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

Hello, and welcome to Inogen's Strategy Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, February 27, 2023. I would now like to turn the conference over to Nabil Shabshab, President and Chief Executive Officer. Please go ahead.

Thank you, Kevin. Good morning, everyone, to people here in the room as well as people that have joined us on the webcast. My name again is Nabil Shabshab, I'm the President and the CEO of Inogen. I've been with the company for just about 2 years now. So before I start talking about the transformation, which is on Slide 3, I just want to maybe provide some context for people that as earlier with Inogen very briefly. So we're a global med tech company with a footprint in about 60 countries where we commercialize our products. Our revenue in 2022 was $377 million. The more important thing is we operate in a very difficult disease state, COPD. According to the CDC, the U.S. prevalence of COPD in 2020 was between 5.2% and 6.2%. COPD is the sixth leading cost of test in the U.S. was in 2020, also according to the CDC economic burden on the U.S. economy is about $50 billion at that time. And there were about 1.3 million COPD emergency departments admissions in 2019 according to the American Lung Association. So needless to say, before we start, we take our job very seriously in terms of helping people in that very difficult to be paid and beyond in terms of going into respiratory care, but we're very focused every single employee at delivering on our purpose of improving the lives through respiratory care every day when we come to work. So let me cover very briefly the transformation. So as I said, I've been here for about 2 years. So quarter to 2021 till today has been a very significant amount of effort and change in Inogen. I would characterize Inogen before as an HME with a great product, which we want to build on and retain in terms of quarter DNA. But more importantly, the evolution is to actually make sure that we are on our way to become a med tech company that has a global footprint and can go beyond COPD only and the other disease states too. So we've always characterized our strategy to have different time horizons, short to medium, medium to long, I'm going to only focus on the first 2. So in the short to medium, of course, it's a combination of driving POC-based oxygen therapy, long-term oxygen therapy. And I'm going to go through some details about how much runway and potential is less in that market. But also that short term includes introducing innovation so we can start generating growth from new product introductions but more importantly, when we get to the next stage of enhancing in the medium to long term, new product introduction and building on the capabilities we have in place are going to become a critical factor for our growth. And today, we want to dedicate some of that time to be able to go through the innovation pipeline as well as make sure that we expand the petite that we have beyond COPD. So let me characterize on Slide 5, why we believe that there is a lot of potential still ahead of Energy. If you look at the data set from CMS in terms of estimated penetration for portable oxygen concentrators, you realize that even in 2021, that penetration was still at 22%, which is pretty small. So the runway is really long, and there's a lot of work ahead of us and an opportunity that presents itself at the same time. If we expand our purview from all the CMS data and we look at IQVIA, and that basically includes not only CMS but private payers, that penetration is even lower than 22%. If you look at 2021 data, it's 13.9%, so which means that the POC-based therapy is even still at this nascent stage within the larger players and the larger data sets. Equally important, if I look at what patients want, as characterized on the right hand of this slide, we believe that there are some key things that we've uncovered in our own quantitative research in 2021 that are very telling about the state of the disease itself as well as the industry. About 3/4 of the people strongly believe that there is a meaningful difference between oxygen tanks and POCs. The final impact concurrently with the fact that 2/3 of them want more control about the device that they acquired when they have COPD. And then I add to it the fact that also 2/3 of them believe that brands matter and portable oxygen concentrators. And then I add to it on at the top of it that about half of them were never informed of a POC optionality when they were diagnosed and prescribed -- that tells us that the runway is still long ahead of us, and there's plenty of growth opportunity, not only from a market penetration perspective of the modality, but also from the attitude of the patients as well as the prescribers. So on Slide 6 is one of the slides that we want to focus on today about the transformation in terms of how are we planning on growing by optimizing our channel mix and it's really important. So today, if we look at Inogen in the past as well as partially before we came, we were on the right-hand side. We were downstream, and I'm going to characterize that model as we were waiting for the patient to get diagnosed as well as prescribed upstream, and then we were waiting for them to be on a certain modality. After that, they might get dissatisfied with the modalities that they're on. Then they see our advertising, they actually react to it, and then they come into my funnel, and I try to convert them into either a cash sale patient or a rental patient if they can't afford to pay for it. So you look at it and you say that's counter to the patient diagnosis, prescription and buying journey. Buying journey, meaning [ if I buy what I run ] it's like the opposite. We were waiting downstream for all of this activity to happen upstream and for people to sort of come down that path, and then I was focusing on selling them for cash. And one of the channel evolution vectors that we have is we're going to actually keep the 3 channels that we have upstream in prescriber where we're going and investing our partnership in B2B, but also equally important our DTC that we're not going to actually give a on because it's a unique differentiator to be able to look across the channels, optimize our footprint, optimize our investments and where we're building for growth, all for the reason that if we are going to scale based on the opportunities that we just highlighted, which is still very low in terms of penetration. It has to happen within the prescriber channel as much as it is on the DTC side and then in conjunction with the partners that we have in the middle. So, let me sort of cast a slightly different lens. I'm going to focus on Slide 7 on only a prescriber in DTC. And people are sometimes asking us. So why are you now optimizing the channel strategy? So why now? And what is it going to yield? So these numbers are, of course, the last there based on hard numbers, but we've put harbors to make things much more digestible. And they are basically in comparison to DTC being the base. So let me start with the 4 lenses very simplistically. It's the channel scalable and predictable in terms of forecasting revenues and so on. The sales and marketing cost reasonable, so I can get a contribution margin that I want or an ROI. And then the lifetime value of the patient and/or the prescriber high enough, meaning I can scale, I can scale profitably and they can drive high level of growth. And then it's the contribution margin where we need it to be. So let me start on the right-hand side for the DTC channel. So if you think about scalability and predictability, we rank this as half. And the reason there, we've been saying for a while that the DTC model is a one-to-one model, meaning I have one lead that I have to generate. At the end of it, there's one patient. And with that patient comes on POC and possibly a few accessories. So that is not a very scalable model because every time I want to tell it, you we have to spend that money and generate that lease. And then beyond that, I can't scale. I sold you the device. And we all know the lifespan of patients with COPD is between 4 and 5 years, depending on what data you look at. So there's not a lot of lifestyle value for that patient at the end of it, and you'll excuse me be clinical and cool and how I'm describing it, it's just from a business perspective. But if you look at the prescriber channel on the opposite end, this is a one-to-many model. It's very simple in terms of characterizing that way. And the reason we say one-to-many is I can actually deploy a salesperson, they develop a relationship with a prescriber and that prescriber would give me prescriptions, let's call it 3 to 4 illustratively a month, a perpetuity as well as they're practicing provided I deliver on my promise both in the product and the service that they have. So you look at these investments and they say, “Okay, when is very scalable?” Almost the same cost, one is not. So let me get to the cost in terms of sales and marketing. So on the DTC side, we all know as you can see in our marketing spend that there is a significant amount of spend for me to actually feed that channel, and I'm going to go into that a little bit more in detail later on. On the prescriber side, the cost --and I’m simplifying the cost is mainly the cost of the feet on the street, which is the sales people that I got in place and the support network that I give them. But the sales and marketing expenditure on one side is much lower than the DTC side. And the lifetime value I've covered, I'm going to just stress a couple of points. One device, set of accessories on the DTC side. On the other side, multiple prescriptions, multiple patients, multiple devices with the accessories to come with them, albeit on a rental model versus on a cash sale model, but still the lifetime value of that patient compared to the prescriber that I developed for the same -- roughly the same amount of spend is very different. If you want to boil that down and say, okay, let's boil it down to me, what's the contribution margin on the channels? And why are you making a change? While I'm going to stress again, we're not walking away from BPC, but there is room for optimization. I look at the contribution margins, half [indiscernible] one at scale, when I scale the prescriber channel, you can say that, “Okay, I need that balancing factor in my channel strategy and in my mix to be able to not only the growth, but this profitable growth that we are aspiring to and the shift recently.” So when we came about 2 years ago, the focus was on building capabilities and standing up a medical device or a medical technology company. We've made those investments. Now it's time to leverage them but what we're aiming for is not only growth as a singular lens and the yard spec is growth and returning to profitability in the medium to long term. So that's why it's very critical for us to now read with the channel strategy and make adjustments as required. So let me then do a little bit of a click down on the commercial strategy and a comparison. The national will be clear, but it's not as clear as when we look retrospectively. So we wanted to provide our investors with an opportunity to look back a little bit so we know how to look forward, and that's really critical. And the way we're going to look at it is I'm going to look at sort of like 2018, 2019, which were key performance here in direct to consumer, and then I'm going to compare them to '21 and '22, which are the most recent 2 years with some of the changes that we made. So if you look across 2018, 2019, that had the sales of $142 million and $166 million, you quickly realize from the scoring on the slide that this was predominantly driven by spending a lot on advertising, scaling the sales organization dramatically and numbers to be able to hit that revenue and also driving that penetration by lowering the average selling price. So if you just plan 2018, 2019, it's a very clear story in terms of how things are actually trending. Again, I'm just for the sake of clarity, more salespeople in the seats, much more advertising and lowering ASP to be able to hit those peak numbers. If you look at '21, '22, you realize that almost the opposite what's happening. So I'm going to characterize it as we started taking down some of the sales headcount as we were aiming to optimize productivity and efficiency and the channel. We started also reducing advertising spend as part of the pilots and we took ASP up at the same time, which is also an evidence that what with the right sales organization, the right sales discipline, you can actually achieve results that can scale from there, but that are much more oriented towards returning an investment on that channel. That's why I would say within DTC, it's not a matter of do we want to play. It's a matter of how we play and how we scale efficiently and profitably. So we hope that this rendering in terms of retrospectively as well as what happened recently is an indication of prospectively what are we trying to do and why. So sometimes the DTC channel on it is a little complex as people understand what the model looks like and how does it work. So I'm going to characterize it at the high level where there are 2 funnels that actually are stacked on top of each other. The marketing funnel is all about paying for sourcing the leads and then qualifying them as new to file feeds. The third one immediately under is taking those leases turning them into opportunities and closing them as simple as that. And people have asked us recently and asked me during discussions. So in a bid how do we remain highly confident that you guys are going to fix this moving forward once and all. So to just characterize very simplistically, there are 6 things that are in the marketing funnel and 6 things that we're focused on in the sales funnel. So let me start with the marketing funnel very quickly. So how do we optimize the advertising [indiscernible] a lot of work in the pilots about what's the marketing mix, what's the channel mix in terms of the omnichannel, which one basically yields a higher number of qualified leads, how do I actually get to that optimal level while I'm optimizing my spend, what qualification process do I put these needs in because I won't qualify leads. I don't want qualified leads at the top end of the fall. And then once I actually do that, do I know the patient attributes, certain patient attributes lead to higher wind flow rates than others, and it's very critical for us to make sure that we understand these patient attributes not only in the lead qualification, but also how we sell them and the messaging required to pose them. And then also the mix, I get these leads over the phone, pending life transfer, won transfers when they call N-1800 number or are they coming through the web because they sell the form. And these have different close rates, so we're optimizing that, too. So just for clarity, again, at the top of the funnel, there are 6 finite things that we've learned from the pilots matter the most. Within the 6, there are a few that are even more critical than the others, but we're very focused in terms of applying the learnings from the pilots and then moving them forward into scale in Q1 and Q2. So that's about the funnel. Let me quickly go through below the funnel. And this is all about sales discipline. So let me start with we stood up a sales operation function that's capable of seizing the organization with the right numbers, measuring them against the right metrics and being able to report that out very clearly but -- so there's a combination. How do people -- this is the inside sales organization. How do people spend their time, what do they focus on? How are they utilizing that time is very critical for us. And we've known that there are variability and I'm going to demonstrate it with an example later on. How do you develop your pipeline from the leads that you're getting? There is a discipline and skill in building the right pipeline, calling it at the right time within the right frequency within the right amount of time, meaning time to first contact with that lead. And then that could result into closing sales, but that also has sales techniques within it. So we've isolated it as a variable in terms of the training that providing after the pilot and then how people improve their selling skills. There's also a leader feature aspect in terms of the management layers and the old structure. So we've now refined what that order structure is going to look like. So people have enough help and coaching, but also they have enough time to sell. And then, of course, that tenure that we've been talking about, people need time to scale their skill. So there is a rough tenure within that. So again, as a takeaway from this slide, I'd like you to think about that there are very finite, not only about the funders, but below the final barriers are part of the scaling as we learn from the pilots that we've applied in Q3, Q4 and '22, and we apply them in the first half of 2023. So let me maybe -- so talk is easy and cheap, but let me demonstrate with a real example. And we just did a comparison. So these are similar groups under different managers, same 10-year same number of people relatively. And the lucratively -- so if you apply some of the disciplines that we're talking about specifically below the funnel before we improve the marketing front. So the team that is being managed much more stringently in terms of teaching people and scaling the scale, managed to do 46% work out a day compared to these are almost 10 people in each group for the sake of the illustration. So about 50% more costs per day, which is a better indicative way of how to work your funnel, the talk time, which is important. Once I get a patient on the phone, the talk time really matters in terms of handling objections and closing them. So they've improved their top time by 24%. The opportunities that were moved from Utopia to opportunity went up 15%, which is also very important. The number of units sold is up 7%, and the conversion rate from [indiscernible] into sale is up 11.2%. So even at that level before we go to higher-level metrics, it's very important to see that these are very promising productivity results that now are in the process of being scaled in Q1 and Q2 for 2023. So let me click one level up in terms of the total organization is a much longer time frame or comparison. Because during that period, there's a lot of noise, including COVID, pre-COVID, et cetera. We elected like last time to show a much longer time period. And we looked at the 21 months that we've been -- the new management team has been here compared to the 21 months, which is the period before that. So quickly as a read, which ties back to some of the principles that we talked about in the previous slide. So we reduced the number of reps about 11%, even though the tenure was down about 10%. The revenue of the rep went up 23% roughly. The number of units declined, but in totality units per rep are up. This is due to the tenure and the mix and some of the attrition that we have. And then this is in the cash channel. And from the rental channel, which also comes through DTC, units are up 36%, 36.6% and the units per gram are up 53.4%, all while we took the price up 21.3%. So not a different story, longer the time series reflecting that in terms of some of the disciplines that we've demonstrated that put scale before. So let me now transition a little bit to the prescriber sales organization. So just by way of background, this is an organization we stood up in March of 2023. So it's relatively young in terms of tenure as an organization. Part of it was some of the learning and we are hiring also in terms of what sales skills and what discipline and co-frequency and cold pattern do a need. Nevertheless, when you look at the results, they're relatively similar to DTC in terms of the opportunity to scale and deliver growth. So I'm going to click through some of them. The number of reps went up from 34% to 54%. Now within the 34, the focus and the funding and the data and the processes were not there. So that's part of what you see in the numbers. So number of 10-year deps were down about 60%. But despite that, units went up 51%, units [indiscernible] 1.3%. New prescriber acquisition is up 75%, which is very critical if you want to cover more people upstream. You have to go to the prescribers. Patient rentals from existing prescribers went up 52.6% and then from the new prescribers went up 94.2%. These are very promising indicative numbers, let's say, that prescriber channel, which is upstream, where people are diagnosed, prescribed and put on therapy. If we get there and we continue with the progress and by way of background, what we've talked about in Q4, so we delivered 23% quarter-on-quarter in terms of growth in that channel, and it's very critical for us to continue that momentum because it also fits where people get diagnosed described and they buy an upstream versus only waiting for them downstream. Before I go there, so just as a reminder and a summary. The 3 channels are critical for us, including the partnership in terms of B2B. The balancing within those channels and where we direct our sales investment is very critical and important for us. And the prescriber channel is becoming much more prominent than it used to be because of the ability to scale and deliver profitability over the medium and the long term in the end. So that's a little bit on the commercial update because there were a lot of interest in terms of giving a little bit more detail about what's really happening in terms of where were we, what were the things that we needed to jump why the change? Why now? And how is it going to play out? With that said, that's behind us. Let me focus a little bit on growth and innovation. It's the lifeblood innovation is the lifeblood of any organization. And one of the things before I go through the slides that when we came to Inogen about 2 years ago, there was an innovation pipeline that once we apply the stringent criteria, you heard me talk before about 4 criteria basically that you apply to be able to evaluate innovations and the prospect putting those in the pipeline. The first one and the most critical one, the clinical value actually have clarity on the patient population, annual indication. And can I deliver clinical value is the first criteria. The second criteria, can I build the product, so technical difficulty. Third one, of course, is going to get it cleared by the regulatory bodies, FDA and/or BSI and/or EMDR. And then fourth, we're going to get reimbursed for it because only cash sales does not generate the growth that you fire, you need critical mass and scale. And when we applied those 4 filters to what was in place at that time and the pipeline not the single project survive the criteria. So we had to start from the ground up one more time. Now within that, we've made significant progress that I'll show you on the slides. But let me start a little bit with what we wanted to portray the patient needs and/or the disease state or states plural. So as you can see from the middle of the slide on Slide 14, so hypoxemia, hypercapnia, dyspnea and reduced exercise capacity are sort of intermingle like we used to -- sometimes for simplification, you think of them as a disease progression. I start with Dyspnea which is shortness of breath and by progress. But in reality, when you look at the clinical pathways, sometimes things happen before each other, no matter what these 4 things are intermingle within the patient and the overbite are plenty within that. Now if I look at the outcome, forget with the disease space. So these people come -- either have COPD or just a heart failure and/or obesity as leading comorbidities and indicators. But no matter how I look at it, there is an impact on the patients. Let me start with the patients first. Restricted activities for daily lives. If I have Dyspnea or COPD. It's the same and sometimes, if I have both, it's even worse. Exacerbations that leads to hospitalization, like we talked before. As a reminder, 1.3 million acquisitions to emergency rooms successor patients in 2019, hospitalization and mortality. So there is patient impact on daily lives and then there is both a clinical and an economic impact of the health care systems. And the reason we look at them now differently than looking singularly at COPD. So we were very focused in the last 10, 20 years on COPD, there's an overlap in the patient population, we're going to show what the overlap. Then our multiple core avidities in the same patients as depicted on this slide. They are treated basically within the same call points that we have for COPD. And then you can say, okay, pulmonologists and possibly got the outages, basically are the 2 call points that within our universe of [ 4 Point ], I don't have to pull on other people to be able to treat different disease space. And then like I said, there's a significant clinical and antieconomic impact on the health care system. So keeping that in mind that life for us is beyond only COPD, which is a change moving forward. Let me maybe start with the portfolio lens first and the reason we're starting with that first is we had shown this in multiple meetings as of November, all the way to JPMorgan. And I'm going to start with that, just to remind us of what we started talking about and how we're going to apply it to the disease space. So to the next side, which we're not showing, there's 20 years of POC leadership. So we're not going to worry about that. Let me focus on the 23% to 24% range first. So late '22 and '23, 2 product launches are very important. Rove 4 and Rove 6, which are one in tons in Europe and the other one is going to be launched in the U.S., but we've talked extensively about that. From an innovation perspective, so what's in the pipeline for the next -- this year and next year. The BOC was more than 6 settings, which is really important, and then [indiscernible] interoperability. I should be able to read the option level in the plot of patients to be able to pay it off moving forward in terms of how these patients manage their disease and how the clinicians take care of them. And then when I look at the indication, outside COPD, there is no shortness of breath. So COPD [indiscernible]. Then when I move to the next list, which is 24 25, you can see that, okay, the POCs will be now added to ambulatory ventilation assistance, very important for people with dyspnea and hypercapnia. Hypercapnia being the accumulation of CO2 in your blood stream. The ability to just add ventilation to what not only oxygenate the patient, it's really essential for you to manage COPD space. We will keep the [indiscernible] interoperability and then we will add a connected stationary concentrator because people are intermittently on POCs or stationary concentrators or tanks of course. And we want to be able to monitor them no matter what model they are as long as they are on a concentrate or not on attacks. And then in 25-26 a little bit further out, innovation program continued flow and pulse. Continuous flow remains one of the things that some clinicians remain very focused on and despite all the efforts that we will do in terms of market development, the BOC based therapy is adequate. Of course, you have to solve also from a portfolio perspective. So that's in the pipeline. Higher flow BOC for patients with more advanced disease space, including COPD need higher flow in addition to ventilation, which is in the previous stage and then managing respiratory anxiety is really difficult. Now the thread that cuts through this. We've talked about this before, we used to say there's a device [indiscernible] strategy. So not only the POC and/or POCs [indiscernible]. The connectivity of that device, but more importantly, what do I do with it? If you want to start with the end in mind, the end is to be able to accumulate data. So most patients monitoring data accumulation in terms of being able to pay off in one of the ways. I can help the patient in terms of make decisions ahead of time. So I think the further of them in terms of worrying about what's sitting on my own, what's my oxygen level, all the way to close loop, meaning if patients opt in, I can change the setting and then inform them later. And then for the clinicians, when somebody shows up once every quarter, so 4 times a year, I see them for 10 minutes. I have enough data in terms of trends. I'm not going to be better than the amount of data to be able to look at it and say, "I know how you've been doing and I know how to titrate your how to see you or what I'm going to put you on in terms of therapy, additionally to what you're on.” That's data-driven and today is nonexistent. So that digital health will come across COPD, dyspnea hypercapnia and [indiscernible]. But that's a pure illustrative portfolio perspective. We started the conversation about the disease space that we are focused on. So hypercapnia, dyspnea, COPD and then contested heart failure. So let me show comparatively, and this is also nutritive based on the numbers that we have. So all the sizes of the bubbles are competitive to COPD. So let me maybe illustrate with an example. When I look at the dyspnea number of patient population, it's 219 x the size of COPD today. Now today, we don't play in that space. So I'm using this as an example, [indiscernible] to say, “Okay, how do I read this?” And then the orange bar is basically the penetration of long-term oxygen therapy. So let me look at the orange bar across first. So in [indiscernible] space, there's plenty of room because long-term oxygen therapy is not penetrated enough. But we don't want to own the player COPD, we want to play on the other verticals. But within the disease, the main disease states, there are overlaps that we were talking about, and they are very important. So COPD and as much as the heart failure comorbidities in some of the patients, and you can look at the size of the patients who have both of them, but they're basically within the same therapy regimen and the prescription. And then if you look at dyspnea. Dyspnea and COPD have an overlap. Dyspnea and obesity have an overlap also. And then hypercapnia, and of course, I'm going to point out, these look like tiny market sizes, but they are very high-value patients in terms of the impact of hypercapnia on both economic and clinical meaning in terms of mobility are really high hence a very high value base. So let me take the previous perspective that we had the portfolio and over layer. And you can see that what we had on the illustrative blueprint in terms of POC with more than setting PO2 interoperability to understand SPO2 level and portable oxygen, portable continues [indiscernible] COPD and dyspnea all that first sort of like left-hand side of the chart. And then the digital health cuts across. But then once we get into dyspnea and to hypercapnia, ventilation becomes important for us, which was in that middle of the portfolio chart that we showed you before. So now you can say, “Okay, in a day, this is great. I actually like this chart.” But tell me, can you guys -- do you have the right to play in that space? And can you really win? So I want to just go through 2 lenses very quickly to say, why do we have a firm belief that this is the right innovation strategy that could lead to growth. So let me start with the project feasibility. You have the right to play. I mentioned 4 criteria before technical regulatory reimbursement in commercial. So of course, we're in COPD, these are full articles. So I'm not going to talk about. But if you look at Dyspnea as well as with the combination of COPD and obesity, you realize that from a project feasibility, there is a lot of opportunity for us to play. And these hardware over time, as you de-risk some of these variables and continue to progress these through the product development funnel, they will change, hopefully, positively. They become more full or sometimes because of attrition, you have to actually abandon one of them. But from a right-to-play they are core, they're very close to oxygen therapy. There are patients that we know because they're similar to COPD and they have the comorbidities that are together. From an ability to win, the simplest, best way to look at this is, what do I do for them today if I got involved versus what do I do for them if I deliver on that innovation pipeline. And I don't need to actually talk through this. If you can quickly see that the clinical value for these patients is different and significantly different between if I don't evolve and the portfolio and if I well according to that blueprint. Immediately, you can see these have boards selling up because you need that ability, not only in oxygenation. Oxygenation, ventilation, remote patient monitoring and connectivity and then your ability to win becomes much more significant and it's not only the devices evolving, but also the digital services within it. So I'm going to conclude where my summary in terms of why Inogen addition to the fact that, in my mind, these are patient populations and disease states that really still require help and there's a lot of runway in it. So, we have a global footprint, of course. We're now improving our innovation pipeline, as demonstrated and it's going to go beyond COPD. And the transformation, we're building a scalable organization that actually not only from a portfolio perspective, from a commercial go-to-market perspective. The transformation is well on its way in terms of do we have the right teams and the capabilities and the right ability to fund growth moving forward. And I would say one thing that I didn't put on the side, factor a team that is in place today. So if you look at the last 8 quarters, we actually have met or receded the expectations of the 7 out of the 8 quarters and the only hiccup was in the last quarter and mix was 1.4% below. So despite the fact that we were building and we're fixing the organization during the most turbulent times from a headwinds in terms of the market forces, macroeconomic supply chain, some of the self-inflicted on from 2020 about MDD exploration, et cetera. We delivered the 7 quarters and we are back on track for the 2023. And then the opportunity to revert to profitability in the medium to long term. This is a very different change from what we've had before, but a plan change. We had said that the first year 2021 and 2022 are going to be investment years. This is the time now for us to actually add a lens to we instead of only focusing on focus on profitability. And then the leadership that is in place as well as on the board, the skills that they are required in terms of leaning in and helping the management team get to the right team. So again, as I said, when I started, there's about 200 people at edition, and they take the purpose very seriously, and they put the patient at the center of every day when they come to work. And this is something that is a glue that hose organization together, motivates people to do the right thing. And this is also the underlying motivation of some of the progress and the excitement that you see on behalf of the management team that we can become a larger, scalable and more profitable organization moving forward, serving a larger number of patients, not necessarily only in COPD. With that said, we're going to conclude the presentation part, and then take some questions.

[Operator Instructions] Our first question today is coming from Mike Matson from Needham & Company.

It seems like you have a great plan and strategy in place. So good to see all that. I guess the stock has kind of suffered here a bit. And I don't know exactly what the issues are. It seems like the revenue growth has sort of been okay, considering the supply chain, but profitability has definitely taken a turn for the worse. And I know you kind of addressed that, but you didn't give any kind of longer-term growth targets or margin targets or anything like that. But can you maybe just talk about when you expect to get back to profitability and positive EBITDA?

I'll take that first, and then Kristin can comment if there's a need on some more detail. So let me go back to, I think, the premise. So we're focused, like you said. We've delivered, as I ended my comments for 7 quarters out of the 8 and the 8 [indiscernible]. So today, in terms of the outlook moving forward, we have commented on our earnings call and prepared remarks that we will be low to mid-single-digit growth in 2023 with an objective to get back to positive adjusted EBITDA by the end of the year. Now the comment about our margins actually are worsening, and maybe Kristin can make a few comments in terms of once you start taking out the onetime events out of the Fed, including PPV and so Kristin, can you make a few comments on that just for clarity on the mark impact.

Well, in Q4, we had a significant impact. The biggest impact really was coming from our channel mix as the BOC was a lower-than-normal B2B growth. So that channel makes us the biggest impact by them. As you know, Mike, the premiums that we've been paying on semiconductor, that has been a headwind all year long, and we do expect that to continue into next year, but to begin to lead off in the back half. So you'll see the margin expansion as our channel mix normalizes again and as the PPV [indiscernible]. Additionally, in Q4, we did have an increased warranty expense, which drove down the margin.

Mike, let me just add a couple of things. Just to quantify. The premium price base for semiconductors, roughly $24 million for the year, and that's a significant headwind that is starting to improve, like we addressed on the coal in terms of supply chain, some of it because of the pre purchases will carry through 2023 in terms of what we have to expand. But at the hands of it, we're hoping like everybody else that this will normalize and that guy on the P&L will go away. Now the remainder, Kristin explained. Let me tie it back to when she started the comments with. It's a channel mix. If you reflect on the discussion we’ve had, there's a reason behind optimizing the channel strategy moving forward, as evidenced by moving away from a yardstick of DTC is the only and the best way to measure the success or failure of Inogen. But when -- like we sort of showed the score card, that is partially true. But also, if you want to mind getting back to profitability, which is at the core of your question, that optimization in DTC and the evolution of the prescriber channel is really critical for us moving forward. I hope will answer the question, Mike.

And then just as a follow-up, the channel mix point that you're making, I guess, can you just comment on -- I mean, clearly, we know there's big differences in the gross margins. Can you maybe just comment on that? I know you're probably not going to give us the numbers. And then what about the operating margin differences across the 4 main channels? I seem to remember the prior management team would say that it was fair that they weren't that different when you get to EBIT or operating margin. But can you just remind us there where -- which is the most profitable channel on that basis?

So let me maybe start at the high level. What you saw on the slide in terms of the contribution margin, if that is a proxy to answering your question, and scale the prescriber channel is going to be very profitable. Today, what you see what your visibility is, you see gross margins on the rental channel, which is very healthy. And then you see a gross margin on sales, which is both B2B as well as DTC. But for us, if you are going to scale an organization and get back to profitability, we have to go beyond the gross margin. As I said before, the DTC channel is an expensive channel that continue to maintain and scale because of the advertising spend required for you to generate that growth. So it doesn't mean we're going to walk away from it, but I want to optimize it. If you say, okay, we give me an answer, which is the most profitable channel. My trajectory in terms of thinking about this prescriber at scale will be the most profitable channel over time. That's why we're spending our energy and time and investments there. That will be the most profitable channel moving forward.

So I think we can open up for questions here in the room. And I know about [indiscernible]. Why don't we start with you?

A short-term question and a longer-term question. I appreciate all the color on the strategy on optimization. I guess the question I have is in the shorter term, why is 6 months the right time frame to think about this turn as a pretty steep first half versus second half acceleration in productivity. Why is that the right time frame? And then to the extent you can talk a little bit about the long term, what are we shooting for at steady state here? What is an ideal sales force size in terms of scale and productivity of Reps. What's the ceiling? What could this be in your mind if you do execute on this.

2 great questions. So let me start with the 6 months because it's an excellent question. So if you reflect on 2022 and how things played out during the year because of supply chain issues that we had and then the surprises on MDD and MDR. We had to prioritize DTC the revenue number because naturally, it's the highest ASP highest margin. So we didn't pilot much in the first half of the year because this was no time to tinker with that organization. And the priority was get the most revenue you can for the supply available. As we shifted focus in sort of Q2 into Q3 into remediating Europe for MDD and then later on remediating the backlog in the U.S. and because we were still supply constrained, especially in Q3, it was starting the [indiscernible] and ramp them up. Now the [indiscernible] did not ramp up as much as we wanted. So they took Q3 and Q4. Now naturally, part of what we've shown in terms of what are the variables that we have isolated to be able to focus on, some of it is behavioral and sales discipline. It would be foolish on our behalf to say, I can completely change behavior for 3 months and a quarter. Now we believe that the impact will start showing up in a quarter, extending to 2 quarters because this is not like black and white map or flipping a switch. There is discipline, sales behavior, time management. These are things that now we know exactly where the potential friction is and how to solve them. But they are reliant on people changing their behavior, and we know that we will drive that. But about let's call it 3 to 6 months instead of half first and second half. So that was the first question. So ideal mix in terms of our ideal sales for sites. So let me start with historically. We had recently made comments that we're about 300 and we say, give or take than 15%. We made comments in the earnings call that we are now at 250 trending south of that by the end of the year. We believe that the productivity will play out in terms of what the smaller sales force with the optimized advertising backed all into the objectives of productivity, efficiency and profitability eventually in the medium term will be 250 trending south, we will update people as we go, but there is room for us to continue to optimize. That's on the DTC side. Let me just call it the prescriber. Prescriber, we stand at around 60%. We believe there's still a little bit more room. And the rationale there is relatively simple. We look at the universe of targeted prescribers want to call on. We look not only at coverage but frequency in terms of the higher sales. We believe the number is between 60 and 75 over the next year or so. So that's the right number to think about on the outside sales force versus the [ impact ]. So this answers the question, Matt?

Yes, anything on productivity, what you think our productive reps should be generating...

So we show this historically. That's a great question. We will be updating productivity metric points a year moving forward. And we want to clean up the periods. The reason these periods are long, and there is little messy is because there was, like I said, we didn't change that much in Q1, Q2. We started changing in Q3, Q4 that was covered in the middle office. So we use the time is to make sure that we are very comprehensive. Moving forward, we'll compare year-on-year and at the end of every year, we'll look at productivity levers. And we are confident that the production numbers will be much more positive than they are today.

Can you provide a bit of an update on how you're thinking about generating some clinical data that demonstrates the advantages of from oxygen therapy and specifically POCs? And like how much of a priority do you think this is as you look to expand the base of prescribers and eventually expand to some of the new indications as well?

Let me make the high-level comments and Stan will actually -- is the expert. It is as is dealing with this. So let me start. So in our prescriber channel, today, if I look at the low penetration rate of POC, it's not only products and service. It's also involvement and conviction. So let me call it involvement and conviction. If I'm a prescriber that today is prescribing 2 liters per minute agnostic of modality, you're going to have to convince me not only through clinical data, but also some positive key opinion leader interactions to be able to say, you know what, I need to spend a little bit more time describing the right modality. With that said, I'm going to let Stan make the rest of the comments.

So maybe before I go into what's going to happen in the future and how we're building, let me just start with the foundation as to where we're starting from, right? So generally speaking, the oxygen therapy is supported by a few studies, not that many. And typically, they do not differentiate between notes. So even if you look at the current guidelines, there is just a mention of saying, well, ambulatory oxygen kind of makes sense because people can do with this. But it's not like it's a robust set of evidence. And the emphasis in those studies is really on the end points of reducing mortality and morbidity, therefore, by default, you're going into various sick-patient population literally at the end of their journey. So what we are trying to do while continuing to anchor ourselves in the current guidelines recommendation position, we're trying to say, well, actually before a patient gets there, they are becoming short of breath. And the way they manage it, they are limiting their activity, right? So there is a direct impact on the culture life. And once you stop moving, all the bad things start happening. So the way we're trying to approach it is we're trying to move in to say, okay, why don't we look at the specific impact of our devices, whether this is a current portfolio with the portable steel concentrators or the development devices with the portable ventures to show that this is actually -- this has an opportunity to change the way people function, right? So this is one avenue that [indiscernible]. The second avenue that we're looking at coming back to the slide that Nabil was showing is, well, if patient has overlapping conditions, such as, for example, COPD and congestive heart failure or [indiscernible], right? There are much -- they have much higher propensity to need the support. So why not go into those conditions and look at the overlaps and generate evidence symptoms. So those are a few avenues that we're going to pursue in terms of filling the market and also building deeper evidence to -- in the population that we are targeting. Now before we put any strong investment into conclusive pivotal studies, we need to make sure that we are shooting with the right targets, right? So therefore, what we are doing right now, we are putting efforts into epidemiological observational evidence in terms of how patients are managed and what the issues that they're facing and also into the smaller pilot type studies. So it's not huge spend, it's a quicker turn around in terms of in and out to get the evidence. But that should allow us to put the bets on the right goals when we're committing to the larger trials. So we're currently in the pilot phase and observational phase. Next wave will be maybe a couple more selected approach to the more conclusive larger-scale trials.

And Stan, in 2023, what do you expect to publish? To provide [indiscernible] is a little bit behind and people are not publishing on time, but what just gives them an idea of what we’re publishing.

So from the real-world evidence perspective, there are 2 sources of data that we are currently looking at, and we should have the reports from them this year and publication one is we actually have access to the French mantel data set that looks at the target patient populations and the modalities of treatment. So we have it for the whole country. And we're also looking at our own device generated data. Keep in mind, our devices everything that happens to them by the minute from the they're being produced. And we do know our patients pretty well through the call center and support the reimbursement, right? So we're looking at the patterns of use, we look at the adjustment of settings. We're looking at the respiratory rates, all of those things to kind of understand where we stand. So those are the 2 observational efforts that will generate data. From the clinical study perspective, we are -- we have completed the local study. We're expecting the preliminary results and maybe 2 to 3 weeks from now. We are starting the study in heart failure, looking at the improvement in case capacity. We are starting a sleep study, showing the ability to titrate patients on the bounce dose to reach the target levels of saturation overnight. And later in the year, we hope to do the study to start the study with the venture assessed to improve exercise capacity.

[indiscernible] Secondly, historically, the estimate CAC is as low as 200 before they did the big ramp or sales force in 2018 or '19. It's not a high 600. It's now about 400. One is, can you remind the except that we'll go stop line we spend greater than more cap? No, it's a 300 cap that we're going to spend against. [indiscernible].

So let me as maybe people do not hear the question fully. So what are we doing in terms of the lead generation and the optimization of that effort and messaging? So there's multiple efforts within that. One is on the omnichannel. So what's the mix between the DIRECTV, omnichannel, social media, et cetera. And then within that, which ones actually generate more phone needs versus web leads are very important for us. So there is room within that, the quality of the leads that we get in terms of qualifying them before we put them into the sales funnel, that's important. And then on the back end of it, as they go into the sales funnel, if they don't close immediately, what's the nurture path in terms of putting them back into a marketing funnel where you continue engaging and then try to sell them more time. So those variables are going to leave. We're not commenting in hard numbers in terms of advertising spend. As we click over the quarter, we are going to see that we're optimizing advertising spend to be able to get to that productivity efficiency and higher quality marketing funnel yield and the artwork starts in the sales funnel. Now your question is on the size of the sales force also.

No, no. So first part of the question is, are you a significant changes in how you're allocating the spend in budget, TV, social, CMS. And then is there any change in the messaging I believe that you are deliverable to how you allocate the budget by channel? [indiscernible] to generate on that.

So the first part, there is a lot of work on what the channel marketing mix is, like I said, okay, DIRECTV, long form, short form, social media, et cetera. Their focus is to generate more phone leads as much as possible over the web lead and the higher quality. Now within that, the messaging, now we understand because we did a segmentation study on our patients as well as our prescribers. We know the 4 segments exist in the market. The messaging in general will be tailored to the segment type. So when you get into the front, we're going to designate which patient segment you’re in and your sales messaging, other than the value proposition, how do I present that sales value proposition. The sales messaging is tailored to the segments to improve the productivity of the sales force. So the lead to a shorter sales cycle and the higher will close rates is within the messaging. Now overall, the creative so far, we haven't done anything on our creative. The next phase, you've indicated what it is. Based on all these insights, we are going to refund our creative. 2022 was not the time to do it. But moving forward, new creatives that will be produced beget social media and or in DIRECTV will be informed by all the insights quantitatively that we gathered about the patients and which segment is more important than others for us to maximize the return on investment from a marketing spend.

What's the level of [indiscernible] that spread lighter agreement. You spend above this, you stop. Below this...

We're not comment on specifically on that number, but we will consider it as part of the metrics to actually report on.

A question on the pipeline. Talking a lot about promo monitoring. Is that something that physicians can monetize? Is there a reimbursement for that? Does that still have to be put into place? And then the follow-up is you have that slide with the right to play pie graphs where there's still some white space. So when you think about what you need to get to the medium and the longer term innovation, is it humans? Is it technology? Do you need M&A? How do we fill in the demanding spaces...

With back team on that let me answer the first at the high level. So I think let me start from the back and then work my way to the front. The pipeline we showed is organic. It's within our capabilities and can make a few comments in terms of which one is the biggest difficulty is it technical and/or clinical in terms of evidence and so on. So it's organic. And I think it's important for us to think about that pipeline in terms of predictability. Can I deliver most of these programs and information, there is an attrition rate that is inherent in the pipeline. The good thing is to look at this pipeline and it has multiple opportunities in it. And even with the attrition, there are projects below what we pull the water line in terms of funding today and then you can replace one project with the other. From a funding perspective, we're comfortable funding all the projects in the pipeline today, with the exception of maybe the back end of it, we're delaying some of it because we're managing our effects judiciously, but those are in the 25, 26 window. So I'll let Stan make a few comments on the quality of the innovation pipeline.

So on the innovation pipeline, maybe to qualify, we have assumed certain attrition rate, and we have purposefully put more projects into the pipeline so that we compensate for it and we can deliver a steady state of things coming out over the next 3 to 4 years. And we have also diversified the innovation pipeline by the level of risk and by the type of projects. So we have the physical devices, digital health projects and the new indications right? So different things to different risks and different time line to impact. From the perspective of the capabilities on the slide that Nabil has shown, you might see some of the [indiscernible] being half empty, but that's not from the technological feasibility perspective. It's just that some of them being a little bit more innovative than the other is we still need to consult with the regulatory agencies in terms of what is the right path and strategy to actually get it to clearance because there are multiple options in front of us, and we just need to wait what's the most advantageous way to proceed. From the perspective of reimbursement coverage that you asked about, whether physicians can monetize digital health, there are established reimbursement codes for the remote patient monitoring and for telehealth telemedicine. The way we are approaching it is that we plan to leverage the existing codes and make sure that the profile of the product fits into this. But that being said, that is also synergistic with the approach to the prescriber channel because they will not have to take it naturally, right? You need to actually talk to them about that opportunity, describe the product and make sure that this grades well with the EMR screens or whatever it is that they're using in their main systems. So this is where the efforts are going to go into in terms of making sure that we look at it as an opportunity. But last but definitely not least, aspect of it that I wanted to highlight. Some of it is directly monetized both through those codes. So it is monetizable through the opportunity to differentiate the product and update share because of the rationale. I would like to reiterate that we are dealing with the chronic progressive conditions where adherence to therapy historically have been problematic and the individualization of therapy has been a chore. So allowing patients to see how are they doing, allowing to identify areas where things are not going well and we're in the [indiscernible] have an opportunity to, one, optimize the patient use of the technology. 2, allow the clinician to intervene at the right moment. And for the combination of those 2, hopefully open the promise to improve the vision outcomes to patient growth.

Nabil, can you switch into the sales perspective? Describe what changes have made improving profile [indiscernible]. Talk about sales on, but if you could describe what was changed in the trading sales and describe changes in ability to retain micrograms group training...

So it's a great question. So in 2022, we upgraded not only the criteria in terms of who we want to attract, how do we qualify them and how do we onboard them first. But then now the programs are moving, how do I train them for continued productivity and for retention, which is the second part of your question. Part of it is we're considering not only that, but also commission plans, how do we like think about that part of the -- what's being implemented right now. There is a tenure issue that sort of as part of the performance in 2022, we believe it could be partially part of the performance. So keeping people for a longer period of time is important, but we've also realized that the tenure is an important criteria, but not as important as the other criteria that we've shown in terms of if I give you the right system, the right data and the right accessibility to win and the process, plus the coaching, as you said, and continued development, 10 year matters less. One of the things we did not show, there is now evidence that we have that people with lower tenure are almost producing close to the people with the higher venue despite the reasons you given the process Yes. So we didn't put that in the slide, there's too much data, but people that have been here about 4 to 6 months getting close to the productivity of the people that have been here longer, but that's part of the playbook moving forward.

What is the right time with CSO to own Salesforce because we get better control and grow productivity, et cetera. And then described before the clinical even is there on [indiscernible] and we are fulfilling the almost with the case matches, many oxygen providers. So without clinical evidence why do you want to put you on list.

I think 2 excellent questions. Let me maybe tackle the last one first. First, in addition to your portfolio being compounded, and I'm going to draw your attention back to what patients want when we showed those quantitative numbers, patients really want to be on [indiscernible]. So given the optionality. Now the optionality is a frequency and presence issue. So not only how many prescribers you cover with one frequency, how many times do you show up in a month, become really critical. Because the way the process works is, the prescriber is actually issuing these prescriptions in the back. The front office staff is handing them out like you said to HMEs, where one of the HMEs. Now when we go into the field and we talk to permissions, people say, everybody wants to be on a BOC. I know the value of it, but everybody wants it. Now what you're trying to short circuit is that the transition between the back office and the front office 2 ways. One, if you are at that conference, write it in the prescription that you want BOC and only liters per minute, that's the clinical work and market development plus the education. And within that, we insist when we call on these prescribers that our sales force stocks to the prescriber, not the front office of the staff only. So part of the productivity measure that you get face time with the prescriber to tell them the value proposition. Now the good news is everybody knows the brand, everybody knows the quality and everybody knows the value of energy and BOC. So that works in our advantage. But the frequency and the presence in those offices is really critical. And if you look at the coverage and the frequency, this is how we actually draw out these maps because we want the right amount of frequency, not only the coverage, especially as you nurture these offices, like you said, in the beginning, much higher frequency. Once I get into that normal cadence, I'm getting my fair share of the prescription and I'm delivering in terms of the service, you can lower the frequency and expand the market. That's definitely frequency and consequently is as important as coverage.

CSO...

Yes, the CSO, we have the optionality contractually to convert any time we want. We're still now optimizing in terms of like there is sometimes the need for -- so there's a lot of analytics that come with the CSO. And this is why we say we're much more data driven in our approach than others. So part of the CSO offering is analytics. We can isolate that over time and buy it separately and then rebadge sales people internally. And it's the vision when we started, we said 18 to 24 months, we're still in the first year, but it's definitely under consideration whenever we need to submit that [indiscernible].

I just have a quick follow-up on the prescriber channel productivity metrics. Definitely, I noticed a nice uptick in the number of patient referrals for new and existing doctors. But the actual number of units per rep didn't change that much. Like how do you think about that metric specifically? And could you see maybe like flagged inflection this year as the strategy gains momentum.

So let me maybe characterize it with the 2 variables on the VSAT numbers. The number of -- so you're referring to the work plus 1.9%, right? So there are 2 numbers underneath that. One is we went up in terms of the number of people that are last 10 years in that organization. So you saw that unit productivity go down a little bit. And then there was some turnover, just to be completely transparent, we had to pay people that we're not performing at the right level. So that impacted that. But then as you scale as the 10-year start building up on the prescriber side because tenure is really important on the prescriber side for the relationships, much more than on the DTC side. As that is behind us, you're going to see that productivity defined optics, as evidenced by the number of new prescribers we're signing up and then the number of pits from existing subscribers too.

I don't think we have any more questions on the line. Is there anyone? Okay. Kevin, you can go ahead and close the call.

Thank you. And thank you for attending Inogen's Strategy Update Conference Call. This does conclude today's call. We will be disconnecting the line. We hope everyone has a great day. Thank you for your participation today.