Inogen, Inc

Welcome to InnoGen's first quarter 2022 earnings 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 and one on your touchtone phone. If anyone has difficulty hearing the conference, please press star and zero for operator assistance. As a reminder, this conference is being recorded today, May the 5th, 2022. I'd now like to turn the conference over to Jason Summers, General Counsel. Please go ahead.

Thank you for participating in today's call. Joining me are CEO Nabeel Shabshab and CFO Kristen Kaltren. Earlier today, Inogen released financial results for the first quarter of 2022. This earnings release is 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 second quarter and full year 2022, our expectations with respect to supply challenges and cost inflation related to semiconductor chips, used in our batteries and concentrators, our expectations on 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 channel organization, including the expansion of the sales team and implementation of healthcare intelligence platforms and tools, to our partnership with Ashfield Healthcare. Higher 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 products in both the short term and long term. The follow-up statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions that involve risks and uncertainties that are set forth in more detail in our most recent periodic reports followed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligations 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 our company 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 rules. With that, I will turn the call over to Inogen's President and CEO, Nabeel Shamshal. Nabeel?

Thank you, Jason. Good afternoon, and thank you for joining our first quarter 2022 conference call. We are pleased with our execution during the first quarter of 2022, whereby we continue to mitigate higher cost and supply chain headwinds while largely meeting stronger customer demand, hence delivering results that exceeded our expectations. This accomplishment is significant in the context of the semiconductor shortages and the company navigating a month-long global manufacturing shutdown from January 3rd through February 9th, 2022. We have made steady progress on the execution of our strategy to expand and effectively increase our sales footprint, specifically in the prescriber channel, while driving increased productivity across all our commercial operations. We continue to work through supply chain challenges to meet the market demand, and we are investing behind our commercial strategy, R&D, and clinicals in support of long-term sustainable and durable growth and profitability. Now, turning to the first quarter, total revenue declined 7.5 percent to $80.4 million from $86.9 million in the same period in 2021, primarily driven by supply chain constraints that resulted in limited sales and our domestic business-to-business channels. We directed the available capacity primarily to the direct-to-consumer sales and rental channels and our international business-to-business channels to balance strategic imperatives while optimizing revenue and margins. In an effort to mitigate margin-related pressure, we have recently implemented an additional price increase in our domestic direct-to-consumer channel beginning in March 2022, in addition to the previous price increase that went into effect September 2021 in all channels except rentals. Domestic direct-to-consumer sales increased 12.2 percent to $34.4 million in the first quarter of 2022 from $30.6 million in the first quarter of 2021, primarily driven by increased average selling prices. Inside sales representative productivity increased in the quarter despite lower average inside sales representative headcount, which was down approximately 6.9 percent from the competitive period in the prior year. We continue to optimize our inside sales capabilities with increased focus on enhanced sales management disciplines and data-driven selling techniques, and we are actively managing turnover through a focus on talent acquisition and development that is aimed to strengthen our commercial capabilities across the board. We are pleased with the performance of our inside sales team in the first quarter. We saw improved direct consumer sales productivity per representative and increased average revenue per order versus the first quarter of 2021. Rent and revenue in the first quarter of 2022 increased 31.8% to $13 million from $9.9 million in the same period in 2021, primarily due to increased patients on service and higher Medicare reimbursement rates. As of March 31, 2022, we had approximately 43,200 patients on service, which was up 24.5% compared to March 31, 2021. We had approximately 32,800 billable patients on service as of March 2022, an increase of 22.1% over the prior year. The increase in patients on service was primarily driven by our strategic efforts to elevate prescriber awareness and referrals, through our prescriber sales team and greater utilization of patient leads for rental opportunities aided by the relaxed Medicare criteria for oxygen therapy reimbursement due to the COVID-19 PHE. Domestic business-to-business sales in the first quarter of 2022 decreased 83.4% to $5.1 million compared to $30.7 million in the first quarter of 2021. This was a result of the current supply-constrained environment and based on a strategic decision to balance various business variables. Most critically, as of early May 2022, we have started shipments to our domestic business-to-business channel in order to elevate some of the order backlog in our system. International business-to-business sales in the first quarter of 2022 increased by 77.7%, or 86.8 percent on a constant currency basis to $27.9 million compared to $15.7 million in the first quarter of 2021. The increase was primarily driven by a strategic decision to prioritize that market to fulfill existing demand ahead of the EUMDD certificate expiry as we progress the ongoing regulatory filings to secure the necessary MDR certificates for later in 2022. Despite the continued supply chain challenges, we remain cautiously optimistic about the demand while we monitor COPD diagnosis and prescription rates in anticipation of them returning to pre-COVID-19 levels in the U.S. and other major markets. Supply chain disruptions and increased cost of critical components have persisted across industries, including the medical technology sector, specifically as it relates to availability and cost of semiconductors. Due to the war in the Ukraine as well as the COVID-19 extended lockdown in China, such shortages are expected to remain a challenge and negatively affect our operations potentially into the second half of the year. We are closely watching these trends and actively pivoting to mitigate ensuing impacts through strategic sourcing, product redesign, and pricing actions. In the first quarter of 2022, premium pricing for chips sourced from the open market has trended higher versus the fourth quarter of 2021 which has resulted in inflated costs that negatively impacted our cost of goods sold. 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. Some of the opportunistic purchases of semiconductor chips remain on the balance sheet as prepaid expenses and other current assets or inventory. This is because much of these components have not yet been utilized in the manufacturing process, nor sold to customers in the period. While we expect some improvements, we believe that supply shortages and resulting cost impacts are likely to continue through the second half of 2022, resulting in higher cost of goods sold per unit versus the first quarter of 2022. We are pursuing additional motherboard redesign, as well as aggressively engaging our regular suppliers to get firmer commitments, while simultaneously canvassing the open market for additional quantities. We are pleased with the motherboard redesign for our Energen 1G5 POC, which has already gone into production, as well as the price increases that have allowed us to cover most of the cost inflation related to the chip shortages. Now for an update on the strategic initiative focused on increasing the size and productivity of our prescriber sales organization. As of March 31, 2022, we had 54 sales representatives versus our target of 60, which we expect to reach during Q2 2022. This team is focused on top decile oxygen prescribers nationwide, which we believe will allow us to cover 65% of the oxygen therapy patients in the U.S. at the point of diagnosis and prescriptions. Supporting this team are 12 virtual concierge service reps that handle all the administrative tasks and allow the prescriber sales team to maximize their selling time. While still in the early months, we are very pleased with the initial results across both our contract sales organization, Ashfield, as well as our internal Inogen teams. This is evidenced by a faster productivity ramp for new hires, increases in patient referrals, and growing referrals from new prescribers. In addition to expanding the sales force and coverage, we are focused on driving sales productivity through proprietary prescriber insights and analytics specific to that channel for the first time in a gym. Next, I'd like to cover reimbursement rates. In the first quarter, CMS implemented a 5% Medicare inflation adjustment effective January 1, 2022. As expected, the 2% Medicare sequester benefit that has been in place since May of 2020 due to the COVID-19 public health emergency, or PHE, expired on March 31, 2022. The sequester then resumed with a 1% reduction to rates from April 1, 2022 until June 30, 2022, with a full 2% Medicare sequester expected to resume on July 1, 2022, and continuing through September 30, 2030. As a reminder, based on the DMEPOS rule finalized in December 2021, the areas that are non-rural, non-former competitive bidding areas will be subject to a reimbursement reduction once the PHE associated with the COVID-19 is declared over. In these areas, rates would probably decrease approximately 20% to be in line with the former competitive bidding areas. In addition, once the PHE is declared over, the relaxed Medicare criteria for oxygen therapy reimbursement would be removed and the new oxygen national coverage determination would be in place. It is important to note that the PHE has been extended recently for 90 days through July 15, 2022. Now moving to the status of our European regulatory clearances. As a reminder, current Energen products are commercialized in the European Union under medical device directive certificates, and ours is expected to expire on May 18, 2022. We anticipate securing an approval of our medical device regulation submission and for the issuance of the MDR certificate during the fourth quarter of 2022. We have prioritized shipments to Europe to go into supply chain before May 18, 2022, which should help us meet existing orders. Additionally, we have applied for select EU country-level derogations or exemptions as an additional mitigation measure. Derogation requests have been filed in Germany, France, Spain, Italy, Belgium, the Netherlands, and a few other European countries. While we await final decisions for those countries, We have secured the UKCA certificate required to continue to ship products into the UK and expect shortly to have the certification required to continue to ship products into Switzerland. 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. 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. While we are focused on executing on our commercial strategy and driving pricing excellence, we remain committed to working through the ongoing supply challenges and mitigating the material cost inflation impact. We are continuing to build capabilities, invest in our infrastructure, clinical evidence, innovation and new product development, as well as further commercial capabilities to strengthen and advance our market leadership position and portable oxygen therapy. We believe that these focus areas and investments will contribute to our goal to driving long-term sustainable and profitable growth and value creation. I'm also happy to formally introduce our new CFO, Kristen Kaltreider, and turn the call over to her now. Kristen?