Inogen, Inc

Greetings, and welcome to InnoGen's third quarter 2021 earnings release conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Sommer, General Counsel. Thank you. You may begin.

Thank you for participating in today's call. Joining me are CEO Nabeel Shabshab and CFO Ali Bowline. Earlier today, Intergen released financial results for the third quarter of 2021. This earnings release and Intergen'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 strategies for 2021 and beyond, expectations related to our financial results for the fourth quarter and full year of 2021, our expectations with respect to supply challenges and cost inflation related to semiconductor chips, using our batteries and concentrators, 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 prescriber sales organization, including the expansion of the sales team and implementation of healthcare intelligence platforms and tools through our partnership with Ashfield Healthcare LLC. Hiring expectations, expectations regarding reimbursement and regulatory changes, our expectations regarding the market for our products, and the impact of the COVID-19 pandemic on our business and supply and demand for our product. in both a short-term and a 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. Action 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 Indigent'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 turn the call over to Imogen's President and CEO, Nabil Shabshab. Nabil?

Thanks, Jason. Good afternoon, and thank you for joining our third fourth of 2021 conference calls. We continue to make progress to revise and begin implementing a clinically informed approach to innovation, product development, and our go-to-market strategy. Over the last several weeks, we announced an important new partnership with Ashfield to strengthen our commercial capabilities, and we appointed Dr. Stan Glaser as EVP and Chief Technology Officer to lead our R&D and engineering, in addition to his previous responsibility for medical affairs and regulatory affairs. At the same time, like others in the industry, we are navigating the challenges posed by the supply chain disruptions that are limiting our ability to meet demand and creating an inflationary cost environment, which is partially offset by price increases across all sales channels that was effective in September 2021. In the third quarter of 2021, we saw total revenue growth of 25.3% from the third quarter of 2020. primarily driven by sustained demand, improved average selling prices, and the reduced impact of the COVID-19 pandemic and related public health emergency, or PHE, versus the comparative period in the prior year. In addition, we believe oxygen therapy patient diagnosis rates are returning to historical levels due to the increased pulmonologist interactions that were reduced during the COVID-19 PHE. Due to supply chain constraints and in an effort to optimize financial results, We intentionally focus our available capacity on supplying our direct-to-consumer sales and rental channels and our international business-to-business sales channels, which you will see reflected in those results, while attempting to fulfill critical orders for our domestic business-to-business partners. We are pleased by our strong rental revenue growth and our improved direct-to-consumer sales revenue in the third quarter of 2021 versus the third quarter of 2020. Direct-to-consumer sales increased due to relatively strong demand, which improved sales representative productivity and average revenue per order versus the first quarter of 2020 when these metrics had seen a decline from prior periods associated with the COVID-19 pandemic. We believe that the improved metrics we saw in direct-to-consumer sales and rentals versus the comparative period in the prior years were primarily due to higher vaccination rates leading to increased desire for mobility, concurrent with the relaxation of closure orders related to the COVID-19 PHE, as well as improved consumer confidence. While in the short term, our outlook is impacted by certain supply chain constraints, we are proud of the actions we have taken to make structural improvement in our business, including our investment in our prescriber organization and other areas, productivity improvement in our direct-to-consumer channels, and increases in our average selling prices. In the last two quarters, demand for our products increased versus the competitive period in 2020, which led to improved revenue growth rates as we were able to also improve gross margin and adjusted EBITDA returns. We believe over the long term our strategy to optimize the commercial infrastructure and drive productivity while investing in clinical research and research and development will help us work towards our plan to return to sustainable double-digit revenue growth and profitability. Before we go through the third quarter financial results in more detail, I would like to provide an update on the impact of the supply chain disruptions primarily associated with the semiconductor chips used in our portable oxygen concentrators, or POCs, and batteries. Since our second quarter 2021 earnings call, we have continued to see this impact as shortages continue and costs rise. While we have been hard at work to help mitigate the impact of these shortages, it has and likely will continue to have a negative impact on our ability to fully meet demand in the quarters to come as these chips are used across all of our POCs in both batteries and printed circuit boards. We are continuing to work with our OEM partners and leveraging to the extent possible open market avenues to purchase the necessary semiconductor chips. The cost of these chips from third parties have trended significantly higher in the third quarter of 2021 than the cost seen in the second quarter of 2021 as a result of high demand for these chips and the costs are expected to continue to increase if and to the extent supply is available during the shortage. As a result, we saw inflated costs related to the acquisition of semiconductor chips begin to negatively impact our cost of goods sold in the first quarter of 2021, and we expect this to have an increased impact on our material costs in the fourth quarter of 2021 and continuing into 2022 until supply and demand get closer to equilibrium. Even though we paid significant costs in the first quarter of 2021 associated with these chips, Most of these costs increase prepaid expenses and inventory given that these components were not yet in the finished products that were sold during the period. We still believe, based on our assessment and industry feedback, that these supply shortages and increased costs may likely continue through the second quarter of 2022. In addition, the increased cost of goods sold per unit in the first and second quarter of 2022 is expected to be higher than the cost increase expected in the fourth quarter of 2021 based on the information known to date. This is a dynamic situation as component cost increase have exceeded our initial projections and open market availability of components are not guaranteed, which may lead to additional limitation on production if components are not available at agreeable prices. We expect demand to exceed supply for our products in the interim, but have taken the necessary measures to partially offset these rising costs by implementing price increases across products as of September 1, 2021. In addition to the semiconductor chip limitation, we are continuing to see supply chain challenges for other components used in our products, albeit to a lower degree. Thus far, we have been able to manage through these challenges with increased inventory levels and heightened supplier management and communication. With that, I will now provide details for our third quarter 2021 revenue by channel. For the third quarter of 2021, we generated total revenue of $93.1 million compared to $74.3 million in the third quarter of 2020. As I referenced earlier, this represents a robust increase of 25.3% over the comparative period in 2020. Domestic business-to-business sales in the third quarter of 2021 decreased 1.1% to $22.8 million compared to $23.1 million in the third quarter of 2020, primarily due to supply chain constraints that limited product availability in this channel. International business-to-business sales in the third quarter of 2021 increased by 49.7% or 46.9% on a constant currency basis, to $21.8 million compared to $14.6 million in the first quarter of 2020. Increase was primarily driven by increased emulation of patients in Europe and improving operational capacity of certain European respiratory assessment centers closer to normal levels, and improving COVID-19 vaccination rates enabled patients to return to more normalized activity levels and seek treatments. Domestic direct-to-consumer sales increased 24.6% to $36.3 million in the first quarter of 2021 from $29.2 million in the third quarter of 2020. The increase was primarily driven by increased demand for POCs due to higher COVID-19 vaccination rates and the relaxation of closure orders related to COVID-19 PHE leading to increased ambulation, as well as improved consumer confidence as compared to the third quarter of 2020. Inside sales representative productivity was strong in the quarter despite lower average inside sales representative headcount, which was down approximately 8% from the comparative period in the prior year as attrition outpaced hiring. In addition, sales in this channel were impacted by lower battery accessory sales in the period due to supply chain constraints. We continue to look to add new inside sales representatives while maintaining our hiring standards and being mindful of the supply chain constraints we are facing. We expect minimal net new inside sales representative hires in the near term due to the size and the quality of the candidate pool and expected attrition. But as part of our growth plans, we are increasing our focus on improving productivity of our existing inside sales force. Despite the lower headcount, we are pleased with the performance of our inside sales team in the third quarter as we saw improved direct-to-consumer sales productivity and increased average revenue per order versus the first quarter of 2020, including the price increase effective September 1, 2021. Rental revenue in the third quarter of 2021 increased 61.3% to $12.1 million from $7.5 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 September 30, 2021, we had approximately 40,400 patients on service, which was up 8.9%, sequentially compared to June 30, 2021, and up 36.9% compared to September 30, 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, as well as the relaxed Medicare criteria for oxygen category reimbursement due to the COVID-19 PHE. Despite the supply chain challenges, we are still cautiously optimistic that our performance both in direct-to-consumer sales and rental channels is a positive indicator for improving market conditions of our products overall. I also want to provide an update on the recently announced agreement with Ashfield, our contract sales organization, to enhance our go-to-market capabilities in the U.S. The plan to add approximately 20 dedicated sales representatives to our prescriber sales organization is now underway. Additionally, Ashfield will provide access to its best-in-class data-driven sales management disciplines, proprietary cyber insights, and analytics to support a growth strategy and drive performance in the clinician sales channel. We are still in the early stages of ramping up this collaboration, but we expect to have these sales representatives hired and trained during the first half of 2022, including the rollout of new and enhanced processes, tools, and field support teams across our entire prescriber sales organization to help drive productivity and efficiency. We look forward to providing more updates around our clinical strategy and our investments as we move forward. Now turning to the latest from CMS, On September 27, 2021, CMS announced a final ruling on the home use of oxygen national coverage determination and removed the national coverage determination for home oxygen use to treat cluster headaches, largely in line with the proposed rule issued in July 2021. We are supportive of these changes and believe that expanded coverage for patients who would benefit from oxygen therapy, reduced administrative burdens, and greater physician decision-making authority on proper patient care can improve access for patients who are in need of oxygen therapy. Briefly, I'd like to also update you on the recently released Medicare traditional fee-for-service market data for the full year 2020. While the Medicare information has certain limitations when used to estimate the size and makeup of the oxygen therapy market, such as the absence of brand or manufacturer information, we believe that the information can serve to approximate the long-term oxygen therapy market in the United States. Based on the data set, we estimate that the share of POCs in the traditional fee-for-service Medicare long-term oxygen therapy market grew from 18 percent in 2019 to 20.9 percent in 2020. However, this estimate does not include patient cash sales or private insurance transactions, so we believe that this data from CMS may represent a conservative estimate of actual POC market penetration. POCs were still the fastest-growing modality in oxygen therapy based on the CMS data, and we still believe this category has a significant growth opportunity ahead. The data also showed a continued trend of a decreasing share of stationary concentrators, transferring devices, systems, liquid systems, and oxygen tanks. Due to the trend of a higher percentage of patients receiving both stationary and ambulatory oxygens, we have increased our estimate of target for penetration of total long-term oxygen therapy patients using POCs to be approximately 72%. This is up from our prior estimate of 70% and is based on our estimate that 90% of the ambulatory long-term oxygen therapy patients could be served by POCs over time. As we look ahead, Despite some near-term challenges, the underlying demand for our offerings is strong, and we are confident about our commitment and focus on increasing the POC market penetration and improving patient access. To that effect, we remain focused on strengthening patient awareness of our best-in-class POC offerings and expanding our efforts in terms of market development to increase awareness and advocacy of clinicians in support of POC-based oxygen therapy. We recently announced that Dr. Stan Glaser, Immigrant EVP and Chief Medical Officer, has been appointed to the role of EVP and Chief Technology Officer, responsible for R&D and engineering, medical affairs and regulatory affairs. Dr. Glaser brings extensive expertise in development and commercialization of combination drug device innovations, clinical development, medical and regulatory affairs, as well as market access across various disease states. In his new role, Stan will partner with the leadership team to drive clinically informed disciplines in innovation, product development, and go-to-market strategies. We also announced that Brenton Taylor, previously Imogen's EVP of Engineering, will be leaving Imogen after a transition period ending April 1, 2022. We are very grateful for Brenton's leadership and the significant role he has played in the founding of Imogen and bringing it to where it is today. In the meantime, we are committed to working through the ongoing supply challenges while we continue to invest in our infrastructure and enhance our clinical evidence, R&D, and commercial capabilities to strengthen our market leadership position and portable opportunity. While we are still early in these efforts, I believe that we are on the right path to create long-term, sustainable, and profitable growth and value creation. With that, I will now turn the call to our CFO, Ali Barla. Ali?