Inogen, Inc. (INGN) Earnings Call Transcript

Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really happy to introduce our next presentation from Inogen, going to bring up Nabil Shabshab, the CEO, and then we'll do some Q&A after. Nabil?

Thank you, Robbie, and thank you for having us here. Welcome, guys. So I'm going to maybe start with those who don't know Inogen that well with a very high-level description. So we're a global med tech company that is focused on respiratory care, but deep into the oxygen therapy -- long-term oxygen therapy market for chronic respiratory conditions, COPD and beyond that. As a company, we take our purpose, our true note very seriously, which is improving the lives through respiratory care. It's the globe that hosts the organization together, everybody wakes up every day with a very discerned focus on serving patients much better than the day before. And that's what drives us every day. Let me talk a little bit about the impact of COPD, specifically on health care system, but more importantly, on the patients themselves. So if you look at some of the views on COPD recently, especially in the NIH analysis in 2020. And you see that COPD is the sixth leading cause of death in the U.S. as of that date. Also, the CDC estimated that the COPD prevalence among adults 18 years or older, is around 5.2% to 6.2%, so it's a significant percentage. But more importantly, the impact on the patients themselves and the health care system, not only that this disease is progressive in nature and debilitating and actually lowers the quality of life of the patients as soon as they get to the later stages of COPD. The cost is about $49 billion in 2020 of COPD based on the American Lung Association and there were about 1.3 million emergency department [ visits ] in 2019, which is a significant amount of visits that hopefully could be lowered. COPD and other diseases, including cystic fibrosis or congestive heart failure, lead naturally to lower oxygen in your bloodstream and hence, can benefit greatly from long-term oxygen therapy and COPD is, as we said, a debilitating disease that we know we can help in terms of not only providing long-term oxygen therapy for our patients, but in an ambulatory fashion that greatly benefits them. So a snapshot from a different angle about COPD, we basically have a geographic reach of 60 countries plus where we are commercially active. We operate out of 3 or 4 major locations, 1 in California, 1 in Ohio, 1 in Texas and our European headquarters in the Netherlands, but we also have an OEM or a manufacturer in the Czech Republic and our manufacturing locations are Texas and California and the U.S. So if you look at the strength in terms of the patents that we have. We have more than 90 patents that are issued and pending. But more critically, we have a very broad reach from a channel perspective. I think the 1 thing that defines Inogen very uniquely is the fact that we are both, a medical device company and an HME, 2 and 1, meaning that we can leverage not only our capabilities in terms of serving patients with new and improved systems, but also we can get it into the hands of our patients ourselves while partnering sometimes with HMEs but doing it directly ourselves. So the breadth of that reach, be it in the direct patient to prescriber through the HMEs and distributors around the world is something that sets us apart. So if you look at -- in terms of a financial snapshot, a very solid balance sheet, which we'll cover later on. And then what we actually put out yesterday in our press release, our unaudited preliminary results actually show that we're going to land in the estimate of $376.7 million to $377.7 million in 2022, which is about 5.2% to 5.5% growth. Okay. So let me maybe take a little bit of a step back into the transformation that we have been going through for the last 18 months. And if I could characterize it, I think we're moving Inogen from being a very strong HME with product capabilities and an excellent portfolio into a medical device company that will always retain its HME strain in the DNA that differentiates it but can then aspire to be able to continue to serve patients, not only in COPD, but beyond, as I will explain later. And then that journey started about 18 months ago, and it's progressing really well, but it's helping us build the foundation for sustainable durable growth, which is ahead of us yet because of also not only the capabilities we're standing, but the low market penetration that we have. So on Slide 7, if you look at our strategy, so there's maybe 2 or 3 things that are happening at the same time. One is we're strengthening and delivering results. And then the other 1 is while doing that, while we're transforming the organization to unlock growth moving forward and actually not only drive growth, but actually aim for return to profitability in the medium to long term. So simply, if I look at the runways, we think of them as parallel runways that are happening simultaneously with each other. Today, as the first one, we do have the portfolio that we actually know serves patients in the best way possible. And the focus is on driving commercial execution to actually drive penetration of POC-based therapy versus other modalities and that gives us a significant runway for growth. But we're not satisfied with that. With the second runway is actually growth through new product introductions, which is really important for us, and I'm going to be able to later on, just walk you through a high-level blueprint of where we're going from where we are today and the new imminent launches that we have in 2023. But also importantly, the third runway is one which is focused on market development. You can accelerate actually the penetration of POC-based therapy if you generate enough clinical evidence and in support of what the key opinion leaders and scientific advisory boards want to do to be able to change also the behavior of the prescribers, not only be able to show up at their clinics and advocate for the right therapy. You want the guidelines and the scientific evidence to help you and aid you in actually generating further interest and penetration in that market. And then naturally, the fourth thing that we always look at because we are in a position that helps us continue to look for the right inorganic accelerator and an opportunity, which is really important for us, but we're very selective in that sense, and we continue to look at potential ways to add to the portfolio and go from oxygen therapy into a respiratory care company, but also do that not only organically, but inorganically. Moving to Slide 8. There are 4 major things that we focus on in support of the strategy that I just went through. So the #1 is growing the core by evolving the commercial model. And that commercial excellence and pricing excellence is something that we've talked about extensively over the last 18 months. And specifically, we're focused on the 3 channels that we believe there's opportunity to continue to drive productivity and efficiency in. I'm going to start with the direct-to-consumer channel. And I'm going to share a few early results that we feel are very promising in terms of the pilots that we've ran. If you look at the 2 periods, October 2019 into March 2021, which is the 18 months before the new team landed in place. And you look at the most recent 18 months, April 2021 to September 2022. I'm going to just rattle off things that are not on the slides in terms of why we believe the productivity is on its way. It's still work in progress, but we believe this is a very solid proof of what we can do moving forward. If I look at the total DTC revenue, it's gone up 18.1% in the channel. If I look at the total revenue per rep -- per DTC rep, it's gone up 33%. If I look at the number of reps that have gone down 11%, but I still achieve the other milestone above. Also, when I look at the average selling price for POCs, it's gone up 24.6%. And when I look at the total units sold per DTC rep, they've gone up 9.5% while the tenure of the reps is down 5%. So the early progress that we're making is very promising. We're looking to institutionalize it moving forward and drive a higher level of productivity and efficiency in the DTC channel. Also, one of the things that we've done differently recently as of early in 2022, February or March, we decided to start focusing on the prescriber channel, which is really important for us. And the reason there is we want to go upstream to where people get diagnosed and prescribed. We don't want to wait for them only downstream, both DTC and prescribers have a place in our business model, but we want to be able to maximize the lifetime value of the patient that is prescribed, which is really important for us. So we're going to market. We've got 60 territories that we cover. We've also had very promising productivity improvements that I'm going to go through, just 3 of them. So if I look at the monthly rental productivity, of [ tenured ] reps, it's up 93% in the same period that I mentioned before. If I look at the patient referrals, existing and new prescribers, they're up 16% and 21%, respectively. And if I look at new prescriber acquisition, which is a major focus for us, it's 2x the base that we had before we started the focus area. Why is this very important for us? As I said, it maximizes the lifetime value of an oxygen prescription. It allows me to get in and put the patient on the right modality, right when they're diagnosed, and they actually are sent home with long-term oxygen therapy. The third one, which is also a very significant focus for is how do we elevate the strategic partnerships with HMEs to a level that is more around collaboration, especially that we're doing a lot of clinical work to expand the market in totality for all the players involved. But those who really are going to partner with us in terms of putting the patients on the right modality, have a lot of time with us in terms of how to advance the market together, but using the B2B channel as strategic partners to continue to drive to that objective. So that's on the commercial side, number one. On the second focus area that we have is, of course, enhancing performance through new product introductions. So the 1 thing that's very different for us moving forward, that we started as a discipline 18 months ago is all our innovation ideas in the pipeline that we'll talk about later on are basically discussed and vetted with a scientific advisory board, they're clinically oriented. We know what patient population, what indications, what benefit we hope to drive. And we actually are thinking ahead of time and putting it into our development cycle, what clinical evidence do we need? That's a very different take on how we actually talk about innovation moving forward. But most importantly, we want to innovate not only in COPD, but also beyond that disease state. So you'll hear me talk later on about hypercapnia or dyspnea. These are indications that we know that we can add to our base patient population and continue to drive performance and growth through new product introductions, which is really critical. The third focus area is efficiency. So we cannot only grow. We have to become a much more efficient organization, but also that discipline that I'm going to cover will elevate the customer and the patient experience, which is really critical for us. So if there's no friction in the processes and the experiences, be it with a customer and/or with the patient are much more satisfying. We know that, that is a driver of the brand equity and the commitment to Inogen as a brand. And 1 of the reasons people select the best-in-class portfolio in addition to it being an excellent experience for them. So streamlining and digitizing processes in the back office are really critical. We have very significant areas that we're working on in terms of intake processes, billing, customer service that can benefit from not only cleaning up the processes, removing redundancy, removing friction, but also scaling those through digitization. So that's a key focus for us moving forward in 2023. So -- and that benefit we can deliver not only within the functions. As you know, an organization, sometimes these processes are disconnected. We want to look across the functions first, and foremost, so we can actually take out that friction also within the functions and deliver the benefit to the corporation at large. And as I said, in the process elevating the customer and the patient experience. The fourth area for us, of course, is looking at inorganic opportunities. We're always -- we're very clear in our criteria and what we look for. We're very selective in terms of what we look for, and we're looking for always a way to continue to increase the portfolio impact in terms of dealing with respiratory distress and diseases, not only in COPD and not only in oxygen therapy specifically. And those are -- we're blessed with the fact that we have a strong balance sheet that I'll cover later on to be able to have the opportunity and the liberty to look at inorganic accelerators in addition to growing the core. So if I move to Slide 10, let's talk about why we remain excited at Inogen about the potential opportunity that lies ahead of us. On the left-hand side of Slide 10, you'll see the CMS data published for 2021. And there's 1 number I'd like you to pay attention to, which is 22% penetration of POC-based therapy out of the total. If I look at that number alone and develop what is the size of the runway that remains ahead of us as an organization as long as we continue to deliver the best-in-class innovation and services, the runway is huge for us and keeps us excited every day to come to work and avail ourselves of that opportunity to serve more patients with the right oxygen therapy [ modality. ] But in the middle of that slide also, if you look at the data that has all payers, not only CMS data, that percentage is only 14% of POC-based therapy. It's even lower than 22%. So if you triangulate the data, no matter which way you look at it, there's plenty of opportunity for us to continue to move people from tank oxygen therapy to portable oxygen therapy through concentrators that is very significant ahead of us and requires the strategy and the transformation that we just discussed. But also beyond that horizon, if you start looking at new indications, including shortness of breath, which is known as dyspnea or hypercapnia, which is the accumulation of CO2 in your bloodstream as well as other disease states, you'll realize that beyond the runway that is available in COPD and then oxygen therapy, there are other venues for growth, which, as I said, keep us very excited about the future of Inogen and what we can do for the patient populations we serve. So on Slide 11, we wanted to actually portray a little bit at a high level. What does our innovation roadmap look like? But more importantly, where are we coming from? So if I look historically at Inogen and its strength, it's had so far, always the best-in-class portfolio and the best products out there. But our last launch was in 2019 and what we call Inogen G5. So that still is a significant base for us to launch ourselves from with the new discipline that I just described, much more clinical discipline, regulatory, technical discipline, but the milestone that we're at today is a very exciting one. So after 4 years, we're now finally launching a new product in the U.S., which is a 4-setting POC that delivers ultimate performance based on weight and size and will be launched in the back half of 2023, and we have already launched a new and improved Rove 6 which is the G5 that has improved features in it in the EU at the end of 2022. Those milestones are just the beginning for the journey in terms of growth through new product introductions. Let me talk about the runway moving forward. And that runway is typically characterized if you look at what we've said publicly, between 2 and 5 years. So it includes multiple things. One is a more advanced portable oxygen concentrator that is connected and basically has an ability to accumulate data that can benefit the patient as well as the clinician and how they manage their disease by being informed and they have data to drive their decisions about titration, other therapy parameters that they need to change. And we know that there is a certain patient population that can benefit from higher flow. And we have said publicly that the next generation will be more than 6 setting, which is the current device that we have. So that's number one. Now also within that, there is a broader indication for the patient population that's say, okay, all is the COPD or are we going to start thinking about hypercapnia as well as dyspnea? And those require not only an oxygen concentrator, and we have a program in the funnel that we have today, which is also about providing ambulatory ventilatory assistance in addition to oxygen therapy. And there are very few solutions that allow patients to actually ventilate in an noninvasive fashion, while they're actually ambulatory and moving around. And this is 1 of the main focus areas that we believe can serve those 2 indications that we have. So the runway will go from only products to more and improved products in terms of the advanced next generation to a connected device that has a digital health value-added service on top of it that can benefit both, the patients and the clinicians that I said, and then expanding into indications of oxygen therapy plus ventilation moving forward. And this is the blueprint that we have from 2024 moving forward and we can answer some questions maybe in the Q&A on that. So moving to Slide 12, you can say, okay, so what have you done historically and where are you going? Where are you going, of course, is off the discussions today, but let's look retrospectively. The company has delivered 12% CAGR for -- 5-year CAGR from 2016 to 2021. If you look at the revenue breakdown, and this is a revenue breakdown that I'll characterize with it being evolving. So that pie chart on the right is $358 million, just for quantification, broken down as follows in terms of the channels. And based on the discussion we've just had around our evolving channel strategy, this will continue to evolve in service of not only growth but also return to profitability, but this is what the breakdown was in 2021 at the end of the year. So again, diversified channels, this strategy is getting stronger. We're looking for not only growth but to drive efficiency and to drive oxygen penetration, but we have the base for it to actually launch ourselves from in 2023 and moving forward. So on Slide 11, I mentioned very solid balance sheet, cash and cash equivalents of about $210 million, no debt for the company gives us the opportunity to do a couple of things. One is to continue to fund our growth strategy, which is really important, but also to manage like we've done through turbulent times of supply-chain interruptions and premium pricing and so, that gives us the leverage to be able to do that, but also leaves the door open for inorganic growth like we mentioned before. If you look at the gross margin profile, it's a depiction of sort of the -- not only the rental, but the sales, gross margin. Sales, gross margin is a combination of both B2B and DTC together. And you see that we're in the high 40s range, bordering on 50. The most important thing is we have a line of sight of how we can continue to improve that in 2023 moving forward. So it's -- this discussion would not be complete if we do not discuss operating disciplines. And on Slide 14, we simply wanted to summarize 4 key areas that we're focused on to continue to drive operating margin. So 1 of them, of course, naturally is lowering manufacturing material pricing because supply chain is improving. And we have discussed publicly how much of a premium pricing we paid for semiconductors before. And then we expect that, that will abate moving forward in 2023, specifically towards the back half, like we've said before, and that will be accretive in terms of the margin improvement. Also improving manufacturing capacity utilization is really critical for us. The growth that we are aiming to generate will help us put volume through fixed infrastructure and contribute to that accretion. But driving commercial and back-office efficiencies, also that I talked about through process improvement, cleanup, streamlining and digitization is also something that you cannot but focus on as an organization. If you want to drive scale, if you want to drive efficiency and if you want to drive repeatability, we are very focused on looking at where that not only help us drive growth but help us drive margin also. And there's multiple programs that we're working on in that sense. And then of course, gaining operating leverage, where we are now after a couple of years of investment is we're looking at a runway where we accelerate revenue, but we accelerate operating expenses at a lower pace to be able to lever the P&L and return to profitability, as we've said publicly adjusted EBITDA positive at the end of 2023. I would be remiss if I don't talk about very briefly the strength of the team. You can look on our website to look at the background, blue-chip key executives that, in my mind, are ambidextrous. And let me just click down on what I mean by that. These are people that are capable of strategizing very differently, data-driven insights led, but there are people that are capable of executing with excellence because you can't have one without the other. And my always aspiration for myself as well as for people that I work with on the team, is you have to excel in both. And that's how you can actually accomplish some of the progress we made over the last 18 months and not only delivering on our promises but fixing and building a stronger organization simultaneously moving forward at the same time. So at the end, I have to come to a conclusion of if I was on the other end, and I said, "Okay, so why Inogen? So what's your pitch, what's your elevator pitch?" And here goes, okay? So we're a global market leader in high-quality, innovative, and you heard from me before, increasingly innovative chronic respiratory care, oxygen therapy company. We operate in 60 countries. We have high brand equity, and we will continue to drive that adoption of POC-based therapy on behalf of our patients and for the clinicians that we serve. We are definitely a company that's building a sustainable competitive advantage in terms of expanding the market while we get our fair share of growth out of that market expansion. So we are focused on market development as much as we are focused on the growth for the company itself. We've went through an 18-month transformation so far. We're like sort of towards the end of it, but this has been an impressive track record for the team that you've seen on the previous slide in terms of how to deliver on the promises, while building for a scalable, more desirable organization that can return to profitability in the midterm. Financial position we've covered. You've seen our balance sheet and the strength that we have. It gives us opportunities in terms of funding growth as well as looking at other accelerators. And then an opportunity to return to profitability in the mid- to long term. And then not only the world-class leadership that we have, but also the Board that we have is a different profile now with a much more strengths in terms of partnering and being the constructive challengers of what the organization is putting forward as a strategy, but how also we're executing on it. So with that said, I want to thank you for your time, and we turn to Q&A now. Robbie?

So maybe we could start off with the fourth quarter pre-announcement. Sales came in at the lower end of the guidance range, just a hair below where consensus was sitting. Maybe you can walk us through some of the trends you saw by different business and any of the details you can provide.

Yes. So I'm going to go to Q3, of course, because we're in that period. So I think during Q3, we had signaled multiple times also in the conferences, Robbie, that we went through that there's some macroeconomic headwinds and then some inflationary pressure that we're seeing. So the inflationary pressure more on the DTC side, the macroeconomic headwinds are basically on the B2B side, the availability of capital, access to capital for the B2B customers that we have. We've actually managed to work through most of the headwinds like we've indicated in the range that we've put out there in Q4. I'm not going to only make a comment on Q4 in terms of the breakdown. We're going to be able to cover that during the Q4 earnings. But we've jumped over significant headwinds, and I'm proud of the team of those of what they've done, and we'll give you more color in Q4 on the channel performance per se.

What about as we think about supply availability. Where does that stand versus your targets and your goals? And how far away are we from getting to unrestricted supply?

Yes. So I think let me just [ go through ] context a little bit before, I think really the height of the supply constraints, we were like -- visibility was week-to-week. We went to month to month. Now we're at the quarter level. We feel fairly comfortable with the fact that the first half of 2023, we got what we need. We're working on increasing that towards the back half of the year. We need a few [ dense-driven ] months of performance from the regular suppliers in January and February. And hopefully, we'll be able to also update on that in the earnings call. But I feel much more with the 3-pronged approach that we've had, regular channel, collaboration and partnership, open market and redesign of products. We feel comfortable for the first half and we're working to us getting to that comfort over the back half as soon as we can.

Just to be clear, so comfort with the first half, that means that your sales growth will be limited by Inogen, not by supply?

Yes. So the supply would not be a constraint in the first half, yes.

How do we think about -- if we sum up those 3 channels of acquisition for supplies, how do we think about how much it cost to make in the Inogen unit now versus before COVID started?

Yes. So I think we've talked about -- let me use Q3 also as of the [ deflected ] guideline. I think we had incurred about [ $13.4 ] million in terms of PPV, right, on the balance sheet. And so when we started talking about PPV in general, I think we said that there is a significant increase in terms of the cost basis for the product. I would be a remiss if I don't say, at the same time, we're 1 of the companies that took price in the marketplace. So we did 2-price increases, 1 was September of 2021 and 1 was March of 2022. The sum of all the price increases across the channels cover the PPV variance that we have incurred in terms of the product. And that eventually will become a good guide on the P&L as we start seeing those -- like price variance paid start declining, that would become a good guide on the P&L.

Okay. You have a new platform that just launched in Europe, launching in the U.S. in 2023. Maybe speak to some of the differences? And should we be thinking about this as an incremental improvement over the prior version? Or is this something more meaningful?

Yes. So -- it's a great question. Let me start with what we call Rove 4. So it's a 4-setting POC that basically in terms of weight size and run life is comparable to the 3-setting POC. We believe that, that opens up in terms of growth from patients that did not want to carry a heavier device, but they needed a higher setting. So in net-net, we haven't done exactly the math in terms of cannibalization. We believe it's incremental, accretive opportunity because it's opening up the ability to have higher ambulatory with a higher setting with the same encumberment in terms of weight and size. The Rove 6 which is a 5-setting improved device is, in general, an update on previous device that we have. So I would look at that as more compliant now with the EU MDR, the reason why it was updated was EU MDR is compliant. It's fully launched now. And in my mind, the incremental opportunity there is a little bit less, but it's mainly Rove 4 that is a new and improved that will get us a growth trajectory.

And with the gap of EU MDR, do you think you lost any share in the European market?