In November of last year, I believed that it was time to wake up in the case of Inspire Medical Systems (NYSE:INSP). After shares fell below their late 2020 levels, while sales have five-folded in the meantime, appeal was on the increase even as growth was slowing down as a result of the law of large numbers.
While adjusted operating losses came down, more work was to be done on the operating leverage front. By now it became evident that momentum was strong in the fourth quarter, yet I recognize that a spectacular rally in recent months has lifted the bar and expectations quite a bit already.
Inspire Medical Systems – A Potentially Inspiring Stock
Inspire focuses on the development and commercialization of minimally invasive solutions for patients suffering from sleep apnea. To that end, the company has developed the Inspire system, at the time the only FDA-approved neurostimulation technology used to treat so-called obstructive sleep apnea.
The idea behind the system is that it monitors breathing patterns and, if necessary, delivers nerve stimulation through implanted devices in order to open airways whenever breaking patterns become irregular. The operation itself now only takes 90 minutes, is safe, and equips patients with an 11-year-long lasting battery, with some 60,000 patients treated to date.
A $25 stock on its IPO day in the spring of 2018 was valued at a modest $400 million, despite having an FDA-approved product and catering to a large potential patient population. Sales were trending at around $40 million at the time, coming in at more than double a $17 million number in 2017, which in itself doubled from $8 million in sales in 2016.
Ever since, continued growth made that sales were reported at $50 million in 2018, as sales grew further to $82 million in 2019, as shares consequently rose to the $75 mark at that point in time, only to more than double and trade near the $200 mark by year-end 2020.
Post-pandemic, the company has only seen stronger growth with revenues up 40% to $115 million in 2020, as revenues doubled to $233 million in 2021, to nearly double again to $408 million in 2022.
Despite the strong growth and gross margins reported in the 80s, the company posted an operating loss of $48 million, which rose in dollar terms compared to a $40 million loss in 2021, but revealed progress in relative margins.
For 2023 the company originally guided for 37-40% sales growth, with revenues seen between $560 and $570 million, as no margin guidance has been provided. The company started 2023 strong, reporting an 84% increase in first quarter sales to $128 million, as the company obtained countrywide reimbursement in Belgium and obtained FDA approval for the treatment of Down syndrome patients.
Shares peaked at $330 following the release of the earnings report. This price level and 29 million shares outstanding granted the business a near $9.6 billion equity valuation, and an enterprise valuation just north of $9 billion after factoring in a substantial net cash position. Needless to say, valuations ran quite hot at over 15 times sales.
Valuations Come Down
Between a peak in July and the fall, shares have lost over half of their value, as shares fell all the way to the $120s in November. In the meantime, Inspire posted a 65% increase in second quarter sales to $151 million, with operating losses seen at $16 million, up minimally compared to the year before. In November, third quarter sales were reported up 40% to $153 million and while growth slowed down, operating losses narrowed to $13 million, an encouraging sign.
The company now saw full year sales at a midpoint of $610 million, as I picked up coverage at $145 in November. By now a $9 billion peak enterprise valuation had fallen to $3.8 billion, equal to about 6 times sales, which looked like a reasonable multiple given the still solid growth being reported, even as percentage growth came down.
The issue of course was the losses, but the company appeared to make some progress on this front, as that was needed to create appeal for investors as well.
A Big Rally
In the short period which has lapsed since November, shares of Inspire have risen some 50% to $218 per share as of the moment of writing. This momentum run is attributed to a massive recovery in equity markets in the fourth quarter, all induced by lower interest rates. More fuel was provided in January when Inspire issued positive comments about the fourth quarter while issuing solid guidance for 2024.
Fourth quarter sales were seen up 40% to $192.5 million which looks solid and is in line with the reported results, as full year sales were reported at nearly $625 million, some fifteen million ahead of the latest guidance. The company posted a quarterly operating profit of $9.3 million and amidst interest received on cash holdings and little taxes paid, net earnings of $14.7 million worked down to a $0.49 per share earnings number, all while net cash grew to $460 million.
The company guides for 2024 sales to come in between $775 and $785 million, up 24-26% from 2023. This looks solid and likely is conservative, as the real issue is how margins will evolve. Given the cash holdings, there is no need to turn a profit, as management continues to balance between growth and margins. The company continues for stable gross margins in the mid-eighties, but unfortunately, no (operating) earnings guidance has been provided.
On the conference call, management guided for greater seasonality in the first quarter (to be softer in this case) yet expected overall operating leverage to improve throughout 2024, and to be profitable in the second half of the year, being rather comforting words.
After a 50% run in the time frame of a quarter, the operating asset valuation has risen to about $6 billion here, trading at roughly 7-8 times forward sales, which are still growing at a decent clip but are not really profitable (yet).
This clearly demonstrated that the company does not believe that there is a (massive) negative impact of GLP-1 drugs, but perhaps that is a bit too early, as there is an active debate about whether obesity and high BMIs are linked to obstructive sleep apnea. On the most recent conference call, management even indicated potential benefits from GLP-1 drugs, as high BMI patients tend to have lateral wall constructions, which the company’s solutions have trouble with.
Given all of this, I am a bit cautious given the momentum seen already, although I recognize that the company ended 2023 on a strong note and issued solid guidance for 2024. Amidst all of this, I am constructive on the business, but before getting involved I would like to see a bit of a setback, or a period of stagnation, after a great momentum run seen already.