Inogen, Inc

Welcome to Inogen's second quarter 2024 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 followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference is being recorded today, August 6, 2024. I would now like to turn the call over to Ryan Peterson of Investor Relations.

Thank you all for participating in today's call. Joining me are President and CEO Kevin Smith and CFO Mike Bork. Earlier today, Inogen released financial results for the second quarter of 2024. This earnings release is available in the Investor Relations section of the company's website, along with a supplemental financial package. As a reminder, The information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2024 and beyond, expectations related to our financial results for the full year 2024, progress on our strategic initiatives, including innovation, our expectations regarding the market for our products, on our business and supply 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, August 6, 2024. 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 as may be required. We have posted historical financial statements in 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 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 turn the call over to InnoGen's president and CEO, Kevin Smith.

Good afternoon, and thank you for joining our second quarter 2024 conference call. During today's call, I will provide updates on our progress towards our three strategic priorities, driving top-line growth, advancing our path to profitability, and expanding our innovation pipelines. I would then turn the line to Mike for a full review of our financials and outlook. Before I provide updates on our strategic priorities, I'd like to briefly highlight our strong second quarter 2024 results. We achieved $89 million in total second quarter revenue, reflecting 6% year-over-year growth and 14% growth from the first quarter of 2024. Our performance in the quarter was reflective of strong commercial execution from our team worldwide. We have also now completed our executive leadership transition and are excited to move forward with a concrete team in place. Now turning to updates on our strategic initiatives, I will start by highlighting our progress on driving top-line growth. A highlight of the quarter was growth in our business-to-business channels. Our team continues to do a stellar job building and strengthening relationships with new and existing customers worldwide. We believe our differentiated POC offerings resonate with our customers as Inogen offers the highest quality POCs, the lowest total cost to serve, and a host of digital health and value added services that make us an attractive partner. In addition, we saw a modest tailwind in our B2B channel related to a recent competitive exit from the market. This nicely complimented our base growth in the quarter, which overall was driven by our differentiated offerings and strong commercial execution. In our direct-to-consumer sales channel, we again saw year-over-year declines, but also generated 10% sequential growth. This sequential growth in the channel reflects our progress in improving lead generation and rep productivity. As a reminder, we are operating with a downsized and more efficient sales force on a year-over-year basis. We are excited about the progress we are now making as we continue to optimize our approach through this attractive and high-margin channel. Across the business, we are also continuing to work through our previously announced hospital and patient-first pilot programs. The hospital initiative in our rental channel targets hospitals in addition to individual practitioners. By targeting hospitals, we are able to access patients earlier in their care pathway, increasing the duration over which we can receive payments. Our patient-first initiatives in our DTC channel involves the cross-training of sales reps to execute both cash sales and insurance rentals. Our goal is to ensure that everyone who wants to receive an antigen POC can receive them quickly and easily. We are seeing encouraging results and look forward to providing more updates in those programs as they are formally put into place. Switching over to our progress on reaching sustained profitability, where we made significant advances in the quarter. I'm thrilled to report first quarter of adjusted EBITDA profitability in my tenure at Imogen. This is an exciting milestone and a meaningful step in the right direction. But please note our path to durable profitability will not necessarily be linear, as we will continue to invest thoughtfully in support of growth. Over time, we do see a pathway to sustainable adjusted EBITDA profitability with our current innovation pipeline and product portfolio. During the quarter, we continue to drive operating improvements in our DTC sales and rental channels to position for higher go-forward margins in these areas of our business. These are part of a host of initiatives we're executing, including a variety of programs to optimize our operating profiles. We are excited about the prospects of these initiatives, but they will take time to begin flowing through the financials. Turning to operating expense, where we experienced and expect further increases in advertising costs as we approach the November election. These costs primarily affect our direct-to-consumer sales channel, which relies heavily on TV advertising to reach consumers and generate leads. Finally, I would like to share updates on our innovation pipeline. We look forward to bringing the Simiax product to the U.S. market and continue to make meaningful progress toward FDA clearance. We will provide updates as they become available. Moving to our POC portfolio, we continue to expect the launch of the newest generation POC, the Rho4, in the back half of the year. The Rho4 offers patients a new fourth flow setting, a service life of up to eight years, and the highest oxygen production in the lightest weight POC in the market. These innovations are representative of our mission to provide patients on oxygen therapy with an opportunity to maintain mobility and quality of life as they undergo treatment. Additionally, we continue to invest in our digital offerings to ensure Inogen devices remain as easy to utilize and maintain as possible. With that, I would like to say I am proud of the significant progress our team has made towards our strategic initiatives in the quarter. We will continue to position Inogen for near and long-term success. I will now turn the call over to Mike for a more detailed review of our financial results. Mike?

Thank you, Kevin, and good afternoon, everyone. Unless otherwise noted, all financial comparisons are to the prior year comparable period. Total revenue for the second quarter of 2024 was $88.8 million, an increase of 6.1% compared to the prior year. The increase was primarily driven by higher international and domestic business-to-business sales partially offset by lower direct-to-consumer sales and rental revenue. For the second quarter, foreign exchange had a negative 10 basis points impact on total revenue and a negative 30 basis points impact on international revenue. Looking at second quarter revenue on a more detailed basis, direct-to-consumer sales decreased 15.6% to $22.6 million from $26.8 million in the prior period driven primarily by lower representative headcount. Domestic business to business revenue increased 16.5% to $21.3 million versus $18.3 million in the comparable period, driven by increased volumes with new and existing customers. International business to business revenue increased 31.1% to $30.5 million compared to $23.3 million in the prior period, Similar to our domestic business, the increase was primarily driven by increased volumes with new and existing customers. Rental revenue decreased 6.2% to $14.3 million from $15.3 million in the prior period, primarily driven by lower average billing rates due to the mixed shift to private payers. Now I want to discuss our gross margins. Total gross margin was 48.1%, increasing 740 basis points from the same period in the prior year, primarily driven by lower premiums paid for components, as well as one-time favorable adjustments to reserves, which drove a benefit of approximately 300 basis points. We expect gross margins to be in the low to mid 40s in the back half of the year. Sales revenue gross margin was 48.5%, an increase of 1,000 basis points driven primarily by a reduction in premium price components and increased volumes. Rental revenue gross margin was 46.2%, a decline of 430 basis points, driven by a decrease in the percentage of patients billed and next shift towards private payers. Moving on to operating expense. In the second quarter, total operating expense increased to $49.8 million compared to $45.8 million in the prior period, representing an increase of 8.7%. The increase is primarily due to higher personnel-related expenses, partially offset by lower sales and marketing consulting expenses due to the exit of our third-party relationship as we manage our spending in this area thoughtfully. We also saw higher advertising expenses given elevated costs of television advertisements associated with the US presidential election season, and we expect that trend to continue into the second half. In the second quarter of 2024, we reported a GAAP net loss of $5.6 million and a loss per diluted share of 24 cents. On an adjusted basis, we had a net loss of $1.6 million and adjusted loss per diluted share of 7 cents. Adjusted EBITDA was positive $1.3 million compared to a loss of $3.2 million in the prior year period. We're pleased to report positive adjusted EBITDA and are managing our expenses closely as we continue into the back half of the year. That said, our second quarter performance should not necessarily be viewed as predictive of upcoming quarters. Moving on to our balance sheet. As of June 30th, 2024, we had cash, cash equivalents, marketable securities, and restricted cash of $121.2 million with no debt outstanding. Before I turn the line back to Kevin, I would like to share our revenue expectations for the full year 2024. Based on our progress in the first half of the year and trends in our business today, we expect full year 2024 revenue to be within $325 million to $330 million, reflecting approximately 3% to 5% year-over-year growth. In addition, as I mentioned earlier, we expect gross margins to be in the low to mid 40s in the back half of the year. With that, I will pass the call back to Kevin for closing remarks.

The first half of 2024 was the time of transition for Imogen, as we welcomed Mike to the CFO role, and I am excited to have our new management team in place. Our team remains steadfast in their determination to deliver best-in-class care to respiratory therapy patients around the globe, and we will maintain that approach into the second half of 2024. We look forward to updating you on our progress as we continue to expand our impact for patients with respiratory disease. With that, I will open it up for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Robbie Marcus with JP Morgan. Please proceed with your question.

Hi, this is actually Lily on for Robbie. Thanks for taking the question. Maybe starting with DTC, hoping you could give a little bit of color on the sales force. how are you thinking about the progression of the size of the Salesforce over 2024? And how should we be thinking about productivity in the commercial organization ramping from here?

Sure. Hey, Lily, thanks for the question. This is, this is Kevin. I'll start with that one, Mike. Yeah, so as we indicated in our, I believe it was in our last call or recent call, the sales organization, the DTC side is in that 150 to 170 range. And so we're not going to continue to comment on that size of that organization unless it varies outside of that significantly. But that size is the size team that we are comfortable with going forward. We believe that we have a good team. building the tenure, the training, and so forth that we need to or they have in order to grow. We're seeing positive traction come out of them. We're not going to go into individual metrics within that other than as we're talking about revenue here today. But we are focused on increasing that productivity within that DTC channel. We do have the patient first pilot that we had referenced as well. We're trying to make it as easy as possible for any patient who wants to have an antigen POC to get an antigen POC. So we're making that smooth and efficient, and we believe that's gonna help us continue to grow in the future.

Great, thank you. And then on the rental side of the business, you talked about the hospital strategy. So can you give a bit more color on how those efforts have been progressing and how we should be thinking about how big of an opportunity this can be for you relative to, individual practitioners. Thanks so much.

Certainly, Lily. When you look at the hospital pilot, as we're looking at what that is, and I've referenced this a little bit in the prepared remarks as well as before, but some additional color. This is going a bit further upstream, right? So that rental channel, you think about that as the prescribers, the sales team that's going to the physician's offices to gain referrals from those offices. And we had previously a third-party organization that we were partnered with out there. That is now just purely an in-house team, although scaled back a little bit, but we're satisfied with the results that team is achieving. We're actually very happy with that. It's an opportunity for us to continue to build. But going into the hospital side, is going even further upstream. So by the time the patient leaves the hospital, they're set up with oxygen, often a tank, as they're coming out of the center. We are, with the prescriber team, trying to get those patients further downstream. But they've already had some months of billing that are eating away before they go into that capitated period. But if we go into the hospital, we get that patient day one coming out of the hospital, set them up with a POC, with an antigen. and be able to capture that billing. Plus, we're more efficient with the number of patients we can have referrals for per sales call with the sales reps. That is, as I'll remind you, is in a pilot phase right now. We don't see that falling into the financial statements until we're fully executing on that one, but I wouldn't expect to see that as a meaningful flow through here in this coming quarter.

Got it. Thank you.

Thank you. Our next question is from James Beers with William Blair. Please proceed with your question.

Hey, guys. Thanks for taking the question. This is Jimmy from Margaret, and congrats on the good quarter. I wanted to first start off on some of the B2B strength you saw, maybe looking first at OUS. Were there any large tenders during the quarter? I know it tends to be a little lumpier internationally. And then can you just give us a sense on your confidence on international continuing at that rate? And then also on B2B domestic, you know, could you also just parse out, I know you mentioned that, you know, you saw a tailwind related to Respironics exiting the market. You know, is this also the market getting better and maybe, say, improved relationships on your end?

Thanks, Jimmy. Do you want to start with that one?

Yeah, sure. Kevin, I'll take the first part of that question. So in terms, Jim, in terms of your question on any large one-time orders or tenders, we really didn't receive any orders that we believe that we call one-time and not repeatable. The results in our B2B channels were the result of broad-based demand from both new and existing customers. So to answer that first question, no, there really wasn't anything we call outsized orders.

Yeah, and we do see the opportunity continue to build there internationally. For that reason, like I said, I know it can be pretty chunky at times, but we feel that the relationships that are being built is certainly adding to the growth that we'll see internationally. And on the domestic side of things, We certainly do see some tailwind from the exit of our competitor in the U.S. market. We see this as growth. We've gained new customers. We've also gained some additional business and existing customers. I don't see this as one-time deals that we've gained because of that exit, but certainly that tailwind is there.

Great. Thanks. That's helpful. And maybe switching gears a little bit, I wanted to touch on guidance. You know, you grew 6% this quarter, 8% last quarter. I mean, you're now growing high single digits, call it, in the first half of the year. I think the guide now implies a deceleration in the second half, despite they're similar to easier comps. So maybe why the more conservative outlook? And then maybe as you look to 2025 and long term, what's the right range of growth we should sort of model for this business going forward? Thank you.

Yeah, Jimmy, thank you for that question. First of all, I'll start out by saying we're really pleased with the strong first half we had in 2024. I'll also talk a little bit just about our guidance philosophy. So our guidance philosophy is to really set prudent and achievable ranges, and we want to be able to commit to that number, meet or exceed it. In terms of our guidance for say the full year guidance and therefore the second half of the year guidance, what we're seeing is we're anticipating headwinds beyond normal seasonality based on the national election. Advertising, we're expecting to be more expensive, maybe difficult to obtain good slots. And we believe that that may result in less ads being placed. So we may have fewer leads as a result of the advertising changes. So we kind of see that as an impact to our D2C business, and that's really what's driving that guidance for the second half of the year.

Great. That was helpful. Thank you, guys.

Now, in terms of your question, your other question about kind of future, so we'll kind of stick to what we've talked about in terms of guidance. And as we kind of progress towards the rest of the year, we get into our AOP, process and kind of move forward. We'll determine what type of guidance we think we should give going forward. But at this time, we're really not going to comment on 2025 or beyond at this point.

Great. Thank you.

Thank you. Our next question is from Matthew Blackman with CIFL. Please proceed with your question.

Hi, guys. This is Colin on for Matt. I wanted to start in the rental business, thinking specifically about the productivity ramp for the prescriber channel efforts that you brought in-house. How do you think about that productivity ramping, and could we see this return to being your fastest-growing business in the near term or even in 2025? What wood's left to chop there?

Yeah, I'll start, Colin. I'll start. Basically, I think it just may be helpful to give kind of our view on what's going on in that rental business at this point in time. And then maybe we can expand on some of the other questions you had. But what's going on as we see it? We're still seeing the trend towards private payers less than Medicare. So the lower reimbursement rate per month on the private payers versus Medicare. Part of that trend relates to the patient shifting to Medicare Advantage. As we look at patients on service, we're up compared to, say, Q2 of last year, but our patient on service has stayed somewhat consistent over the past few quarters with attrition offsetting new patients. So what we're seeing is more cap patients, therefore less bill patients. Those are kind of the dynamics impacting our rental business. Obviously on the top line, but those are also drop downs impacting our gross margin as well. We are focused on adding more billable patients to the funnel. Kevin, maybe you can add some color here on kind of how we're approaching this channel.

Yeah, certainly. And that, you know, that will go back to the looking at the hospital pilots that were working through that channel, opportunities to get more uh yeah more opportunities per sales rep further up the uh further up that food chain right and uh to be able to get more months of billing before a patient enters the uh the capitated period so more revenue per patient and then also opportunity to have more referrals per uh per sales call uh if you will going into the uh to the discharge planners at the hospital so we do see opportunities for that to uh to continue to build that creativeness i won't uh coming in the future, the specific channel there as to how that will compare with the other ones at this point in time, but we do see good opportunities.

Understood. That's really helpful. And then I had one on gross margins. Beyond the higher cost inventory rolling off, can you walk me through again the driving forces of the step up from last quarter and particularly which gross margin line rental or sales, the one-time adjustments really affected during the second quarter?

Sure, Colin. So in terms of what we're getting a little bit of an uptick this quarter from some adjustments to our reserve accounts. So they're typical adjustments that we run through in our closing process, always consistently revaluing and estimating what those are going to be. But Those, we're calling them one-time adjustments representing about 300 basis points of favorability to our gross margin in Q2. And in terms of, what was your other question? I'm sorry, the second part of that question?

Really, which gross margin line, sales or rental, did that flow through during the quarter? Yes. And which parts fall off going forward?

Sure, that's under the sales gross margin line.

Okay, understood. Thank you.

Thank you. Our next question is from Mike Mattson with Needham & Company. Please proceed with your question.

Yeah, thanks. I just wanted to ask one on pricing trends kind of in the different channels. So, you know, domestic B2B, international B2B, and DTC sales in particular, you know, I guess just on a year-over-year basis, what's happening with price? in those channels?

You know, with the pricing in the channels, we've been maintaining some pricing discipline as we go through there. There's price pressure, certainly. We see that, we feel that from competitors, but we do feel that we have the right, that we've got the right messaging to be able to pull through on that. But we've been holding relatively stable. There's a little bit of downward momentum on that, but it's particularly in our B2B channels, we've been holding on tight for that. We certainly see some, when you see the DTC sales, we see some pressure certainly there on price with resellers and so forth. And there's moments certainly when we start to compete with ourselves on that, still imaging devices that we are that we're working through there. But we do feel that we've got the right pricing strategy, we've got the right messaging, and it's particularly important when we start to look at B2B on how we can maintain our pricing with the lower margin sales.

Yeah, okay. All right. And then I did miss some of the prayer marks. I apologize if you mentioned this, but I just wanted to check in on the Semiox product. Were there any updates there in terms of FDA pathway or timing or anything like that?

No, we haven't given any updates on the timing for that one. What you should expect to see a firm update on timing would be when we have the regulatory clearance from that. Then we would provide the updates and basically that outlook as to what that commercialization plan and timeline will look like.

Okay. All right. And then just on the DTC sales business, so it's been declining for a while now and I know there's been kind of a scaling back in the rep headcount and so forth, but, you know, what is it going to take, I guess, to get that business back to growth? And, you know, when do you think that could potentially happen?

Yeah, so, Mike, I guess just from a high-level perspective, you know, when you talk about what's going on with that business, again, we've talked earlier about rep counts and that, so clearly that's, That is what's driving that, pretty much driving the reduction, if you look on a year-over-year basis, for Q2 in the year-to-date. You know, we are seeing, though, we're seeing, you know, we're seeing some favorable things there. We're seeing, you know, higher revenue per rep. We're seeing some, you know, pretty decent ASPs as well. But as we look in that, I'll let Kevin comment more on the future and what we want to talk about that. But effectively, that's where you're seeing that drop. We've cut a lot of costs out of that DTC sales force. We're seeing that benefit running through selling and marketing on a year-over-year basis, but we're trying to right-size that channel.

Right. And as a reminder, we're looking at this as a rebaseline year. And with that DTC headcount, we feel we've got the right team in place, the right leadership in place. We have excellent marketing effort that we believe is put together and supporting that team as we go forward. In this pilot program that we've been running that we've talked about a little bit here with that patient first, enabling any patient that wants to get an Inogen to easily be able to get that smoothly and easily be able to get an Inogen POC, regardless of whether they come in as a potential cash sale or if they're choosing insurance coverage for that option. So we're working through the pilots on there, working on making sure that we're managing the cost within that to optimize, but we feel good with the structure that we have today going forward.

Okay, great. Thank you.

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.