Inogen, Inc

Welcome to InnoGen's 2021 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. To ask a question at that time, please press star followed by one on your touch-tone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference is being recorded today, February 24th, 2022. I would now like to turn the call over to Jason Sommer, General Counsel.

Thank you for participating on today's call. Joining me are Inogen CEO, Nabeel Chopchop, and our CFO, Mike Serskener. Earlier today, Inogen released financial results for the fourth quarter of 2021. This earnings release and Imogen'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 2022 and beyond, expectations related to our financial results for the first quarter and full year of 2022, our expectations with respect to supply challenges and cost inflation related to semiconductor chips used in our batteries and concentrators, our expectations of European regulatory clearances and related impact on our international sales, 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 COVID-19 pandemic on our business and supply and demand for our products in both the short 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 report filed with the Securities and Exchange Commission. Action results may vary, and we disclaim any obligation to update these forward-looking statements, except that they 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. Also, during the call, we will 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 InGen'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 rules. With that, I'll turn the call over to Indigent's President and CEO, Nabil Shapsha. Nabil?

Thanks, Jason. Good afternoon, and thank you for joining our fourth quarter 2021 conference call with We have made steady progress on the execution of our strategy to expand and effectively increase our sales footprint while driving the productivity of our commercial operations. We also continue to make progress in mitigating the supply chain challenges in order to meet the market demand, and we are investing in R&D and clinical while strengthening other critical capabilities in support of short-term growth while setting us up for long-term sustainable and durable growth and profitability. A few months back, we announced an important new partnership with Ashfield, our contract sales organization, to effectively advance our prescriber growth strategy, and we have made significant progress ahead of plan in terms of training and deploying the additional sales representatives and enhancing the operating model. In addition to enhancing our overall commercial excellence, we successfully executed a price increase in September 2021 that primarily offsets the cost of inflation associated with the industry-wide limited semiconductor chip availability. Turning to the fourth quarter results, we saw total revenue growth of 3.3% from the fourth quarter of 2020, primarily driven by improved average selling prices, sustained demand, and the reduced impact of the COVID-19 pandemic and related public health emergency, or PHE, versus the competitive period in the prior year, which was partially offset by supply chain constraints that primarily limited sales in our domestic business-to-business channel. This was in line with the midpoint of our preliminary unaudited revenue estimates provided on the January 10, 2022, and the results for each revenue channel reported were in line with those estimates as well. With ongoing supply chain constraints and while attempting to fulfill critical orders for our domestic business-to-business partners, We intentionally focus our available capacity on supplying our direct-to-consumer and rental channels and our international business-to-business sales channel in an effort to optimize revenue and margins. Additionally, in anticipation of the temporary suspension of manufacturing operations effective January 3, 2022, we have reserved a portion of our supply produced in December 2021 to partially meet the demand primarily for our direct-to-consumer sales and rental customers we expected in the first quarter of 2022 until the time we had restarted production. Before we go through the fourth quarter financial results in more detail, I would like to provide an update on the two items we reported in the January 10th press release relating to preliminary revenue results for fourth quarter and full year 2021. With respect to the impact from supply chain disruption associated with the semiconductor chips used on the printed circuit board and batteries of our portable oxygen concentrators, we are seeing continued pressure on supply with some early signs of improvement in the regular supply channel for these chips. We are working closely with our regular semiconductor suppliers to firm up their overall commitments and smooth out delivery schedules for the orders they had initially confirmed for 2022. Despite early promising signs, the semiconductor shortages linger and likely will continue to limit our ability to fully meet demand in 2022. We reported in the fourth quarter of 2021 pre-release announcement that we were temporarily suspending manufacturing operations due to this semiconductor shortage related to decommitments from various brokers on the open semiconductor market. The late cancellation of committed but outstanding semiconductor orders resulted in a decision to temporarily suspend operations beginning January 3, 2022. As expected, that suspension was a brief one, and we have now restarted our production at our Texas and California facilities and at Foxconn, our contract manufacturer in the Czech Republic, between February 7 and 9, 2022. Ahead of the plan, we laid out on January 10, 2022, and we are back at normal production levels. We are continuing to work across the semiconductor suppliers of our OEMs and leveraging to the extent possible the open market channel to purchase the necessary semiconductor chips. We additionally are completing the redesign of the motherboards on our Imogen I G5 POC to utilize alternative chipsets that currently have a higher level of availability, which we expect to begin using in production starting in the second quarter of 2022. With the motherboard redesign, there will be no material impact on the functionality, performance, patient user interface, or patient experience, but we expect greater optionality in sourcing semiconductors moving forward. The cost for the chips sourced from the open market has trended higher in the fourth quarter of 2021 versus the third quarter of 2021 as a result of high demand and constrained supply. This resulted in inflated costs related to the acquisition of semiconductor chips that negatively impacted our cost of goods sold in the fourth quarter of 2021. We expect the increased cost of chips to have an increased impact on our material costs in 2022 based on purchases already made to secure supply. We also expect such impact will increase if the regular supply chain's ability to catch up to demand further regresses and the alternate chips that are in the redesigned motherboard start to witness similar shortages, due to the heightened demand. The higher semiconductor costs incurred in the fourth quarter of 2021 as a result of sourcing on the open market have also increased our prepaid expenses and other current assets and inventory, given that most of these components were not yet in finished goods that were sold during that period. We still believe, based on industry feedback and our evaluation, that the supply shortages are likely to continue through the second half of 2022, despite some expected improvements. As part of our strategy to minimize supply disruptions and meet a higher portion of the expected 2022 demand, we decided to forward buy a portion of our semiconductor requirements for 2022 opportunistically during the second half of 2021. As a result, we expect the increased cost of goods sold per unit throughout 2022 to be higher than the cost increase seen in the fourth quarter of 2021, especially given that we will continue to source part of our semiconductor requirements during the first half of 2022 and possibly into the second half of 2022 from the open market channel. While the supply chain situation remains fluid, we are pleased with the motherboard redesign for our Imogen I G5 DOC and are aggressively continuing to pursue efforts to get firmer commitments from the regular supply channel while simultaneously canvassing the open market for additional quantities. Again, our execution around the price increase we took back in September 2021 has allowed us to cover most of the cost inflation due to the chip shortages. As mentioned in our pre-announcement on January 10, 2022, current Inogen products are commercialized in the European Union under the Medical Device Directive Certificates, and ours is expected to expire on May 18, 2022. We are preparing the filing for the MDR submissions for certification under the EU medical device regulation in the earlier part of 2022 for both existing and new and improved systems and expect the MDR certificates to be issued during the third quarter of 2022. We have verified our ability to meet most of the demand in terms of existing orders through our shipments up to May 18, 2022, MDD certificate expiry. Additionally, we are in the process of applying for select EU country-level derogations or exemptions as an additional mitigation measure. We are also working towards securing the necessary certification for Great Britain and Switzerland, where the EU MDR is not directly applicable, allowing for continued operations in those two territories independent of the timeframe for certification under the EU MDR. I would like to reiterate that the anticipated gap in EU marketing is unrelated to product safety or performance and will not impact US commercialization. Based on our latest discussions with the notified bodies, we expect the EU MDR dossier for our improved products to be reviewed and potentially cleared in time for long-term operations in the EU. With that, I will now provide details for our fourth quarter 2021 revenue by channel. For the fourth quarter of 2021, we generated total revenue of $76.4 million compared to $74 million in the fourth quarter of 2020, which represents an increase of 3.3% over the competitive period. Domestic business-to-business sales in the fourth quarter of 2021 decreased 57.6% to $10.3 million compared to $24.2 million in the fourth quarter of 2020, primarily due to supply chain constraints that limited product availability in this channel. International business-to-business sales in the fourth quarter of 2021 increased by 47.6% or 50% on a constant currency basis to $20.1 million compared to $13.6 million in the fourth quarter of 2020. The increase was primarily driven by increased ambulation of patients in Europe and improving operational capacity of certain European respiratory assessment centers closer to normal levels, as improving COVID-19 vaccination rates has enabled patients to return to normal, normalized activity levels and seek treatments, partially offset by supply chain constraints that limited product availability in this channel. Domestic direct-to-consumer sales increased 23.3% to $33 million in the fourth quarter of 2021 from $26.8 million in the fourth quarter of 2020, primarily driven by increased average selling prices. Insight sales representative productivity increased in the quarter despite lower average insight sales representative headcount, which was down approximately 3% from the competitive period in the prior year. We are continuing to optimize our insight sales representative team by increasing our focus on enhanced sales management disciplines and utilizing data-driven and insights-led sales techniques aimed at improving the productivity of our insight sales force. We are pleased with the performance of our inside sales team in the fourth quarter, as we saw improved direct-to-consumer sales productivity per representative and increased average revenue per order versus the fourth quarter of 2020, including the price increase effective September 1, 2021. Rental revenue in the fourth quarter of 2021 increased 39.4% to $13 million from $9.4 million in the same period in 2020, primarily due to increased patients on service, higher Medicare reimbursement rate, and higher billable patients as a percent of total patients on service. As of December 31, 2021, we had approximately 42,900 patients on service, which was up 6.2% sequentially compared to September 30, 2021, and up 33.2% compared to December 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, as well as the relaxed Medicare criteria for oxygen therapy reimbursement due to the COVID-19 PHE. Despite the supply chain challenges being worked through, we remain cautiously optimistic about the direct-to-consumer sales and rental channels while we continue to assess the potential impact including changing COPD diagnosis rates and other variables as a result of the COVID-19 in the U.S. and other major markets where we operate. Moving to the strategic initiatives focused on increasing our prescriber sales organization, our total physician sales representative headcount was 35 as of December 31, 2021, compared to 24 as of December 31, 2020, an increase of approximately 46%. However, in light of the collaboration with our contract sales organization, Ashfield, as of January 2022, our prescriber-facing sales organization was at 47 sales reps in place and 10 sales reps with accepted offers that will be in the field early March 2022, well ahead of the timing we had communicated when we announced this agreement. To support the combined 57 physician-facing sales reps, we have evolved our operating model by adding 12 Ashfield concierge service reps that will be assuming administrative responsibilities, which we believe will increase the selling time of the sales reps by about 60%, according to our internal early estimates, while improving the customer and patient experience. We expect a new strategy and action plan will significantly improve our coverage of the highest-defile prescribers with adequate call frequency while driving sales productivity through proprietary prescriber insights and analytics for the first time at Energem. The enhanced sales tools and techniques, as well as the concierge service model, will benefit the combined sales force, including Inogen and Ashfield representatives, and we expect will increase our coverage of the portable oxygen patients that are diagnosed and prescribed in the prescriber channel from 40% to approximately 65%. Regarding reimbursement rates, we continue to see increases in Medicare rates for oxygen therapy, with Medicare reimbursement rates increasing approximately 5% effective January 1, 2022, due to the annual inflation adjustment. The 2% Medicare sequester benefit that has been in place since May 2020 due to the COVID-19 PHE was set to expire December 31, 2021, but has now been extended until March 31, 2022. The sequester then resumes with a 1% reduction to rates from April 1, 2022 until June 30, 2022, with the full 2% Medicare sequester resuming July 1, 2022, and continuing through September 30, 2030. As we look ahead, despite some near-term challenges, the underlying demand for our offerings is strong, and we are committed to increasing the POC market penetration and improving patient access. In the meantime, we are committed to working through the ongoing supply challenges and mitigating most of the material cost inflation, focusing on commercial excellence and driving our operational efficiency. We will continue to invest in our infrastructure and capability build, clinical evidence, innovation, and new product development, as well as commercial capabilities to strengthen and advance our market leadership position in portable oxygen therapy. We believe that these focus areas and investments will contribute to our aspiration of long-term sustainable and profitable growth and value creation. With that, I will now turn the call to our interim CFO, Mike Sergius-Ketter. Mike? Thank you, Nabil.