Baron Funds, an investment management company, released its “Baron Discovery Fund” second quarter 2024 investor letter. A copy of the letter can be downloaded here. In the second quarter, the fund (Institutional Shares) declined 7.78% underperforming the 2.92% return for the Russell 2000 Growth Index. The lion’s share of negative attribution and 6.52% of negative performance of the fund during the quarter were attributed to the ten worst-performing equities. The firm believes downward movements are more technically tied to macroeconomic issues and the trading environment and could quickly revert. In addition, please check the fund’s top five holdings to know its best picks in 2024.
Baron Discovery Fund highlighted stocks like Inspire Medical Systems, Inc. (NYSE:INSP), in the second quarter 2024 investor letter. Inspire Medical Systems, Inc. (NYSE:INSP) is a medical technology company, focuses on the development and commercialization of minimally invasive solutions for patients with obstructive sleep apnea. The one-month return of Inspire Medical Systems, Inc. (NYSE:INSP) was 48.14%, and its shares lost 13.54% of their value over the last 52 weeks. On August 22, 2024, Inspire Medical Systems, Inc. (NYSE:INSP) stock closed at $186.35 per share with a market capitalization of $5.557 billion.
Baron Discovery Fund stated the following regarding Inspire Medical Systems, Inc. (NYSE:INSP) in its Q2 2024 investor letter:
“We bought shares of Inspire Medical Systems, Inc. (NYSE:INSP), a medical device company which offers a treatment for moderate to severe obstructive sleep apnea called hypoglossal nerve stimulation. Obstructive sleep apnea (OSA) is a common sleep disorder caused by relaxation of the airway muscles and obstruction of the airway, which interrupts normal breathing during sleep. First line therapy for OSA is continuous positive airway pressure (CPAP), which requires the patient to wear a mask and an air flow generator delivers air pressure to the patient’s throat to keep the airway open. Compliance rates with CPAP are low because many patients find the mask cumbersome or cannot tolerate the pressure. Inspire offers a small surgically implantable device that delivers mild stimulation to the patient’s hypoglossal nerve which causes the patient’s tongue to move forward, opening the airway. Since receiving FDA approval in 2014, Inspire’s device has gained rapid adoption, growing from $8 million in sales in 2015 to an estimated $783 to $793 million in 2024. For context of the market opportunity for Inspire, there are 8 million CPAP users in the U.S., and only 24,000 Inspire procedures were done in 2023 (with 60,000 done since the product launched).
During the quarter, the stock came under pressure due to final data published in June from Eli Lilly and Company’s SURMOUNT-OSA trial. The trial showed that Lilly’s GLP-1 drug (tirzepatide) reduced OSA in adults with obesity by up to 62.8%, and up to 51.5% of participants met the criteria for disease resolution. In our view, Lilly’s tirzepatide and other GLP-1 medicines will have an impact on the OSA treatment paradigm. However, we think that even if some patients fall out of Inspire’s sales funnel after taking a GLP-1, many new patients will enter the funnel. This is because patients who have an extremely high body mass index (BMI) are not currently considered candidates for Inspire therapy, and if those patients lose enough weight with a GLP-1, they can become candidates for Inspire. We also think the total addressable market (TAM) opportunity for Inspire is large and underpenetrated. One of the principal investigators in the SURMOUNT-OSA study estimated that 1 billion people around the world have OSA. Inspire management has estimated its TAM to be at least 500,000 patients in the U.S. alone, and the company’s penetration rate is less than 10%. Finally, we also note that not everyone can tolerate a GLP-1 medicine (particularly the high doses used in the study), and to maintain the effect on OSA patients would need to stay on the drug forever. Given their high costs, insurance companies could place limits on their use. Inspire trades at a compelling valuation (under four times 2025 EV/Sales). Axonics and Silk Road were acquired for far higher multiples. This is too cheap for a company growing revenues rapidly (over 20%) in a hugely underpenetrated market with high (84%) gross margins. Given all these factors, we think Inspire offers a terrific investment opportunity.”
A medical professional performing a minimally invasive procedure while using the company’s technology.
Inspire Medical Systems, Inc. (NYSE:INSP) is not on our list of 31 Most Popular Stocks Among Hedge Funds. As per our database, 35 hedge fund portfolios held Inspire Medical Systems, Inc. (NYSE:INSP) at the end of the second quarter which was 38 in the previous quarter. In the second quarter, Inspire Medical Systems, Inc. (NYSE:INSP) reported $195.9 million in revenues representing a 30% increase from Q2 2023. While we acknowledge the potential of Inspire Medical Systems, Inc. (NYSE:INSP) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
In another article, we discussed Inspire Medical Systems, Inc. (NYSE:INSP) and shared Artisan Small Cap Fund’s views on the company. In addition, please check out our hedge fund investor letters Q2 2024 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
