A New Sleep Apnea Treatment Option You’ll Love
Lately we’ve been taking a long look at diseases which have no cure. It’s surprising that we’re now able to create synthetic life, yet there are still some very nasty diseases that afflict humans which we can’t yet cure. Most of these diseases will kill you, thus the sense of urgency behind finding a cure. However, there are also many medical conditions out there that won’t necessarily kill you but are still being treated using very primitive methods – like requiring diabetics to inject themselves with insulin. Sure, it’s only an inconvenience, but in today’s day and age we should be sorting this stuff out. Imagine having to wear a mask like this one every time you go to sleep.
More than 22 million Americans suffer from a condition called Obstructive Sleep Apnea (OSA) where the recommended first-line treatment is wearing that mask you see above while you sleep. It’s called Continuous Positive Airway Pressure (CPAP) therapy, and it’s the most common treatment for sleep apnea even though it suffers from a known adherence problem. If you’re unfamiliar with sleep apnea, it’s a condition that causes your airway to become blocked or partially blocked while you sleep.
Imagine waking up every two minutes, every time you try to go to sleep. If you’re someone who sleeps with a partner, that oftentimes becomes two people who wake up every two minutes. Unfortunately, the treatment isn’t very eloquent.
Treating OSA with CPAP
The most common treatment for sleep apnea is the aforementioned CPAP machine which uses a hose and mask or nosepiece to deliver constant and steady air pressure which is fed from a base unit. It’s as inconvenient as it sounds, and you can only imagine how much fun that device would be to take through TSA screening. (Don’t check it in, because the airlines might lose your baggage and then no sleep for you.) An article by Verywell Health states “when asked if CPAP is forever, the short answer for most people with sleep apnea is that CPAP is the most effective treatment that currently exists,” and goes on to say that you’re pretty much stuck with it until something better comes along. It’s not exactly problem-free either. An article by Mayo Clinic talks about how “common problems with CPAP include a leaky mask, trouble falling asleep, stuffy nose and a dry mouth.”
Whenever you have a condition like sleep apnea where the common treatment is something less than desirable, quacks start coming out of the woodwork promoting “natural treatments” and “home remedies” that the medical community has been hiding from you as part of a vast conspiracy to sell more CPAP devices. All you need to do is send your bank details to Dr. Ufa in Nigeria and he’ll sort you out. Let’s be clear here. Any alternative sleep apnea therapy being proposed should have some legitimate momentum behind it along with validation from the medical community. If your insurance covers it, that’s a good sign. One medical device for sleep apnea that meets this criteria comes to us from a $1.3 billion publicly traded company called Inspire Medical Systems.
Inspire Medical Systems
Founded in 2007, Minnesota company Inspire Medical Systems (INSP) was spun out from the $115 billion medical device company Medtronic (MDT) with technology that has been under development since the 1990s and became the only FDA-approved neurostimulation therapy for sleep apnea in 2014. In May of last year, the company had an IPO that raised $108 million on top of the $186 million in venture funding they already raised from the likes of Medtronic and Johnson & Johnson. In December of last year, they raised an additional $75 million in post-IPO funding which points to an aggressive effort they’re making at capturing a big chunk of a potential $10 billion annual market they’ve identified in the United States alone. Now, before we get into all that boring financial stuff, let’s talk about what it is they’re offering in place of CPAP therapy.
Inspire Upper Airway Stimulation
The Inspire system is controlled by a small handheld sleep remote, and consists of three components: a small generator, a breathing sensor lead, and a stimulation lead. Simply turn the therapy on at night before bed, and off in the morning when you wake up. The Inspire system is typically implanted during an outpatient procedure. The system is placed under the skin of the neck and chest through three small incisions.
All Inspire patients can undergo most imaging technologies across the entire body including CT, ultrasound, and X-ray scans. The battery in Inspire therapy is designed to last for approximately 11 years. Once the battery runs out, you will need to have it replaced. It’s a quite common procedure with many implanted devices, including pacemakers. So, how well does it work?
How Well Does Inspire Therapy Work?
In 2018, there were 17 studies which evaluated Inspire across a population of 1,470 patients. Data from the STAR clinical trial showed that 86% of bed partners reported either no snoring or soft snoring by their partners using Inspire therapy after twelve months. In another study that was conducted, 96% of patients believe that Inspire therapy is better than CPAP therapy and would recommend it to family and friends. One study by Cleveland Clinic concluded that Inspire therapy is “curative for many patients” and an “excellent option for second line therapy for those who are intolerant to CPAP.” In other words, if you can’t stand wearing a mask every night when you go to sleep, this is the next option you should look at.
Lots of additional detail can be found in Inspire’s investor deck, but perhaps the biggest vote of confidence comes from the insurance companies. Seventy percent of people who submit for insurance approval get it and the procedure is not scheduled until it’s been approved. Over 330 commercial payors in the U.S. have paid for the Inspire procedure, mostly through prior authorization. Inspire is now working to educate insurance companies so that positive coverage policies can be put in place. In other words, if you’re someone who wants to get this procedure and your insurance company initially says no, you just need to be the squeaky wheel that gets the grease.
The Sleep Apnea Market
One term that’s often used by the talking heads in finance is Total Addressable Market (TAM) which refers to the entire revenue that you can capture for any given opportunity. As we said earlier, Inspire talks about a potential market of $10 billion – in the U.S. alone. If Inspire can capture 25% of that TAM, that’s $5 billion in yearly revenues. To put that number in perspective, it’s about one-sixth of Medtronic’s entire revenues for 2018. What’s interesting is how Inspire arrived at the $10 billion number. Check it out.
What they’re starting with are the 2 million Americans with moderate to severe sleep apnea that are prescribed a CPAP device. Published literature suggests that 35% to 65% of those people are “non compliant” which means for whatever reason, they’re not using the machine as prescribed. Inspire takes the lower end of that estimate (700,000 adults) and then reduces it by 30% to account for people who may suffer from “anatomy challenges” leaving 500,000 adults. Multiply that number by an average sales price of $20,000 and you arrive at $10 billion. We’re already talking a $10 billion a year market by capturing only 25% of adults who have been prescribed a CPAP device. We haven’t even talked about kids yet or any global aspirations. In other words, that number has room to grow, and early revenue growth for Inspire shows promise.
Anyone who owns this stock or is thinking about owning it ought to pay very close attention to quarterly revenue growth as it has gone nowhere but up every single quarter. Revenue growth is a proxy for adoption and you want to see that number growing every quarter, even if they’re burning loads of cash early on to scale. The high margins imply that profitability can easily be achieved once the business has scaled.
Inspire is now working on the fifth generation of their neurostimulator and is also developing a cloud-based patient management system called Inspire Cloud. While it’s being designed to allow physicians to monitor patient compliance and therapy efficacy, the cloud-based platform will generate a big data set they can then feed to some hungry machine learning algorithms. One can easily imagine a future where you can check last night’s sleep on your smartphone or run a report that shows you how effective your Inspire therapy has been so far.
Once a company like Inspire can show that they’re on track to capture a decent chunk of their target market, they become an attractive acquisition for medical device companies like Medtronic that have a portfolio of medical device products that they manage in much the same way a retail investor might manage a stock portfolio. Medtronic has not only paid, but also increased their dividend for 41 years in a row. In order to keep those dividend increases coming, they’ll need to continue selling high-margin medical devices into high-growth markets. While early signs appear promising, it remains to be seen if treating sleep apnea with neurostimulation therapy is one of those high-growth markets.
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