the user experience and compete with cumbersome masks.
Inspire Medical Systems ( INSP ) is the largest pioneer in sleep apnea technology. The company has performed on all cylinders in 2023, with consistent revenue beats and guidance increases as sales execution continues to be strong. However, the stock has recently pulled back from over $300 to around $232 per share making the shares attractive for entry. The company has an innovative hypoglossal nerve stimulation design that prevents the need for CPAP masks and changes the game long term for sleep apnea sufferers. Obstructive sleep apnea affects 17 million Americans giving a large potential addressable market before considering 83 million others globally. 91% of patients preferred INSP to CPAP showing its improvement on what is a cumbersome legacy technology. With over 2 million CPAP machines prescribed each year in the United States, the potential for vast growth is there for Inspire. The product has more innovations to come, with INSP moving to a version without a sensor lead in 2024 and instead using an accelerometer to measure the airway. This makes the procedure even easier for physicians, which will increase uptake even more long term. The company is also focused on making high quality software to upgrade the user experience, so customers have no reason to pick a cumbersome mask again. The company has a great pipeline of improvements to come, and should provide strong earnings power in the coming years.
Pay for quality
Those that hold the stock or have looked at buying it before know the company trades at a very high valuation. However, the consistent execution and clean competitive landscape do support a premium valuation here. The company has a high margin product with no significant competition yet in a massive market as sleep apnea is an extremely common problem INSP is solving. Q2 results recently released were more of the same and continued to confirm the bull thesis. Revenues grew 61% y/y to $151.1 million, the majority of which is the main US market. Gross margin continues to be strong at 83.9% with long term margins able to go higher as they simplify the system components. While the company is not operating at a profit currently, that is mostly due to stock based compensation of $22 million. Cash flow was actually positive $15 million, with a net loss of just $12 million. Focusing on growth companies being cash flow positive is the key, as it removes likelihood for potentially significant stock sales in the future. They continue to add sales territories and sales representatives at a measured pace, increasing the reach to the medium size centers. They have grown to a solid 1045 locations in the United States providing the Inspire procedure. They are continuing to add 50-55 per quarter minimum, with upside to those numbers likely. Cash on hand continues to increase with $467 million on hand to fuel growth, meaning no equity raise is on the horizon. Long term operating margins should be in the 30%+ range with a huge addressable market moving from CPAP masks. Most that use masks would rather an alternative and INSP is moving to solving for more difficult cases. They recently received FDA approval for up to 100 apnea events per hour (up from 65) and BMI up to 40 (up from 32). This should be a nice tailwind to growth over the next year, as some patients that weren't suited for Inspire therapy can now take advantage.
The company has made solid progress by submitting its upgrade to Inspire 5 to the FDA - a version with no pressure sending lead. This upgrade makes the procedure faster and easier for ENT doctors, and improves the patient experience as well. It will also reduce the incidents of having to go back into the patient as the pressure sensing lead was the majority of issues with the system. That upgrade should roll out by the middle of 2024 with no slowdown on the launch according to management. They have Inspire 6 and 7 in development as well, with automatic on mode planned for VI (currently you need to activate the system before sleep manually). Sleepsync programmer for physicians was just approved with rollout in early 2024. This will allow for physicians to remote patient assistance by viewing patient data easily from a web portal. Sleepsync will help engagement and long term has SAAS revenue possibilities which is an interesting possibility in the future for additional high margin revenue. The strong focus on patient experience from management is reminiscent of diabetes leader DexCom ( DXCM ) and bodes well for long term uptake of Inspire technology.
SleepSync by Inspire (Q2 Presentation )
Risks - Ignore short term GLP-1 fear
Current risks to the INSP story are from the wider market seeing a significant drawdown and fears over long term demand. Short term fear has picked up as pharmaceutical giant Novo-Nordisk had great results from a recent Wegovy cardiovascular trial. GLP-1 receptor agonists like Wegovy reduce appetite significantly and have shocked the medical world with continued strong trials. They have lowered risk of obesity significantly and the drugs have more demand than available supply - for now. This sparked a recent selloff in many stocks related to obesity, even as the longer term impacts of NVO and LLY GLP-1 drugs are unknown. The market sees this as a potential risk to the obesity levels in the United States as these drugs rocket in popularity. Management actually sees this a potential benefit as current INSP cannot treat lateral wall collapse among the heaviest patients, only tongue base obstruction. They do have long term plans to increase to that indication as well, but over the next few years management thinks this could bring more BMI's into the range for INSP treatment. This is a situation where views are varied between the market and management on total TAM with time proving all.
Fear around medical technology since this trial seems overblown, and INSP is one of several stocks that appear a great buy from this selloff. Valuation is now below the low levels of October 2022 and April 2023 from which the stock had strong rebounds in the past. Price to sales is at 13x which is more than reasonable for a company with a strong moat, high margins and 50% growth at scale. INSP has a beta of 1.38 , making it significantly more volatile than the wider market. If the current pullback continues and morphs into a larger selloff, Inspire could rest its recent lows at $160 per share in a worst case scenario. The company has had several of these 40% drawdowns in the current bull market as the stock continues to be highly volatile. A pullback would require significant downward pressure on shares and would be an even stronger buying opportunity for those looking at the long term. It is good to keep this in mind and purchase the stock in quarter or half size positions and add in pieces.
Buy rated - 1 year horizon
Inspire is one of the highest quality and cleanest stories in medical technology. Competition is minimal in this indication for now as tradition CPAP continues to dominate the market. Payment coverage is strong in the United States covering 260 million lives, allowing for continued strong growth in coming years. Valuation has been reset now to 13x trailing sales where it has seen strong support in the past. The fundamentals have only improved as the product has gained traction and profitability is in sight for 2024. I continue to recommend bulls to add to positions under $250/share for both a trade or a long term hold on strong earnings potential. Inspire is projected to grow earnings at 27.5% per year over the next 5 years, an exceptional rate with more potential in out years. The wider market is expensive but the medical technology space has seen a pullback that should be seen as a great entry point for investors allowing for risk.
For further details see:
Inspire Medical Systems: Excellent Execution And Reset Valuation