2023-11-17 09:39:04 ET
Summary
- Inspire Medical Systems, Inc. shares have dropped below their late 2020 levels despite a five-fold increase in sales.
- The company has seen impressive revenue growth, although coming down a bit amidst the law of large numbers.
- Although operating losses have decreased, more work is needed to improve profit margins and demonstrate operating leverage.
Late in 2020, I believed that shares of Inspire Medical Systems, Inc. ( INSP ) were running out of inspiration after they had seen a great run. After a further great boom in the period which followed, shares are back to levels below the levels seen late in 2020, while the business has grown a factor of 5 times in the meantime.
This is very interesting, of course, amidst rather limited dilution, although that the company is still not yet able, or wiling, to post profits. This makes me a lot more upbeat here, although a bit further operating leverage would be welcomed here.
Going Back To 2018 - IPO Day
Inspire is a medical technology business which focuses on the development and commercialization of minimally invasive solutions for patients which suffer from sleep apnea. For that end, the company has developed the Inspire system, which at the time was the only FDA approved neurostimulation technology to treat obstructive sleep apnea.
The basic promise was that the system monitors breathing patterns, and delivers nerve stimulation to open airways whenever breathing patters become irregular.
The company went public in May 2018, as shares were trading around $25 on the first day of trading, giving the company a rather limited operating asset valuation around $400 million, despite a huge patient population. There were good reason for that, as the business was quite small. After all, Inspire generated just $8 million in sales in 2016, although revenues doubled to $17 million in 2017, and were trending at around $40 million at the time of the IPO.
With losses narrowing, a 10-times sales multiple looked justifiable given the rapid growth and huge growth potential, setting the shares up for a potential multi-bagger, although uncertainty on execution was high.
In the end, revenues rose some 77% to $50 million in 2019, as the company guided for another 35% growth in 2019, with revenues seen near $70 million (only to eventually end up posting revenues of $82 million that year).
After revenues fell during the start of the pandemic, the company saw a recovery during the summer, sending shares to a high of $167 in November 2020. That granted the company a $4.5 billion valuation based on a share count of nearly 27 million shares, although it included a minimal net cash position. This boom was driven by revenues trending at a run rate of $165 million in the end of 2020, although part of the demand was a catch-up impact from the earlier innings of the pandemic.
What Goes Up, Comes Down
In the end, share rose to the $200 mark late in 2020 as share have mostly traded in a $200-$300 range ever since. In fact, shares traded at absolute peaks around $330 in July of this year, after which they have fallen to current levels of $145 per share.
In the meantime, the company has seen impressive growth. Despite the pandemic, revenues rose some 40% to $115 million in 2020, but this was just a start. Revenues more than doubled to $233 million in 2021, only to rise to $408 million in 2022 (nearly doubling again), as a strong testament of the product adoption.
Despite the rapid growth and gross margins in the mid-80s, the company actually posted a near $48 million operating loss in 2022 (comparing to a $40 million loss in the year before).
The 28 million shares awarded the company a $7 billion valuation at $250 in the spring, which pushed up valuations to over 17 times sales based on the 2022 performance, although the run rate suggested a higher revenue number, of course, as the business held nearly half a billion dollars in net cash as well.
Nonetheless, spectacular growth was set to come down, with revenue growth for 2023 seen at a more muted 37-40%, with revenues seen at $560-$570 million, while no margin or earnings guidance has been given.
2023 - Mixed So Far
In May, Inspire reported an 84% increase in first quarter sales to $128 million in sales. The company furthermore obtained countrywide reimbursement in Belgium and obtained FDA approval for treatment of Down syndrome pediatric patients. The company upped the full year sales guidance by twenty million to $580-$590 million alongside the report. Disappointing was the lack of operating leverage, with GAAP operating losses increasing from $16 million this period last year to $19 million and change.
By August, Inspire posted a 65% increase in second quarter sales to $151 million, while the FDA granted wider indication and BMI labeling expansion. Operating losses came in at $16 million and change, and while this was a sequential improvement, losses were bigger than a $14 million loss this period last year. The company updated the full-year guidance again, now seeing sales another twenty million higher to $600-$610 million.
In November, Inspire posted third quarter sales of $153 million, with sales up just 40% on the year before, with sequential growth coming to a near standstill. Despite slower growth, operating losses narrowed further to $13 million and change, which actually marked an improvement from the same period last year. Despite the lower pace of growth, the full year guidance was hiked again, with sales now seen at $610 million, plus or minus two million.
And Now?
Shares are now down to $145 per share, and have actually bounced some twenty dollars from the bottom. At this level, the 29.4 million shares value equity of the business at nearly $4.3 billion, and the enterprise valuation comes in closer to $3.8 billion if we factor in a net cash position of $467 million. This values the operations at around 6 times sales, which is much more reasonable for a medtech player, certainly as growth is slowing down, but still is decent.
Given this discussion, the Inspire Medical Systems, Inc. valuation story looks a lot more compelling here with shares now down to levels last seen in the fall of 2020, in fact trading just below the levels when I last took a look at the business in November 2020. In the meantime, the business has grown from a run rate of just over $150 million to a number close to 4 times that amount, while dilution has been limited.
To ignite appeal, more work needs to be done on the margin front, but operating losses are gradually coming down, as some of these losses are actually tackled by received interest on cash holdings here, limiting the cash burn.
Shares are down nearly 60% from the highs this summer, as interest rates were high already at that point in time as well. While revenue growth slowed down markedly in the third quarter, I am actually a lot more upbeat on the valuation prospects for Inspire Medical Systems, Inc. here, provided that some more operating leverage is demonstrated upon soon.
For further details see:
Inspire Medical Systems: Time To Wake Up