Inogen, Inc. (INGN) Earnings Call Transcript & Summary

Okay. Welcome to the last day of the JPMorgan Healthcare Conference. My name is Allen Gong. I'm on the Medical Supplies and Devices team here at JPMorgan. It's my pleasure today to introduce the President and CEO of Inogen, Scott Wilkinson; and the CFO, Ali Bauerlein. After the prepared remarks, the breakout session will be down the hall and then around the corner in the Olympic Room.

Thank you. I'd like to begin as I usually do by just saying thank you to JPMorgan for inviting us to the 38th Annual Health Care Conference. It's always a pleasure to get up and speak with investors and tell our Inogen story. We're always thankful for that opportunity, and we're thankful for the opportunity today. Our name, Inogen, stands for innovation in oxygen therapy. And I think you'll find as we go through the overview of our company and look at not only our product solutions but also our go-to-market strategy that, that name is appropriate. If you look at oxygen therapy and go back about 40 years ago, when it really came to prevalence, people were -- have been treated with oxygen by what we call the delivery model. A home care company will bring a supply of tanks to a patient and they use those tanks filled with oxygen for ambulation. And they have a finite supply, so they have to manage that supply and they're restricted where they can go and when they can go. And they're highly dependent on that home care company to continue to replenish that tank supply on a regular basis. On the Inogen model, we have what's called a portable oxygen concentrator. It takes room air and it filters out nitrogen, leaves an oxygen-rich stream and provides the patient with a 24-hour solution, both ambulatory and stationary, that gives them unlimited oxygen and fosters mobility and independence. Our product is cleared for commercial aircraft, so patients can travel if they want to travel. As you might imagine, a high-pressure oxygen tank isn't really conducive to going on a commercial aircraft. So we're really about freedom for patients. If you go back and look at traditional O2 therapy and the delivery model, it really restricts quality of life. As I said, there is a finite supply of oxygen for patients. It hinders their mobility. And as the baby boomers have come into the oxygen therapy arena, they are a lot more demanding and don't want to stand for the status quo. From a cost-effective standpoint, our solution is superior. The traditional tank delivery model is fraught with labor and infrastructure and those costs tend to rise over time, whether it be driver pay increases or fuel cost increases. When you have the nondelivery model of Inogen, you can place the product with the patient one time, you eliminate all of the ongoing deliveries and the costs associated with those ongoing deliveries as well as the cost to fill those tanks with oxygen. And from a mobility perspective, there is clear health benefits as well. Studies have shown that patients that have been prescribed oxygen therapy, and they're compliant with their oxygen and they are ambulatory, have less frequent hospitalizations and they actually can live longer. The 3 products on the screen are our 3 current products. And I think you'll find when we talk about our go-to-market strategy, how and why they're differentiated. We focus on patients first. So we look at what do the patients want in a product. And when we talk to our customer, the patient, they say, "I want something small and lightweight that I can walk around with. I want long battery run time so that I have some freedom away from a power source. I want something quiet so that I don't draw attention to myself out in public." That's a differentiated strategy than our competitors, and we're not the only manufacturer that makes portable oxygen concentrators. But our competitors sell and focus on a home care provider first. And it's a different approach to the market. When they ask their customers what they would like as a home care provider, they often hear things like in a fixed reimbursement environment, "I'd really like a lower price." They don't tend to focus as much on exactly what the patient wants but rather on the economics. From that we've emerged with product differentiation and a product leadership position over the last 10-plus years with a go-to-market strategy that where we advertise and drive awareness at the consumer level. That works because we do have a performance advantage over the competition. These 3 products that are currently available have various sizes and output. And actually, the One product, the Inogen One G5, on the far left, is our newest product that was launched in April of 2019. That product will ultimately replace the Inogen One G3. But it has advantages over the Inogen One 3 -- or G3, excuse me, in every performance parameter. It's slightly smaller, it's got longer battery run time, it has much more output, so it can serve a wider array of patients, all around a better product. Now we did announce earlier this week that we do have some supply constraints right now with the Inogen One G5 and we're working through an issue with a supplier on a key component that restricted our sales and shipments at the end of the fourth quarter that is carrying into the first quarter. That's something that we're working through, and it's a short term issue, but I thought I'd highlight that since we made an announcement earlier in the week. But these products are superior from a patient preference perspective versus the other products in the market. Obviously, we've got significant coverage in terms of patents and trade secrets that help keep us in that leadership and performance advantage position. Now as I mentioned, we advertise directly to the patients. We've done that using TV commercials. We've intermittently used radio, print advertising, and digital advertising has emerged over the last 10 years as more and more seniors are on the Internet. We've built a strong brand, built awareness, and we deal and service patients directly instead of solely with the home care companies. So patients will contact us, and we can talk to them about our solutions and either execute sometimes a retail sale or we're also an accredited home care company, and we can bill Medicare and help them use their Medicare benefit to get access to our products. Now that advertising and driving that brand awareness and market leadership position has not only paid off for us through what we call our direct-to-consumer channel, but it's also established us as the leader in the business-to-business channel. We've run our own nondelivery home care company for over 10 years. So we've proven the product out from a reliability and efficacy standpoint. And the other home care providers look to us not only for the best product in the market, but also the expertise that we can share as they convert their model from the delivery model to the nondelivery model. And you see the results of our sales growth at the bottom of the screen in both the direct-to-consumer segment as well as the business-to-business channel. Now the U.S. market. There are some winds of change blowing that favor POC adoption. And if you go back to 2012, POCs were about 5% penetrated into this market. If you look at the latest data, and we use Medicare data to break this down because POCs are coded with a specific hick pick code, which makes it relatively easy to track them. 2018, that penetration was up to 14%. Our vision is that POCs will ultimately replace tanks. It doesn't make sense to deliver tanks any more than it makes sense to deliver ice to an ice box once the refrigerator became invented, so we see that POCs will ultimately replace the tank model. Now this does take some time, and there are some barriers because if you look at the home care community and the business-to-business providers, they have significant investment in infrastructure to facilitate efficient delivery. They've got trucks and drivers and depending on the size of the company, restructuring those costs out can be a significant and costly endeavor. So despite compelling preference by patients for POCs as well as a compelling economic model and a lower total service cost to service a patient with oxygen therapy with a POC, this conversion has been going rather slowly. And we expect that it will take much more than 5 years for that conversion to take place. You look at the reimbursement environment and oxygen has been part of the competitive bidding program over -- since about 2010, and you see significant reduction in reimbursement. It's been cut over 50%. And the rates that we show on the screen are for the portable oxygen concentrator. There's actually a premium for POCs and the reimbursement for tanks is a little bit less than that, roughly $20 per month. So this economic model of delivering tanks has been seriously squeezed. Providers have gone from being able to make a reasonable margin at $200 per month of reimbursement, now struggling to break even at $90 per month. When reimbursement change swept across the entire U.S.A. in 2016, that's when we really started to see the providers focus on trying to change their model for the future. But again, it's a long-term process, and they've got constraints, it's difficult for them to change that overnight. Now in the middle of last year, we made our first, I would call, significant acquisition. We acquired a company called, New Aera, that had a portable ventilator, noninvasive ventilator. And this is a new product for us that is -- will let us participate in tangent markets from oxygen therapy. The product, as it is, allows us to participate in the traditional NIV or non-invasive ventilation market. That market is being included in the competitive bidding program this time around, around 2021. So there'll be new rates effective in a year. Everyone had to place their bids by the middle of next year and everybody is waiting to see where the rates go. Anytime a product category has been placed in competitive bidding, usually the first time around, there's a fairly significant reduction. And that has created disruption in the market. We think that this product puts us in a great position to capitalize on compression of reimbursement. It's inherently lower cost than the other products that are on the market, and it can treat a select group of patients that might be more mobile and still need NIV treatment. In addition to that, it's really a building block for us from a technology standpoint. We also plan to build this technology into our portable oxygen concentrator. There has been a study that's shown that patients that are on oxygen therapy coupled with this technology can saturate at a higher level. They can walk further, they have more energy. And so we want to build that and integrate it into our portable oxygen concentrator, and that's planned for a 2021 market launch. Again, it's all about strengthening our patient preference and our performance position in POCs. Next, we see that this could be a technology that can be used to treat general COPD patients that aren't even on oxygen therapy yet. COPD's patients suffer from breathlessness. They get tuckered out just to breathe because their lungs are very inelastic. So they have a higher work of breathing with inelastic lungs than your typical healthy person. So we plan to also develop a product that would not be an oxygen-driven product, but rather an air-driven product that can assist with work at breathing and treat that COPD market. The New Aera acquisition also gives us opportunities to enhance our financial profile. This is a low-cost, noninvasive ventilator so margin should be attractive, actually even better than what we see on our portable oxygen concentrators. As I mentioned, there was a study and this is a summary of that study where oxygen patients using the NIV product, the TAV, Title Assist Ventilator, saturated better, could walk further, had more energy, less leg fatigue. Again, building this into our oxygen concentrator will continue to enhance our performance advantage and patient preference. So with that, I'm going to turn it over to Ali Bauerlein. She is our CFO, and she's going to talk about Inogen's financial profile as well as our future growth opportunities. Thank you.

Okay. Thanks, Scott. So as Scott mentioned, we did announce earlier this week, our preliminary unaudited revenue for 2019. At the midpoint of the range, it was $361.9 million. All numbers that I'll refer to from here on out will be at the midpoint of the range provided. When we look at our individual segments, you see the blue areas are our direct-to-consumer business driven by those consumers either buying or renting the product. And then the orange parts of the pie chart is our business-to-business channels, both domestically and internationally. As Scott mentioned, we were impacted in the fourth quarter associated with a component issue that impacted the supply of our Inogen One G5 products, and that did have an impact on the fourth quarter revenue. When we look at our individual channels our direct-to-consumer sales was our fastest-growing channel in 2019. It grew just under 10% in the year, although we were limited in growth based on changes in our direct-to-consumer sales representative head count. So in spite of those declines in the sales rep base, which was down approximately 26% year-over-year, we did see approximately 10% growth in that direct-to-consumer channel for the sales. On the domestic business-to-business side, we did have, early in the year in 2019, a reduction in purchases from a large national provider that had a pretty significant impact on our growth rate in that channel. It was approximately about a $20.5 million impact for the full year. Without that, our growth rate, overall corporate growth rate, would have been over 7%. So it had a large impact on our total growth rate as well as the impact of the growth rate on that individual channel. International business-to-business sales were relatively flat in 2019, they were up around 1%. So we did see a slowdown there as well. There are some tender challenges that we're seeing, particularly in the U.K. that has slowed growth in the second half of 2019, but we do expect those to resolve going into 2020 and return to growth in that channel. When we look at our historical revenue, as Scott said, really since 2009, when we implemented our direct-to-consumer sales and rental channel, we've seen significant growth on our total revenues, although a slowdown in 2019, in our growth profile, down to about 1% year-over-year, given both the challenges we saw on the domestic business-to-business side as well as the direct-to-consumer reduction in head count, and then, of course, the supply challenges that we had in the fourth quarter. But we do expect to return to growth in 2020. At the midpoint of guidance, we expect revenues of $392.5 million, and that would be a growth of approximately 8.5% compared to the midpoint of the preliminary unaudited revenue range that we provided earlier this week. When we drill into that a little bit more, we still expect direct-to-consumer sales to be our fastest-growing channel for 2020, and we do expect solid growth, both in our domestic business-to-business and our international business-to-business areas. We do expect to grow our inside sales rep count in 2020, and we also expect now with the headwind on the national provider that was behind us, we lapped that in the fourth quarter of 2019. So that should not be a headwind going into 2020. Although, that channel is challenged by the dynamics Scott talked about with competitive bidding. Competitive bidding rates have not been announced that will be effective January 1, 2021. And so those we expect to be announced in the summer of 2020. So that should give us some visibility on where rates will be going, and then they will be consistent for the next 3 years. And we do expect that to be a driver of growth, particularly in the back half of 2020. We do expect the U.K. tenders to be resolved in the first half of 2020 as well. And we do expect to actually start growing our rental revenue as well. We have been expanding our rental intake team and putting focus there as we know that, that is a great way to access patients who want to use their Medicare benefits and don't have the ability to afford the product as a retail purchase. Looking at our balance sheet, as Scott mentioned, we did close the purchase of New Aera in August of 2019, and that purchase was a $70 million -- approximately $70 million upfront payment as well as earnouts over time based on revenues and other factors. In spite of that, we still ended September with $200 million in cash and cash equivalents and no debt outstanding. So we continue to have a robust balance sheet to look for additional investment opportunities, whether that be in our core business or potential acquisition opportunities. So where are we going from here? Our focus still is on that direct-to-consumer sales expansion. We ended the year with 329 inside sales reps That was down, as I said, 26% or 117 reps, from where we were at the end of 2018, but those reps are performing at a much higher rate than the reps that we had at the 446 level. So we are continuing to focus on sales rep productivity as well as scaling those sales and rental intake teams to drive results over time. We also are planning to expand our outside physician-based sales team in 2020 as well. On the business-to-business side, we're focused both on working with our partners, we have a strong private label partnership that works both in the U.S. and some international markets to get our product in the hands of providers and work with them on the challenges that they have to restructure their business and properly finance the conversion from tanks to POCs. So we expect to continue to strengthen that. We do have a capital program as well in place to help finance those purchases for our HME providers. And we do have distribution in 46 countries, although, looking at the density, most of that is in the U.S. and Europe at that -- at this point. We are also developing regulatory and sales pathways into emerging markets, and we expect that to continue in 2020 and beyond. Looking at new products, as Scott mentioned, we did launch the Inogen One G5 in 2019. That has seen great success in adoption, both from our provider community as well as our patient community. In the fourth quarter of 2019, the G5 represented 55% of our domestic shipments in the quarter. So it already has become the majority of our volume, and we expect them -- that product to continue to take over share versus the G3 and the G4 product. And that is a product that, from a competitive standpoint, really is a step ahead versus anything else on the market. So we think that will continue to strengthen our position, both on the patient side and the provider side. As Scott talked about the TAV product. We are excited about that product. We have done a limited launch in December of 2019 in our domestic channels. At this point, it is a very immaterial expected contribution in 2020. The real driver is once we get that product into our POC as an integrated product, but we do plan to sell the existing product in 2020 and then also work on those additional products that Scott mentioned. That technology, as Scott said, opens up both adjacent markets in sicker patients that need non-invasive ventilation and meet the Medicare criteria as well as our core market of improving our competitive position with POCs, and then also expanding into the early stage COPD market. On top of that, we continue to look for other disruptive products that would be potential acquisition targets for us that are really unique solutions that would provide that same benefit that POCs have provided to patients versus tanks. So we continue to look for those opportunities. And while our overall focus is, first, on improving our operational side of the business and also integrating the TAV product, we will continue to look for what's the right fit to, again, increase our growth in future years. So in summary, we are the market leader in POCs. This is a large global market. It's an underpenetrated market. Tanks are still the dominant way patients receive oxygen therapy, both in the U.S. and worldwide. We do have a unique direct-to-consumer model that both enables us to focus on innovation on the product side but also having direct customer access. We have a product portfolio that we're extremely proud of, and we continue to commit to new R&D to make sure that we stay at the forefront of POC development. And we have a seasoned team that has worked together for many years and an attractive financial profile. So with that, we will be happy to take any questions that you guys have in the breakout room. Thank you for your time today.