Inogen, Inc. (INGN) Q1 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inogen's First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Ali Bauerlein, Chief Financial Officer. The floor is yours.

Thank you for participating in today's call. Joining me is CEO, Nabil Shabshab. Earlier today, Inogen released financial results for the first quarter of 2021. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2021 and beyond; expectations related to our operating results for the 2021; our ability to create shareholder value by driving awareness of our products; expectations regarding our international and domestic sales channels; expectations related to our rental channel; expectations related to our physician sales force; hiring expectations and expectations regarding our sales and marketing roles and related investments; product development expectations; expectations regarding reimbursement and regulatory changes; and our expectations regarding the market for our products; and the impact of the COVID-19 pandemic on our business and demand for our products in both the short term and long-term. The forward-looking statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligations to update these forward-looking statements, except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I will now turn the call over to Inogen's President and CEO, Nabil Shabshab. Nabil?

Thank you, Ali. Good afternoon and thank you for joining our first quarter 2021 conference call. While the COVID-19 pandemic continued to have an impact on our overall business in the first quarter of 2021, we saw sequential growth in all four channels and sequential growth of 17.5% in total revenue from the fourth quarter of 2020. As expected, domestic business-to-business sales were strong with double-digit growth in the first quarter of 2021 over the comparable period in the prior year, primarily driven by the needs to temporarily treat COVID-19 patients upon hospital release. In addition, we were pleased by our strong rental revenue growth and our improved direct-to-consumer sales revenue in the first quarter of 2021, sequentially versus the fourth quarter of 2020. Direct-to-consumer sales increased due to higher demand which led to improved sales representative productivity and higher average revenue per order versus the last three quarters in 2020 on these metrics have seen a decline over the prior periods associated with the COVID-19 pandemic. We believe that the improved metrics we saw in direct-to-consumer sales are primarily due to higher vaccination rates within our patient population, leading to increased desire for mobility, concurrent with the relaxation of closure order related to the COVID-19 PHE, as well as stimulus payments and improved consumer confidence. With that, I will now provide details of our first quarter 2021 revenue by channel. For the first quarter of 2021, we generated total revenue of $86.9 million, compared to $88.5 million in the first quarter of 2020, a decline of 1.8% from the comparative period in 2020. Domestic business-to-business sales in the first quarter of 2021 increased 11.6% to $30.7 million, compared to $27.6 million in the first quarter of 2020. We believe this increase was primarily due to greater demand for POCs for COVID-19 patients upon hospital discharge, partially offset by the lower reseller demand. In addition, we believe the resolution of the competitive bidding uncertainty on October 2020 also contributed to increased demand in our domestic business-to-business channel during the first quarter of 2021. International business-to-business sales in the first quarter of 2021 decreased by 21.7%, a 27.4% decrease on a constant currency basis to $15.7 million, compared to $20.1 million in the first quarter of 2020. We believe the decrease was primarily driven by the continued impact of the COVID-19 pandemic with intermittent lockdowns in many European countries, along with reduced operational capacity of certain European respiratory assessment centers. Direct-to-consumer sales decreased 13.8% to $30.6 million in the first quarter of 2021 from $35.5 million in the first quarter of 2020, we believe the decrease was primarily driven by lower inside sales representative headcount, which was down approximately 18% from the comparative period, primarily due to the impacts of the COVID-19 pandemic on our hiring of new sales representatives. While we were able to hire new inside sales representatives in the first quarter of 2021, we did not find enough qualified candidates to offset attrition. We continue to look to add new sales representatives, while maintaining our hiring standards and being mindful of the continuing effect of the COVID-19 PHE on our sales and marketing efforts. But we expect that to be challenging in the near term due to the size and the quality of the candidate pool. Despite the decrease as compared to the first quarter of 2020, there was increased demand for POCs in this channel in the first quarter of 2021, compared to the fourth quarter of 2020. This increase was primarily due to higher vaccination rates within our patient population, and the relaxation of the closure orders related to the COVID-19 PHE, leading to increased ambulation, in addition to new stimulus payments and improved consumer confidence. This led to improved sales representative productivity, and increased average revenue per order versus each of the last three quarters in 2021 when these metrics declined associated with the COVID-19 pandemic. Compared to the first quarter of 2020, sales representative productivity was flat and average revenue per order was slightly up. We are cautiously optimistic that this may be a positive indicator for improving market conditions for our products. However, given the relatively short timeframe for these improved results, we will be monitoring sales performance metrics in future courses to assess the market opportunity. Rental revenue in the first quarter of 2021 increased 84.2% to $9.9 million from $5.3 million in the same period in 2020, primarily due to increased patients on service, higher billable patients as a percent of total patients on service, and higher Medicare reimbursement rates. As of March 31, 2021, we had approximately 34,700 patients on service, which was up 7.8% sequentially compared to December 31, 2020, and 41.1% compared to March 31, 2020. The increase in patients on service was primarily driven by greater utilization of patient leads for rental opportunities and physician facing initiatives to increase prescriber awareness by our sales force. With a three months tenure, and as I look ahead, I am even more confident about Inogen's commitment to making POC the standard of care by remaining laser-focused on increasing patient access to our products and extending physician awareness. We remain committed to elevating our investments in R&D and building a dossier of clinical evidence to strengthen our market leadership in oxygen therapy. While we are early in these efforts, I believe that we are on the right path to create long term sustainable and profitable growth. With that, I will now turn the call back to our CFO, Ali Bauerlein. Ali?

Thanks, Nabil. As Nabil noted, total revenue for the first quarter of 2021 was $86.9 million, representing a decline of 1.8% from the comparative period in 2020, and a sequential increase of 17.5% over the fourth quarter of 2020. Turning to gross margin to the first quarter of 2021, total gross margin was 45.9% compared to 43.4% in the first quarter of 2020. Our sales revenue gross margin increased to 44.7% in the first quarter of 2021 versus 43.3% in the same period of 2020. This increase was primarily due to lower manufacturing costs per unit versus certain manufacturing inefficiencies we experienced in the comparable period of 2020. This was partially offset by lower average selling prices due to an increased mix of domestic business-to-business sale, which have a lower gross margin versus our direct-to-consumer sales. Rental revenue gross margin increased to 55.1% in the first quarter of 2021 versus 43.8% in the first quarter of 2020, primarily due to higher billable patients as a percent of total patients on service and higher Medicare reimbursement rates, partially offset by higher service expense per patient on service. As for operating expense, total operating expense increased to $42 million in the first quarter of 2021 versus $40.5 million in the first quarter of 2020, primarily due to CEO transition costs, an increase in the fair value of the New Aera earnout liability, and higher personnel-related expenses, partially offset by lower advertising expense. Research and development expense increased to $4 million in the first quarter of 2021, compared to $3.6 million in the first quarter of 2020, primarily associated with increased product development expense. Sales and marketing expense decreased to $25.5 million in the first quarter of 2021 versus $27.2 million in the comparative period of 2020, primarily due to decreased advertising expenditures, partially offset by increased personnel-related expenses. Advertising expenditures were $7.6 million in the first quarter of 2021 compared to $10 million in the first quarter of 2020. General and administrative expense increased to $12.5 million in the first quarter of 2021 versus $9.8 million in the first quarter of 2020, primarily due to $1.8 million in CEO transition costs and a $1.2 million increase in the fair value of the New Aera earnout liability, partially offset by lower consulting expense. In the first quarter of 2021, we reported an operating loss of $2.1 million, Adjusted EBITDA of $5.4 million, a net loss of $0.7 million and loss per diluted common share of $0.03. Finally, we ended the first quarter of 2021 with cash, cash equivalents and marketable securities of $233.2 million, with no debt outstanding. Regarding reimbursement rates, as a reminder, the budget neutrality provision for oxygen therapy was removed in December 2020 as part of the US government stimulus package. As a result, on average Medicare rates increased 10% in former competitive bidding areas, and 5% in all other Medicare areas, effective April 1, 2021. In addition, the 2% Medicare sequester pause was extended through December 31, 2021, instead of expiring on March 31, 2021 as previously scheduled. We see both changes as positive for our industry and overall POC adoption. Now turning to guidance, because of the continued COVID-19 related market uncertainties, we're still unable to provide guidance for the full year of 2021, including our revenue, revenue mix, net income or loss and adjusted EBITDA estimates for such a period. Despite the ongoing COVID-19 pandemic, we believe it is prudent to continue to make investments and expanding our sales force to focus on rental at the onset-of-care, and enhancing R&D spend, starting to build a dossier of clinical evidence and building the necessary infrastructure to support our strategy. Given such investment initiatives, which we believe will support future revenue growth and predictability, as well as margin expansion, we still expect increased operating expense for 2021. Also, while we incurred minimal expenses related to bonus and performance-based stock-based compensation expense in 2020, we expect such costs to increase in 2021, along with certain expenses related to previously announced recent officer transition. Regarding the second quarter of 2021, we expect all sales channels to increase versus the comparative period in the prior year, with the largest percentage growth expected in our rental channel. We expect to continue to see the largest COVID-19 related impact on our international business-to-business sales channels, primarily due to the continued reduced operational capacity of the respiratory assessment centers, and slower vaccine rollouts than the United States. With that, we will be happy to take your questions.

[Operator Instructions] Our first question comes from Matthew Mishan with KeyBanc. Please proceed with your question.

Thank you for taking the questions. Nabil, Ali is the way to think about direct-to-consumer rental from 1Q to 2Q is that sequentially the patient population increases by X amount in addition to a 5% to 10% increase in reimbursement?

Yeah, that's correct. So you'll see it going into Q2, we do expect our patient population, our rental patients on service to continue to increase. And we would also expect to see that 5% to 10% increase in rates on the portion of the business that is Medicare related, which is about 75%, 80% of that total pool.

And thank you for that. And given it's a renewed focus on this part of the business. How should we be thinking about the seasonality of the rental fleet from 1Q to 2Q or 3Q and through the course of the year?

So one of the great things about the rental business is that you don't see as much seasonality that you see in the cash business because you have underlying patient demand and a patient wants to convert to POCs and beat our coverage criteria, they really want to do that year-round. What is different in the rental fleet in terms of net patients added in a given period is there is seasonality around, unfortunately patients deaths, and then also patient changes in insurance. So we tend to see a higher number of patients coming off service in the fourth quarter and in the first quarter of any given year than you see in the second quarter or the third quarter. So if you look at our patient addition, our net patient additions in the period, those tend to be stronger in the second and third quarter versus the fourth quarter or the first quarter. So hopefully, that's helpful. And then of course, it comes down to how much sales capacity do we have, how many referrals are we driving in a specific area.

Okay. That is helpful. And then on the direct-to-consumer sales. It sounds as if there are certain metrics that are leading you to believe that there's increasing momentum there. But on the same token, you're not able to hire the right kind of inside sales people at this point in time, we're not able to find them. Are you losing sales or is it just putting their sales off by about a quarter or so?

So in terms of, you know, the factors that we're seeing, as you said, we are seeing positive indicators, that there is, you know, increasing patient interest in purchasing the product versus what we saw as dampened demand associated with the COVID-19 pandemic. So we are glad to see those improvements in those key metrics that we look at for the D2C business. And as you mentioned, the challenges that we've really seen on the hiring side have also made it difficult for us to show growth in that channel in the year-over-year comparison, in the first quarter. Now going forward, in spite of that, we do expect to get back to growth in that channel, in the remaining quarters of the year, because of the improvements that we've seen in overall demand for the product. So we do see that as a positive. And we do hope to hire more reps, but we are cautious on that front, because it has been a challenge to hire and train people in this period of a pandemic. So the number of sales reps, I don't think our attrition has changed significantly from historical levels. But our ability to replace the attrition with new sales reps has leveled.

Okay. And then just last question, I'm sorry for asking too many. 2Q versus 1Q, 1Q you had had a bolus of B2B domestic sales. Do you think that overall 2Q sales the momentum you're seeing are above 1Q?

Yeah, great question. And I do expect Q2, 2021 to be up from the first quarter of 2021 on a sequential basis in total revenue, I think there may be some moving parts within the various buckets. But, you know, we are seeing more of that historic seasonality that we've seen where direct consumer demand is stronger in the second quarter than it's been in the first quarter. Obviously, we've seen some increasing demand in some areas hit hard by COVID, that also should impact the second quarter. And of course, as we said, in our prepared remarks, we expect rental revenue to have the highest growth as a percent of, you know, last year's second quarter results. So we do see positive trends in the business and do expect to see a sequential increase in the second quarter over the first quarter of 2021.

All right, excellent. Thank you very much.

Thank you. Our next question comes from Margaret Kaczor with William Blair. Please proceed with your question.

Hey. Good afternoon, everyone. Thanks for taking the questions. So I'd love to push you a little bit on guidance for '21. I know you're not keeping it, but I'll do my best to see what we can get out of you. So that, you know, given the demand we've seen in Q1 if we apply kind of the traditional seasonality metrics we've seen in the past, that brings kind of our full year number for '21 to $360 million or more. Now I understand there's a lot of moving pieces. We don't really know what's going to happen in a variety of areas. But maybe more specifically, why wouldn't DTC do as well seasonally as it's done in past years? Especially given some latent demand, extra travel and so on? And then should we also see travel POCs increased in the DME channel, helping support kind of that B2B domestic growth?

Yeah, so I can take that question. And, you know, certainly, we've seen positive trends. I mean, our numbers that we saw in March, were certainly an improvement and more in line with past seasonality patterns. So that is a positive sign. But this is only a couple months in now with March and April, really behind us and seeing that. So we want to get a little farther into the year and make sure that it's sustainable. And this is not just pent-up demand that we're seeing in the B2C channel. But it is really something that we can predict going forward. But you're right, the initial indications are certainly positive for us. I know everybody would love for us to reinstate guidance, but we want to make sure that when we reinstate guidance, that we have the proper visibility to put a number out there that is, you know, an achievable number, a beautiful number, and that number we have high confidence in from a predictability standpoint. In addition, we just hired a new Chief Commercial Officer, who just started less than a month ago. And so, you know, we want to make sure that the entire management team is up to speed and aligned on our priorities, both short term and long term, and has the same level of visibility and confidence in those results, before we put guidance out there. But, you know, the initial indicators that we are seeing in the market recovery seems to be positive. And we also need to make sure that we can continue to maintain the base of sales reps to fill that capacity. Now, on your question on the consumer demand through our B2B accounts, they throughout the whole pandemics have really mimicked what we've seen in our direct-to-consumer business, including in the first quarter, so I don't see their trend, substantially different from ours. And so as a result, I would expect, given the easier comps, them to also show growth in the second quarter versus the year-over-year. And you know, kind of that return to growth. So they have slightly different dynamics, but in the end, they are also tracking consumer demand for POC.

Okay. And then I've got a follow up to that, and one if I can on the '22 in the long term. So this is a follow up to your comments on DME and kind of the sequential increases potential into Q2 and throughout the year, how big was hospital in the first quarter? Because it sounded like maybe you were seeing some excess demand associated with that, that might make it a smidge different. And I know international, it's tough to gauge, but any color there, and then the question on '22 after that.

Yeah. So Margaret, you know, we would love to be able to answer the question on hospitals demand specific to the first quarter. It's very challenging for us to answer that question, because the demand is tied to the same customers. So we weren't selling to hospitals directly in the first quarter, we were selling to all of our same customer base. And they were telling us that they were using a portion of that demand for COVID patients that were being discharged on POCs. So unfortunately, we can't break that out specifically outside of just looking at the trends and trying to do you know, our own estimate. But no, we don't have a hard number of how much was specifically tied to that.

Okay. That's fair enough. And then, you know, I think the big question that you know, I get and I think a lot of other people get is kind of a long-term profile post-COVID. And whenever that happens, if it's '22 or beyond, but how do you guys, Nabil and the team, how do you guys view that growth profile? And as we go through this year over the next four quarters, what are those fundamental indicators that you'll look forward to say you know, what I feel very confident about be at mid-single, high single digit or double-digit and beyond for growth. Thanks.

And so Margaret, I'll take that one. We see ourselves returning to double-digit growth, but not guiding anything beyond that. But we believe that the indicators so far that we've seen in terms of the recovery, in terms of what we're putting in place could get us back to that double-digit space that we are aspiring for in terms of - in 2022 moving forward.

Okay. Fair enough. Thanks.

Thank you. Our next question comes from Robbie Marcus with JPMorgan. Please proceed with your question.

Hi. This is actually Lily on for Robbie. Thanks for taking the question. So I was hoping you could just give a little bit of color on what you're seeing in different geographies. Obviously, things are very different in Europe than they are in the US right now. So yeah, any color you'd be willing to give on, you know, how the recovery has trended US versus OUS would be helpful.

So maybe I'll take that one. So definitely, we're seeing a recovery, which is a little bit stronger in the US and is directly related, as we all know to the higher vaccination rates, even though we're seeing them now fluctuating a little bit back and forth in terms of the hesitancy for people to vaccinate. But that's a very different picture in terms of the mobility that this is creating in the US and the demand for travel, as well as general mobility versus Europe as an example. And where there's still a little bit of a lockdown approach to things. And the major geographies that we operate and be it in France and or in other continental European countries. As you also know, and Latin America, things are very dire in terms of what's happening in Brazil, as well as other countries. So definitely the leading indicator in the US is leading in its nature and doesn't apply to the rest of the geography. But we expect over time as maybe health in terms of vaccination rates starts flowing to the other market, that we see a similar trend to what we're seeing in the US.

Great, thank you. And then just one quick follow up. Just how should we be thinking about OpEx spend over the course of the year, as the recovery continues to play out, in particular, ad spend and considering DTC is still depressed? Thanks.

Yeah, sure. So we're proud of what we accomplished in the first quarter in terms of reducing our advertising spend. We do expect advertising spend to increase in the second quarter through the fourth quarter, as we do see an opportunity for us to spend more and have higher revenue associated with it in the direct-to-consumer channel. So we are moving back towards that model versus what we started really in the second quarter of last year to reduce advertising expense to try and, you know, minimize our operating expenses with the impact of the COVID-19 pandemic. So I would expect that to increase going forward, but also to see, you know, overturn of the revenue generation associated with that higher level of spend.

Thank you. Our next question comes from Mike Matson with Needham and Company. Please proceed with your question.

Yeah, thanks for taking my questions. Just want to ask one on the pipeline. I don't know if you're willing to give any updates there. But it has been a couple years since we've seen a new POC. So wondering if you have anything new coming there. And just wondering if you can give us an update on the effort to integrate the New Aera technology into your POCs?

Yeah. Thanks, Mike for the question. We are actively working on a variety of R&D projects. But we for competitive purposes really aren't going to be speaking about the specific specs until we're ready to launch those products. So just like we've done historically, we want to keep those pretty tight to the vest until we're ready to launch. But as you can see from our financials, we're continuing to invest heavily in R&D. And our focus and goal is to stay the innovation leader in oxygen therapy with the best-in-class POC, but also expand into New Aera - into new areas, like with the New Aera technology, and that work is still ongoing.

Okay, thanks. And then have you seen any sort of response from any of your larger B2B customers as you're increasingly focusing on your rental business Are you worried about that at all?

Certainly, it's something that we, you know, work with the accounts that are partners to us. We have strong relationships with a variety of HMEs. And we think that that's really important as well. And the work that we're doing here is meant to supplement the work that they're doing to convert their fleet and set up new patients on oxygen therapy. So we haven't seen a negative response associated with that. I'd still say that, you know, when we look at our 35,000, almost 35,000 oxygen patients on service versus our estimates of 3 million oxygen patients in the US, we're still a very small fraction of the total market. So you know, while we continue to expand our rental base, and have seen great success there, we also have seen our partners continuing to focus on their conversion. And we have not seen any negative repercussions from any large major account associated with that.

So like, I will add that we should never expect the tension to go away, our intent is to make it a productive, healthy tension. And our focus is on developing the market, like we've commented many times before, which will help all of us benefit from the penetration of the POC modality. And it's the health attention that is referred to is - it's up to every participant to take as much of the upside as they can. And I think in general, this is something that they've learned to live with, and we've learned to live with, and we continue to manage in a very collaborative manner.

Okay, thanks. And then just wondered if you could give us an update on the pulmonology sales force, how big is that, if you're willing to give those numbers or as of, I guess, the end of the year last year and then, you know, how is it - you talked about productivity of your inside sales force, I don't know if you have any way to kind of measure the productivity of these reps or track the leads that are coming from their physicians that they're calling on?

Yeah. So Mike, we're at 24, the intention is to continue to hire very selectively, because these are very unique profiles in terms of clinical selling and the ability to develop the market. The question around productivity, the one thing I can say is, despite the fact that there's a lower percentage of tenured people on the total sales force today, we have seen a double-digit improvement in terms of their productivity versus compared to last year, which is very encouraging. So we're on the right track, heading to the right place with them.

Okay, great. Thank you.

Thank you. Our next question comes from Danielle Antalffy with SVB Leerink. Please proceed with your question.

Hi, this is actually Rebecca Wang on for Danielle. A question on your commercial strategy. You guys hired a new Chief Commercial Officer? How does this change your company's commercial strategy overall? Where do you see the opportunity for him to have the most impact in the next few years - a few months? Thank you.

How does it change? Sorry, I didn't get the full question. How does it change our strategy…

Yeah, your commercial strategy? Where do you see the priorities or area of focus for him in the first few months to make an impact?

Yeah. So the Chief Commercial Officer as part of the - of the management team definitely is going to participate on the two biggest - on the two biggest levels of growth, on the portfolio side and strategy, as well as on the go-to-market. So on the portfolio, the close partnership with R&D and engineering to make sure that we are actually making sure that the portfolio is directed towards where the biggest growth areas are. And the differentiation that we aspire for all the time is one of the areas of intervention. And on the other side, and the go-to-market strategy, in terms of increasing both the productivity and the efficiency of our sales and marketing spend and efforts is one of the critical areas. Also additionally, as we know this is a service business. So looking into things around the customer experience and the patient's experience in terms of them getting on therapy, and then staying on that therapy is one of the areas that the person will be looking at. And George Parr will be focused on all of the things that I just mentioned.

Great, thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back to management for any closing remarks.

Okay, thank you. So while the COVID-19 pandemic has and will continue to influence our business, we are encouraged by the stabilization we have seen in our core market. I am addition to excited about our physician sales team investments which we believe will position us to reach our vision of POCs becoming the standard of care in oxygen therapy. Thank you for your time today and I look forward to engaging conversations with our investors, as we make progress on our strategy to build a stronger energy.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.