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

So I'd like to thank everyone for being here today at the end of the second day of the virtual JPMorgan Healthcare Conference. My name is Allen Gong. I'm a member of the medical devices team here at JPMorgan. It's my pleasure today to have some of the members of the Inogen management team. With me on the call, we have the President and CEO, Scott Wilkinson; and the CFO, Ali Bauerlein. As a quick reminder, under the video on the conference website is a button that you can click to submit any questions that you have over the course of the prepared remarks or even now, if you have them upfront. And we'll do our best to get to as many of those as possible once the Q&A starts. But for now, I'll turn the call over to Scott and the team for any prepared remarks.

Okay. Thank you. Yes, I'm going to start on our slide deck. And if everyone could just go to Slide 2. I'll start with the usual disclaimer regarding forward-looking statements and the safe harbor Act. And remind everyone, all investors should always read our prospectus, look at all of our risk factors and be advised that in conferences and engagements like this, that we will be making planning statements, forward-looking statements and that actual results can sometimes differentiate from those planning and statements that we make. Before I move on, I'd also like to take the opportunity to just say thank you to JPMorgan for having us back again at their annual health care conference. I know it's a little different format this year. But nevertheless, we're pleased to be back. We're always excited to talk about Inogen and where we're going and certainly thankful for the opportunity again today. So if you'd move to Slide 3, please. I want to talk a little bit about the market and the Inogen solution for oxygen therapy. Over the last 40 years, oxygen has been used to treat patients with respiratory ailments. And it's a prescription therapy. So it's managed and prescribed by a doctor. But patients have been served primarily by what we call the delivery model. And that's outlined with the 2 pictures on the left, patients would be set up with a stationary device that supplies oxygen for them in the home. And then if they need ambulatory oxygen, they would be given a series of tanks that contain a finite supply of oxygen and a regular delivery driver would bring those tanks to them, shuttle full ones to the home and take away the empties on a regular basis. And they would have to manage -- patient would have to manage their lifestyle around that oxygen supply. The Inogen solution on the right is a small portable oxygen concentrator. It really eliminates the tanks. It eliminates the delivery, eliminates all the constraints and costs associated with the delivery model. And gives the patients a higher level of freedom, both physically and emotionally, they don't have to be dependent on someone to come to their home for their oxygen supply. They can be in control of their lives. On the screen, we've got our new G5 product. That's our latest product, our flagship product now that is -- more than half of our sales mix is now the G5, our newest product. And these devices, they can use it in the car, they can use in the home, they can use outside the home, they can even use them on commercial aircraft. And our product is called the Inogen One because it's one solution for their oxygen needs. This device serves as both their stationary or at home device as well as their mobile or out and about or away-from-home device. If you go to the next slide, Slide 4, I'll talk about the differences between these 2 models, what I call the traditional model or the delivery model and then the Inogen model or the nondelivery model. First of all, we enable a quality of life that's just at a higher level. We have an unlimited supply of portable oxygen versus the spiny supply associated with the tanks. Consumers, as time has evolved, have been more engaged in decision-making around their health care and the baby boomers expect a higher level of service and care than those that came before them. So there's high demand for this newer level of oxygen therapy in the Inogen delivery model. From a cost standpoint, the traditional delivery model is got both high fixed and variable costs associated with it. And if you think about over time, just the cost to deliver tanks, all the infrastructure involved of rising gasoline costs, rising driver pay, essentially, the costs associated with the delivery model increase over time, and reimbursement has been coming down over time through the Medicare competitive bidding program. In fact, we've seen rates over the last 10 years for oxygen therapy have declined over 50%. The Inogen nondelivery model doesn't require ongoing delivery. So it eliminates those costs. It eliminates the costs associated with filling tanks. So not only is it preferred from a freedom standpoint, it also is a lower total cost to service the patient. And then if you look at on the mobility front, the benefits, again, with the traditional tanks, you have a finite supply of oxygen, so mobility is constrained with an unlimited supply of oxygen on the Inogen portable oxygen concentrator model. Patients can go where they want, when they want. And studies have shown that patients that have been prescribed oxygen therapy, if they're not only compliant, they use their oxygen therapy and they couple that with being ambulatory or mobile, it delivers better health outcomes as well. Hospitalization rates are less and patients tend to live longer if they're both compliant and ambulatory. If you go to the next slide, Slide 5, we've described our 2 key products on the screen, the Inogen One G5 and G4, 2 different portable oxygen concentrators. And really, the drivers of our products, from a design input standpoint, are we focused on what the patient not only needs, but what they want. The 2 products that you see described on the screen are the 2 quietest products on the market. That's important to patients that are out and about in public, especially if a patient wants to go to church or to a restaurant or to the theater, they don't want to draw attention to themselves. So we put a lot of effort into delivering what the patients want versus the home care companies, of course, they care about the patients, and they want them to be happy. But in a fixed reimbursement environment, the home care companies tend to focus more on the price or acquisition price of products, and they'll trade what patients prefer for a lower price. Our model is via the patient-preferred product, exceed the patient's expectations and deliver not only what's necessary from a pure need standpoint, but give them over and above, give them what they want. The 2 products described here, essentially 2 different sizes. So we've got a lightweight product, the Inogen One G4. And then the Inogen One G5, as I mentioned, is our newer flagship product. It is a little bit heavier than the G4, but it has double the output, much longer battery run time. And it's really just a matter of patient preference, the trade-off of which they want. If they want the ultralight product, we have a product for them in the G4. If they really have a premium on battery run time and output, in particular, as patients progress in their disease state, they might need a higher flow than they would gravitate more towards the G5. And as I mentioned, the G5 is now more than half of our sales mix. So it definitely has been a winner with both the home care provider community as well as the patient community. If you go to Slide 6, we've built the brand over the last 10 years with a unique go-to-market model and strategy, where, as I said, from a product development standpoint, we focused on what the patients want. We've tried to drive patient preference and then we've also advertised directly to the patients to make sure they're aware of our solution. We're an accredited home care company as well as a medical device manufacturer. So we've advertised to patients, we've served patients directly, both from a retail standpoint and from a home care service standpoint and we've driven that strong brand and consumer preference over the last 10 years. That's resulted in terrific growth rates. If you look at from 2015 to 2019, strong growth in both our direct-to-consumer channel as well as our business-to-business channel, all led by that brand awareness, brand preference and patient preference for our products. If you go on to Slide 7, please. From a market standpoint, despite POCs being compelling from a lower total service cost standpoint from a patient preference standpoint, it's taken a while for them to really make inroads and penetration in the market. There's a lot of sunk infrastructure costs with the provider community. They've built delivery networks that could be comprised of not only drivers as well as trucks, but also many branches to facilitate efficient delivery. So it's not easy for them to convert their model overnight. That's one of the biggest barriers to conversion is that the provider community has to essentially restructure their business and get rid of all that delivery infrastructure to make the model work. So conversion has been steady but relatively slow when you consider the compelling attributes of the model. In 2012, POCs represented about 5% of the total market. In 2019, which is the latest Medicare data available, we were up to about 18% penetration. So we've made steady progress, but our estimate of full penetration of the market. And we do believe that the market will completely convert to POCs over time and the tanks would be obsolete. That would be going from 18% to the 70% penetration point. And how do we get that 70% number, that's assuming 90% of the ambulatory patients are on the POC, and that would land you at 70%. So as we look ahead, we've made progress over the past, but we've got a lot of room to run in the future to drive that full conversion of that model. So you see in the upper right graph, reimbursement has declined considerably over the last 10 years or so, driven by the Medicare competitive bidding program, that has challenged the delivery model. As I said, the costs associated with the delivery model have been rising. Reimbursement has come down. In the face of COVID over the past year, the Medicare competitive bidding program was actually suspended. There were supposed to be another round that was implemented at the beginning of this year, January 2021. In fact, it was called Medicare around 2021. And CMS suspended bidding, not only to accommodate the needs of the pandemic, but also if you look at where these reimbursement rates have trended, they've kind of flattened out. So what they found in the last round of bidding and what they disclosed publicly is that they really didn't see the further cost savings associated with this program in relation to the cost burden to administer that -- administer it. So they've backed off on competitive bidding. The good news for Inogen as a home care provider is we should have stable rates going, looking ahead, and also for all of our business-to-business customers, they should have full market access and be able to plan with more confidence in what the rates will be in the future due to the suspension of that competitive bidding program. If you'll go to the next slide, Slide 8. We talk here about how innovation is really what drives our machine. If you're going to advertise to patients, if you're going to drive consumer preference, then you have to innovate. You have to have a product that has a solution that's unique compared to the competition. So you see that over the years, we've launched multiple versions of our product. We're now on the G5. We're hard at work on the G6. And you see at the bottom of the screen, we've introduced here, the title-assist device that we acquired through acquisition of a company called New Aera. It gives us noninvasive ventilation technology that not only is terrific from a stand-alone basis, but gives us a technology that we can weave into our POC products and further drive that patient preference and product performance that should keep us at the forefront of consumer preference in the future. And again, that's so important with our direct-to-patient strategy and our go-to-market strategy of focusing first on patients. That will be a big part of our product pipeline in the future is how we use that TAV technology, not only in integrating it into our POCs, but also in other stand-alone products that can give us a continuum of care approach to patients where we can launch products upstream to treat COPD patients that are pre-oxygen therapy as well as sicker patients downstream that maybe have migrated and need that noninvasive ventilation therapy. But that's really the engine that fuels antigen is innovation and product preference. So with that, if you go to Slide 9, please, I'm going to turn it over to Ali Bauerlein. Ali is our -- one of our co-founders and our CFO. She's going to talk about our financial results as well as our future avenues for growth. So Ali?

All right. Thanks, Scott. So if you turn to Slide 9, as Scott mentioned, this gives kind of a summary of our overall revenue results and our revenue by channel. So last -- in 2019, we had revenue of about $362 million. Of course, in 2020, we did have an impact associated with COVID. Through the third quarter, sales were down about 17% compared to the first 3 quarters of 2019, but that decline was smaller in the third quarter of 2020 compared to the third quarter of 2019 versus what we saw in the second quarter, where we saw almost a 29% reduction in the second quarter and about a 19% reduction in the third quarter. So we certainly have seen a COVID impact on the business that has hit both our direct-to-consumer business because of consumer travel and just lower consumer confidence. But it also has impacted our business-to-business sales as referrals have been down from physician assessment centers in Europe have been closed. And we've just seen less flow of oxygen therapy patients for traditional COPD patients. Of course, there have been spikes associated with COVID-19 as that is a primary treatment of patients who have COVID-19 to use oxygen therapy, but those needs are typically short-term in nature and typically used with stationary concentrators or treatment in the hospital with high flow oxygen therapy. So looking at our revenue breakdown, we do report in 4 different channels. The blues here is what we call our direct-to-consumer business that includes both rentals as well as patient sales out of pocket. Rentals has actually been increasing as a percent of our total business this year, and this is a heightened focus for us. Going into 2021, we have seen that increase almost 19% year-over-year through the end of the third quarter and -- so really solid results there. And if you just look at the third quarter alone, that was up 40% in rental revenue. So really solid results there. And at the same time, we've seen our patients on service increase about 15%. So that is certainly a focus for us. As we said, direct-to-consumer sales has had an impact associated with COVID 19. And that has been a little over 20%, about 21% in the year-to-date period. And domestic B2B and international B2B, this is us selling to traditional HMEs, our private label partner as well as resellers worldwide that has also been impacted. Domestic B2B is down about 16% year-to-date and international is down about 20%. So certainly, we've seen impacts in those channels, but we do see long term, great opportunity for us to continue to grow our revenue stream, both in the U.S. and worldwide across our product line. So moving to Slide 10 now. You see our summary of our historical revenue. We have grown quite quickly from our launch of our direct-to-consumer rental strategy back in 2009 with revenues of just shy of $11 million to, as we said, of almost $362 million in 2019. Probably more importantly, in these COVID times is our cash balances. We ended September with about $220 million of cash and equivalents and no debt outstanding. So we've done a good job of not only growing the business over time, but growing in a way that it generates positive cash flow into the business. And that's been very important in these uncertain times that we have the cash needed to run the business and make the right operating decisions for us, but also to use in the future for a potential acquisition target. So that we think is very important in our business. Turning to Slide 11, talking a little bit about future revenue growth and where do we go from here, going now into 2021. We have announced our year-end headcount numbers for our -- both inside teams and our sales team outside. Our inside sales team, we ended with 300 inside sales reps, that's down about 9%. We had reps of about 329 as of the year-end of 2019. And really, that's related to attrition. We were hiring in the first half of 2020. But as the pandemic continued on, we had minimal hires in the back half of 2020. And so with normal attrition, the headcount did come down. This is something that post COVID and the impact of the COVID-19 pandemic, we do expect to start growing again. But we do expect to be cautious in hiring until we see a return to normalcy in this direct-to-consumer channel. We are focused on sales rep productivity, and we also are focused on lead utilization with rentals. That's one thing we're very proud of is that the team has been able to pivot to doing more rentals due to the pandemic and really continue to use the leads that we have. We have thousands of patients that contact us every month and express an interest in our products even during the pandemic, when they aren't traveling as much. It shows really the inherent demand for POCs, but this allows them to get access to the product without having to pay out of pocket and using their insurance benefits. So very excited about that. We also are still focused on our business-to-business partners, both domestically and worldwide. We do have a strong private label partnership with OxyGo and that's something we plan to continue to grow as well as developing our regulatory and sales pathways in the emerging market. We have filed for registration in China. And while that should take some time before we have any meaningful sales in that market, we do see that as a long-term market opportunity for us, given the rates of smoking and pollution and COPD, in general, in that market. We also are, as we said, very focused on the rental side, we've seen great results both in the second quarter and the third quarter of 2010 in that rental business, and we're proud of not only the fact that we've been able to grow revenue, but that we've been able to grow the gross margin of that business. It's very important for us strategically as we look to expand rentals in the future. We did end 2020 with physician sales and support team members of 29, included in that is 24 field reps. So that's the real number of sales reps out there versus 29, including the support infrastructure around them. And we really are focused on that lead utilization as well as creating physician awareness that we can accept patients directly and that the Inogen POCs can be appropriate for the mass majority of the COPD patients that they see. We also are expanding our infrastructure here, both for rental processing and billing. That's very important as we scale this business and scale the number of patients we have to keep up with the backup. And then, of course, extremely important to our overall strategy is staying in the technology leadership position. So continuing to launch new products. We launched our last product, the Inogen One G5 in 2019. And as Scott mentioned, we acquired some additional technology from New Aera in 2019 as well. So we are looking to expand the use of that technology across our product portfolio. And we also are looking at other disruptive products and other acquisition targets that make sense, given both our direct-to-consumer approach as well as our physician targeting that really offers unique respiratory solutions. So we feel like that really will set us up for growth in the future. So turning to Slide 12, just in summary. While 2020 was an extremely challenging year for us. And in 2019 also had its own set of unique challenges for us. We are proud of the fact that we are the market leader in POCs. And this is a large global market that is underpenetrated. And our vision is that we see POCs as the standard of care. We expect that in the future, there won't be a tank-based delivery system and that patients will receive POCs at the onset of care. And that's really what we've set out to do, what our mission is. And we've been able to do that with a unique direct-to-consumer model that allows us to both focus on the product pipeline and what patients really want in terms of features, but also have that direct customer access. We're really proud of our product positioning and our product portfolio. We feel like we have very strong products, the best products in the market, in the POC space, and we're committed to continuing to innovate in this space. We have an experienced management team that really are leaders in the respiratory home care market, and we've been able to do this with an attractive financial profile, while we really have been able to show both positive cash flow, strong cash balances, and we do expect to be able to return to growth in the future. So with that, I will turn it back to Allen for questions.

Thank you, guys. So when we look at kind of the Inogen story, 2020 was really supposed to be the year where you guys stabilized and got back. It's kind of a normal state, really returning to growth across their franchise. Unfortunately, due to pandemic that really wasn't the case. And as we look at the 2021, unfortunately, the kinds of headwinds we're really seeing from COVID-19 have been playing out. Some of your medtech peers have preannounced and highlighted that trends have remained somewhat soft heading into January. So you haven't preannounced yet. But when we think about these dynamics for your own business in 4Q '20 and out into 1Q '21, how should we think about that kind of extended impact, given the -- what we've seen from you as already in 2Q and 3Q?

Yes, I mean, unfortunately, COVID has had a net negative impact on our business. That's pretty obvious. And we were in a discussion the other day and somebody made the comment, you really need to get through COVID to get back to normal, right? And the answer is, yes, that's right. So for us to get kind of back to square one, we've got to get through COVID. So right now, it's a challenging time. The incident rate, we seem to be in the middle of a surge, but there's good news because you've got multiple vaccines that are rolling out. So it looks like help is on the way this year, and we're pretty optimistic about where we're going long term. But it's going to take a while to get through this. We're hopeful that you start seeing movement in a positive direction as far as knocking down COVID by midyear and the second half of the year is kind of transition them back to normal, I'll say that's a hope. We don't really know yet. You've got to have a couple of points on that recovery curve so you can really start making what I would say is a rational prediction. So I think as long as patients are being told, you need to stay home, shelter in place, don't travel, don't be exposed, and you got to remember our clientele. They're patients with a respiratory ailment. So they're particularly vulnerable and particularly conservative when it comes to taking care of theirselves and not going out and being infected. We'll have to get through this to get back on the growth track, I think. Now it doesn't mean that we can't make progress along the way. We talked about the investments that we're making right now because we are looking ahead to the future. And even through the pandemic, we're still the market leader. We still operate in an underpenetrated market with the patient-preferred product, best-in-class and a unique go-to-market strategy. So all of the opportunities that we had before the pandemic hit are still there. This is a little bit of a sidetrack. But we're bullish on the future, and we've augmented our business with doing more rentals, which should be accretive to gross margins and put us a little more in control of our own growth destiny. So longer term, we're excited about it. Shorter term, we're going to have to manage through this as we did last year. We'll be careful. We'll try to watch our spend because we're probably going to be a reduced revenue rates until we get through this. But we've done a good job of taking care of our balance sheet so that we have those money there to invest in our growth for the future, and we'll get through it. But we need to see a few data points before I think we can make some, what I'll say, better, more concrete predictions.

Got it. And then I think one question that still kind of needs to be answered and that one, I think, investors are really interested in is kind of the health of the underlying oxygen market. Obviously, we've seen that slow pretty significantly. And this was another thing where heading into 2020, we were really hoping to see like improvements in trends. And unfortunately, that wasn't something that happened. So when we look out to 2021, should we think of, as you mentioned, because travel is still going to be suppressed because people are still going to be limiting travel? Should we think of this as kind of another delay to that kind of recovery? And what kind of things need to happen really for growth to rebound? Because again, this wasn't just like a cohort slowdown there was -- there were other factors that led to that slowdown. So what needs to happen for that to we're going to get back to growth?

Yes, there's kind of 2 populations to look at. And one is the existing patients. They're already on oxygen. So -- and that's really the group of patients that we serve through our direct-to-consumer program. We make them aware that there's a better solution than driving a tank around. Now again, for them to spend their hard-earned money or on a freedom and mobility device when they're being told to stay home, that's incompatible. And that's why we've seen a downturn in sales of -- in the neighborhood of 20% versus our baseline because patients -- they're not going on that trip of a lifetime or that cruise of a lifetime. But we expect that when we get through this, that will come back. I think there's some -- logically, some pent-up demand just like the rest of us. We all want to get out and do things and get back to normal. Oxygen patients are no different. They're just probably going to be a little bit more cautious. They still have the same desires. Then you've got another population, and that's the new patients that entered the pool, okay? And so those are the ones that go through the physician offices and they're being cared for, they've already got COPD and they get to a point where it's time to put them on oxygen. A lot of patients aren't going to the doctor right now. A lot of physicians' offices aren't seeing patients right now, not only from an exposure standpoint, but a lot of the pulmonologists are completely tied up and overwhelmed with treating COVID patients. So they've pushed a lot of those COPD patients off for regular visits because it's not as critical. And these patients, if they need oxygen, that need doesn't go away. It just gets pushed forward. So once we get through this, we would expect that those patients come back into the pool, and we see that opportunity. Now what's unknown is what is that rate? Does that happen over a quarter, 2 quarters, 4 quarters? We don't know. But logically, these folks that need oxygen, eventually, they're going to be served with oxygen once we get through this, and they see their physicians as they normally would.

Got it. So question and coming in on the DTC business. So you highlighted that your direct sales force had dropped down to 300, it was around like 329 at the end of last year, I believe. And while you were adding at the very start of the year, you saw some attrition starting in second quarter that continued until now. So I guess when we think of like kind of the productivity on that front, that was something that you were really working to improve on. And that we did see like some improvement on before all of these dynamics of COVID happened. So when we think about your DTC business going forward, where can we see productivity really going with that? And what is kind of the target growth rate that you think is like sustainable once everything normalizes and you can really get back on the offensive?

Yes, I can take that one, Scott. So thinking about the productivity side, we've really seen across the sales force reduction in close rates associated with COVID, but also a reduction in the average revenue per patient. So they are buying fewer batteries, fewer extended warranties. So the ASP declines have also contributed to the decline in the direct-to-consumer sales channel. I would expect both of those to return once we get to a point that we -- our past COVID and people are back to normal in terms of their travel patterns as well as just their lifestyle and their consumer confidence. There is an economic side of this. Having somebody buy a product for $2,500, that's not an insignificant financial decision that these patients are making. I would expect that at the point where we start seeing patients travel more that some of the patients who have bought over the last year may come back and buy additional accessories, but they didn't buy at the time that they bought the unit because they weren't planning on travel. But as they travel, there may be a little bit of additional accessories sales that come back as well as part of that. In terms of productivity, the productivity of the sales force in a typical year, we would see a few percentage point increases in productivity for that sales force. That's kind of the level we would expect in the future. So the growth is more driven by not the productivity, but the level of change that you have in the sales force. And we haven't put any targets yet on the size of the sales force, post COVID because, frankly, we want to see what that world looks like. We are very proud, though, of the shift to rental, and that has really increased patient access to the product. And the close rate, of course, is significantly higher many times the rate of a just cash sale because the patient is just committing to paying the additional coinsurance for a POC, which, over a tank, is just a few dollars a month. So it's a very minimal decision if they meet our intake criteria for a rental, and we can take their insurance that a patient has a high willingness to use their rental benefits to get our product. So that's something that we expect to grow as a percent of the total business over time, both through our direct-to-consumer efforts as well as our physician awareness and that physician-based sales team.

Got it. And then, I guess, we're coming up to the end of the session, but just like a final question on the portfolio. I think New Aera business that you acquired certainly seems to bring in a complementary kind of platform. But when we think about the pipeline going forward, it's just G5 is not all by any means. I think one of the real strengths of Inogen is that G5 really does seem to be -- like one of the best, if not the best product on the market. And when we look forward, like how do you really improve on that for like a G6, hypothetically? And when we think about the time line for integrating New Aera onto your existing POC platforms, do you have like a more concrete time line for when we could see that? And when that could start driving kind of like a meaningful synergistic benefit?

Yes. I mean the real beauty in New Aera is in the future product pipeline. And so in using that technology in, what I'll call, the G6, that gives us the ability to drive those patient preference parameters even farther, you could make a smaller product, a lighter product, but still treat a wide array of patients because of the improvement in performance, or you could have the same sized product and then kind of supercharge the performance for people that need even more volume or support or assistance and breathing. So it gives us kind of a spectrum of performance that keeps us ahead. And that's -- we said, that's what drives our engine. The team is hard at work on that. We are calling it a G6. I don't expect that you see that launched in 2021, that's a 2022 product. When you integrate a new technology, it also means a little bit extra clinical work that you have to do that normally isn't as rigorous as if we were just doing a POC on its own as well as additional regulatory clearances associated with the new product. But we're excited about that. I agree with you, I'm very biased. But I think that G5 is the best product on the market. And our goal is to make the best product even better and make sure that we stay in the lead.

Got it. Okay. And with that, unfortunately, I do have more questions, but our time is up. I just want to thank you guys so much for your time, and thank everyone who's stuck with us until the very end of the day. I hope you guys have a great evening and enjoy the rest of the week.

Thank you, again. Much appreciated.