Wolpack se pone corto de Inspire Medical Systems
Introduction
Wolfpack is short Inspire Medical Systems (INSP). The annual market opportunity promoted by its management is so preposterous that it must be disingenuous, leaving investors holding the bag of this terminally unprofitable business. It turns out that Inspire can barely even give their device away: It has been available to ~9 million enrolled U.S. Veterans for free since 2014, but data from the VA hospital system show only 387 total patients have opted for Inspire’s surgery. Our research shows Inspire can’t even sell 20,000 units in a year, much less the 500,000 units claimed by management. Inspire’s surgically implanted device comes with a long list of onerous lifestyle restrictions and insufferable side-effects that permanently haunt past patients and drive off potential patients. Insiders have pocketed more than $340 million from stock sales, nearly 3x the company’s total revenue since the 2018 IPO. Inspire is only good at selling two things: this ridiculous growth story and their stock.
Summary
Inspire’s device is far too invasive and restrictive to ever gain traction in a market with numerous non-invasive alternatives.
Inspire promotes itself as a minimally-invasive and more convenient solution for Obstructive Sleep Apnea (“OSA”). We found that Inspire’s surgery is anything but minimally-invasive. It carries serious risks such as laceration of the jugular, paralysis and leaves large visible scars on the patient’s neck and chest. Further, Inspire’s device requires additional surgeries to replace the battery every 7-10 years for the rest of your life, which is a shit sandwich in-and-of itself.
In the years between these surgeries, Inspire’s device can cause serious injury if the patient has a pacemaker, undergoes an MRI, or requires defibrillation during a cardiac event.
[1] All Inspire patients have to live with a nightmarish list of restrictions that make Inspire’s
“therapy” as inconvenient as we could possibly imagine. They must worry about every day activities like answering their cell phone, using a computer or power tools, going to the store and going through airport security because Inspire’s device can be damaged by any one of these activities, requiring yet another surgery.
Would you be willing to take on all of these risks and restrictions to “ease the symptoms” of a condition that has numerous non-surgical treatment options?
We reached out to several Inspire patients who had written about their experience online and spoke to four who were willing to share their story with us in detail. After hearing these stories, it appears that the adverse-effects and lifestyle restrictions of Inspire’s device can be worse than the symptoms of OSA itself. Inspire’s own studies show that the unhappy patients we spoke to were not outliers. During Inspire’s self-funded
Stimulation Therapy for Apnea Reduction (“STAR”) study, the key to its FDA approval, 85% (107 out of 126) of patients suffered at least one adverse event. During the 12-month study, these 107 patients experienced 494 total adverse events.
[2] We consider this to be very concerning, considering that Inspire hand-picked the patients for this study, rejecting 86% of the original applicants.
Inspire’s real-world FDA submitted adverse event reports include horror stories of surgeons lacerating the patient’s jugular during surgery and patients nearly dying on the operating table, ending up in ICU without ever receiving the implant.
We have provided a full list of these 192 adverse event reports in Appendix D to this report. In the last month and a half, ten new adverse events were reported to the FDA, five of which resulted in removal of the device for medical necessity.
Two of the Inspire patients we spoke to allowed us to share their stories. We will refer to them as “Patient A” and “Patient B.” Patient A felt she was misled about the procedure and the device itself, and that if she had been warned of the potential side-effects, she never would have had the device implanted at all. She told us she experienced three serious adverse events, one of which involved temporary paralysis caused by part of the device slipping down into her abdomen. She claims that when she attempted to contact Inspire about this adverse event, they rejected her claim and “vehemently denied it could have happened.” Inspire now ignores her calls, leaving her only with visible scars and regret.
Patient B was nearly 80 years old when she had Inspire’s device implanted. She complains that the constant electrical shocks feel like someone is “tugging and twisting” her tongue. This is not an isolated incident – one-third of the patients in Inspire’s STAR study complained of similar discomfort from the electrical stimulation.
[3] Even worse, Patient B now carries a bucket around her house because of the significant excess mucus production she has experienced since the device was implanted. Inspire does not list this as a potential side-effect of its
“therapy.” Patient B says that the Inspire device has
“ruined her life.” Neither of these patients still use the device, but they are afraid to have it removed due to the serious risks associated with the removal surgery.
[4]
We also found a growing list of customer complaints, with terrifying descriptions of the potential downsides to Inspire’s invasive procedure, such as “drooling, facial paralysis or drooping, slurred speech” and “nerve damage resulting in numbness and discoloration of one side of the tongue, or battery leaking into body.” These are just a few of the dozens of customer complaints that we found. You can see the full list in Appendix E of this report.
Our research shows that Inspire’s management exaggerates its TAM by at least 50x in order to sell investors a growth story they must know is fictional. Despite incessantly touting a $10 billion (500,000 unit) annual market opportunity, insiders have sold more than $340 million worth of stock since the IPO – nearly 3x the company’s total revenues during that period. Most recently, Chau H. Khuong, an Inspire Director and Partner at OrbiMed Advisors, sold 1.5 million shares for ~$130 million between March 3-6. Just weeks later Inspire pulled its 2020 guidance and announced a secondary offering of 2 million shares at $58.00, a ~35% discount to Khuong’s well-timed sales.
Sleep Apnea experts we spoke to told us that OSA symptoms are often so subtle that patients don’t even realize they have a condition. Inspire’s solution for OSA is proving to be about as popular as lobotomies were for treating migraines in the 1950s.
[5] Inspire’s device has been on the market for 5 years in the U.S. and 9 years in Europe and has only sold ~7,200 units worldwide.
Inspire’s massively overstated TAM also underpins investors’ dreams of achieving profitability through economies of scale. However, Inspire is actually exhibiting diseconomies of scale. Despite growing its unit sales from ~2,300 in 2018 to ~3,700 in 2019, Inspire’s SG&A expense per unit actually increased from $23,800 to $24,800. Inspire has already reached the most desperate OSA patients, making each unit more expensive to sell. At an operating margin of -42.5% and free cash flow burn of -$10,000 per unit in 2019, it may seem impossible for INSP’s financial performance to get much worse, but it can, and we believe it inevitably will.
This company will likely never make a profit. Its device is only a feasible therapy for Strict Amish Communities who don’t use cell phones, power tools, computer disk drives or basically any other technology that we can’t live without. Furthermore, we found empirical evidence to prove how unrealistic Inspire’s $10 billion per year TAM claim is.
Data from Inspire’s most mature markets show that, in reality, the vast majority (99%+) of OSA patients refuse Inspire’s surgical solution. Inspire can’t even sell patients their device for free. For example, Inspire’s device has been available to ~9 million U.S. veterans
at no cost to the patient through the U.S. Veterans Administration (“VA”) for more than five years.
[6] However, instead of taking off toward Inspire’s massive purported TAM, Inspire’s sales to the VA peaked at only 150 units (~1% of VA CPAP) in 2018 and fell to a mere 110 units (~0.7% of VA CPAP) in 2019.
[7]
Because patients must first try and reject CPAP treatment to be eligible for Inspire’s implant, the number of new CPAP users per year is the starting point for its top-down TAM calculation and the basis for its hyperinflated TAM claims. Inspire uses an internal
“company estimate” of 2 million new CPAP users per year for this critical assumption. After speaking to numerous industry experts and hearing over and over that Inspire’s estimate was far too high, we decided to engage an independent market research firm to get the kind of precise data that Inspire refuses to provide.
[8] Their data showed that new CPAP users per year are less than half of the 2 million internal
“company estimate” Inspire uses in its TAM calculation. After adjusting for patient preference and reviewing Inspire’s
actual sales performance in the five years since its FDA approval, we conclude that Inspire’s realistic TAM is less than 2% of what management claims.
Our research proves to us that the internal estimate Inspire uses as the basis for its growth story is a farce. We are providing more truly independent data and estimates for investors than Inspire has. We challenge Inspire’s management to provide investors with evidence that supports its opaque internal estimate of 2 million new CPAP prescriptions per year, which it uses as the starting point in its TAM calculation. We spent months speaking to experts, market research firms and other industry participants, none of whom believed Inspire’s estimate of 2 million new CPAP prescriptions per year was anywhere near realistic.
