Q3 2021 Inogen Inc Earnings Call
<unk> for 2021 and beyond expectations related to our financial results for the fourth quarter and full year 2021, our expectations with respect to supply challenges and cost inflation related to semiconductor chips, using our batteries and concentrator, our ability to create shareholder value.
By dragging awareness of our products.
Expectations regarding our international and domestic sales channels expectations related to a rental channel expectations all into 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 in 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 to both a short term and a long time.
The forward looking statements and this call are based on information currently available to US as of today's date. These.
These forward looking statements are only predictions and involve risks and uncertainties that are set forth in more detail. Their most recent periodic reports filed with the securities and Exchange Commission.
Actual results May vary can we disclaim any obligations to update these forward looking statements, except as may be required by law.
You have posted historical financial statements and our Investor presentations and Investor Relations section of the company's website. Please refer to these files for more detailed information.
During the call. We will also present, a certain financial information on a non-GAAP basis management believes that non-GAAP financial measures taken in conjunction with the US GAAP financial measures provide useful information for both management investors by excluding certain non-cash items and other expensive, but are not indicative of emergency core operating results.
Management needs as non-GAAP measures internally to understand manage and evaluate our business and make operating decisions.
Conciliations between U S gap and non-GAAP results are presented in table is within our earnings release.
With that I'll turn the call over to immigrants President and CEO, the bill such up the Bill.
Thanks, Jason Good afternoon, and thank you for joining our third fourth of 2021 44.
Continue to make progress to leave open begin implementing the community informed approach to innovation product development and they'll go to market strategy over the last four weeks, we announced an important new partnership with Ashfield to strengthen our commercial capabilities and we have wanted the fish growing together.
And Chief Technology Officer that he bought an Indian Virginia. In addition to the speed with responsibility for movie for the affairs and regulatory Affairs.
His iPhone mobility concurrent with the relaxation of closure orders related to the COVID-19, Phd 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 improvements in our business, including our investment in our prescriber organization and other areas productivity improvement in our direct to consumer channel and increases in our average selling prices.
And the last two quarters demand for our products increased versus the comparative 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 first 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 POC and batteries.
Since our second quarter of 2021 earnings call. We have continued to see this impact a shortage of continue and cost trends.
While we have been hard at work to help mitigate the impact of these shortages.
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 POC and both batteries and printed circuit boards.
We are continuing to work with our OEM partners and leveraging to the extent possible open market evidence to purchase the necessary semiconductor chips.
The cost of these chips from third parties have crem was significantly higher in the third quarter of 2021, then the costs seen in the second quarter of 'twenty. One as a result of high demand for these ships and the costs are expected to continue to increase and to the extent suppliers available during the shortage as a result, we saw inflated costs related to the <unk>.
<unk> of semiconductor chips to begin to negatively impact our cost of goods sold in the third quarter of 2021, and we expect this to have an increased impact on our material cost in the fourth quarter of 2021, and continuing into 2022 until supply and demand gets closer to equilibrium.
Even though we pay significant costs in the first quarter of 2021 associated with these chips. Most of these costs increase our 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 this 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 is expected in the fourth quarter FY 'twenty one based on the information known to date.
This is a dynamic situation as component cost increases have exceeded our initial projections and open market availability of components are not guaranteed which may lead to additional limitation on production if components available at reasonable prices.
We expect demand exceed supply for our products in the interim but has taken the necessary measures to partially offset these rising costs by implementing price increases across products as of September one 2021.
In addition to the semiconductor chip limitations, we are continuing to see supply chain challenges for other components used in our products, albeit lowest biggie. Thus far we have been able to manage through these challenges with increased inventory levels and tightened supplier management and communications.
Workstation of motion all those related to COVID-19, P. H E leading to increased emulation as well as in fourth consumer confidence as compared to the third quarter of 2000.
Inside sales representative productivity was strong in the quarter. Despite lower average inside sales representative of head calm, which was down approximately 8% from the Confederate this theory in the prior year attrition outpaced hiring and.
In addition sales in this channel were impacted by lower back to to excess and sales and the period due to supply chain costs chains.
We continue to look to add new inside sales representative while maintaining our hiring standards and being mindful of the supply chain constraints, who are facing we expect minimum net new inside sales representative hires in the mid clown due to the size and the quality of the candidate pool and expected attrition that is part of our growth plans, we are increasing our focus.
On improving productivity of our existing inside sales force.
Despite the lower head count 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 averaged over another order versus the first quarter of 2020, including the price increase effective September one 2021.
Hence the revenue in the third quarter of 2021 increased 61, 3% to $12 $1 million from seven $5 million in the same period in 2020, primarily due to increased patient from service hi relevant patients as a percent of total patients on servers and tired and indicated in Boston in case.
As of September 30th 2021, we have approximately 40400 patients on service, which was up eight 9% sequentially compared to June 2nd 2021, and up 46% compared to September 30th 2020.
The increase in patients on service for stronger is driven by greater utilization efficiency 14th of opportunities and physician facing initiatives to increase discovered awareness by our sales force as well as the relax Medicare for a theater for auto mechanic reimbursement you to recover 19 Beachy.
Despite the supply chain challenges, we are still cautiously optimistic that our performance both in direct to consumer sales and rental channels as a positive indicate therefore, improving market conditions of our products overland.
We had long term oxygen therapy market grew from 18% in 2019% to 29% in 2020.
However, this estimate does not include with patient cases cash sales or private insurance transactions. So we believe that this data from CMS may represent a conservative estimate of actual POC market penetration.
POC, where 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 strengthening devices systems liquids system oxygen tanks Youtube.
In terms of the higher percentage of patients receiving both stationary and ambulatory oxygen.
Our estimate with target full penetration of total long term oxygen therapy patients using POC 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 POC with overtime.
As we look ahead, despite some near term challenges the underlying demand for our offerings are strong and we are confident about our commitment and focus on increasing with the OCD market penetration and improving patient access does that effect would have been 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 the mission in support of POC based oxygen therapy.
Recently announced the Doctor sparing laser imaging 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. Ludwig brings extensive expertise in development and commercialization of combination drug device innovations clinic.
Development medical and regulatory affairs, as well as market access across a variety of disease States and we would own standalone part number that leadership team to drive clinical inform disciplines in innovation product development and go to market strategies.
We also announced that Dunkin' payload previously emergence EVP of engineering will be leaving imaging. After the transition period ending April one 2022, we are very grateful for <unk> leadership and the significant role. He has played in the founding of imaging 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 global clinical evidence R&D and promotional capabilities to strengthen our market leadership position in portable oxygen therapy.
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.
I will now turn the call to our CFO Ali Bauerlein Ali.
Thank you Bill.
Maybe I'll noted total revenues in third quarter of 2021 with $93 1 million, representing an increase of 25, 3% over the comparative period in 2020.
Turning to gross margin for the third quarter of 2021 total gross margin was 51, 2% compared to 44, 4% in the third quarter of 2020.
Our sales revenue gross margin increased to 51% in the third quarter of 2021 versus 43, 5% from the same period of 2020.
Increase was primarily due to increased average selling prices increase.
The increase was partially offset by higher cost of goods sold per unit in the quarter, primarily due to increased labor and overhead costs and material costs.
The third quarter of 2021 included <unk> 9 million of higher material costs associated with open market purchases of semiconductor chips used in our batteries and POC.
Rental revenue gross margin increased to 58, 9% in the third quarter of 2021 versus 62% from the third quarter of 2020.
Advertising cost for $94 million in the third quarter of 2021 compared to $7.7 million in the third quarter of 2020.
General and administrative expense increased to 93 million in the third quarter of 2021 versus eight 6 million third quarter of 2020, primarily due to increased personnel related expense and increased consulting and legal expense, partially offset by a non-cash decrease in the changing fair value of the new era earnout liability versus the comparative P.
<unk>.
And the third quarter of 2021, we've reported operating income of six $4 million adjusted EBITDA of $12 2 million net income of $12 $2 million in income per diluted common share a 53.
Our tax provision or benefit from income taxes for interim period has been historically determined using an estimate of our annual effective tactic tax rate adjusted for discrete items if any.
We concluded that the annual effective tax rate method would not provide a reliable estimate for the period. Therefore, we utilize the discreet methods, which treats the year to date period as if it were the annual periods and determines the income tax expense to benefit on that basis.
This resulted in reporting to $6 $2 million income tax benefit in the period.
And predictability as well as margin expansion.
Given such investment initiatives, we expect increased operating expense for full year 2021 compared to 2020.
In addition, while we incurred minimal expenses related to bonus and performance based stock compensation expense in 2020.
We expect such costs to increase in 2021, along with certain expenses related to the previously announced officer transitions and additions.
In summary, we expect negative adjusted EBITDA and operating and net losses in the fourth quarter of 2021, and operating and net losses for full year 2021, reflecting the anticipated supply constrained revenue decline increased cost of goods sold per unit and higher operating expense in the period as compared to.
The first nine months of 2021.
To reiterate what Bill said earlier, while in the short term our outlook is impacted by certain supply constraints. We are proud of the actions we've taken to make structural improvements in our business, including our investments in our prescriber organizations and other areas productivity improvements in our direct to consumer channel and increases.
And our average selling prices.
As of the end of the quarter, but the the backlog certainly was the largest in our domestic business to business channel are we are prioritizing our direct to consumer business. So that channel had minimal backlog at the end of the quarter of course that channel was impacted by.
Having the lower availability of.
Batteries for sale, but outside of that there's a minimal impact to that channel uhm and our international business to business Channel also had a backlog as of the end of the quarter, but it was smaller than our domestic business to business backlog one of the challenges that we have Robbie and.
Getting that number is that it does appear like this is across the entire industry that there are these uhm shortages of oxygen therapy products and so we believe that it has led to customers, placing orders across multiple manufacturers to see what product wood.
Get filled first uhm that may overstate, the actual demand of products just given the backlog in the lead time to fulfilling orders right now across the industry, but it was quite large at the end of the quarter and we've continued to see strong demand going into the fourth quarter as well.
Got it okay. So you know you weren't able to this.
This year can control expenses pretty well to account for some of the top line. You know do you do you plan to wait until set.
Second quarter to start the you know the direct direct to consumer advertising start that sales engine again preemptively or is it one of those you're gonna wait to see when demand starts to catch up again, just trying to think how we can you know once supply resumes what what sort of recovery, we can start to look forward.
Two.
Oh that'll be I'll take that one thanks for the question. So as we said the situation is very fluid. We are actually continue to feed the underlying demand to be still.
We have established relationships and getting up to productivity, which typically is in the nine plus months. So it's absolutely the right time to make the investments. We also believe that it will happen.
Back in the years to come but starting in 2022 and the back half of the year as people come up to the productivity that we're expecting and.
As a result of a couple of things the ability to scale the higher discipline and all the insights driven approach in terms of targeting and selection to make sure. We're calling on absolutely the right targets from a prescriber perspective are all going to be net net positive versus how we're doing things today.
Got it thanks, so much.
Thanks, Brian.
Our next question comes from the line of Danielle <unk> with SVP Leerink. Please proceed with your question.
Hi, good afternoon, guys. Thanks, so much for taking the question and congrats on a solid quarter. Despite the despite the supply constraint issues.
I have a question on the <unk> domestic side of things and just curious about how you guys.
See this evolving once we come out on the other end of Covid, which who knows but hopefully happens somewhat in the near future.
I asked that question because you know a lot of these service providers and things like that are cash constrained and COVID-19 really hit everyone and you have the whole dynamic of of the investment and the infrastructure to shift to more of a POC versus stationary model I mean anything you can comment on that about how.
We should be thinking about the b to b business ramping back up on the domestic side once COVID-19 hopefully in the rearview mirror.
Obviously cost increases have hit the providers across the board as well and then of course there is the proposed ruling of what they're going to do once a Phd is over with pricing and oxygen therapy. So we hope to fit.
The industry voice is heard that.
Those rates should continue to increase given the value of oxygen therapy, and a very low cost of.
Reimbursement fit in place today.
I would hope that those would be positive trend for the overall market proper time as well.
Got it and then just just one quick follow up and and I apologize if I, if I missed us, but in the direct to consumer and in the cash sale and rental business did you guys talk about the the rep productivity and how that's trending really thinking about lead generation and then more specifically lead.
[noise] closure rates and just how that's trying to it I. Appreciate you know you're operating under supply constraint dynamic, but anything you can.
Provide their thanks so much.
That's where I can take that so all the productivity size, we have seen improved productivity of the direct consumer team as we've kind of lost.
<unk> the Covid headwind. So obviously during COVID-19, we have seen a reduction in close right.
We've seen that actually become a reality and also from a context perspective, we've seen multiple competitors actually follow us in the price increase because everybody's under the same pressure.
Like we were so it so far extend out exactly micro climates.
Okay got it.
And then if you're if you're looking at sort of 74 million roughly speaking in the fourth quarter.
Is that.
I know, we're not giving guidance for next year, but that is that kind of your quarterly.
Capacity constrained run right and so should we be modeling something similar to that kind of for the early part of 2022.
Yeah. So.
These higher material costs.
Now as you rightly referred to we talked about the cash utilization of using them.
Having additional taxes cash associated with these chip shortages and that is because we are also buying some of these chip shortages for usage in 2022, so that additional costs would eventually has to be recognized on the P&L in a higher cost.
Going into 2022.
Okay.
I understand.
And then just the bill and I understand you have the agreement with Ashfield coming online that's going to take a while but I think you already had 20 or 25 direct to physician reps already in the system.
How are you prioritizing demand to support that sales force.
As this occurs over the next couple of quarters and just how are they doing with the recovery and.
But actually getting to a buy.
By on the increasing 50% of the sales force that we have.
And then my last question.
As you exit 'twenty, one with the balance sheet still seems to be.
Very strong.
Youre not bleeding cash to any extent, even with the supply chain issues.
What is what do you need to.
You see with your business one of the prerequisites for you to be able to start.
Pulling the trigger on some some strategic M&A and some factor.
That could help you guys out brought it up.
Private portfolio.
So from that we've always talked about sort of two parallel runways, we're working hard on increasing the productivity and.
Getting the basics.
Deep showed up in the core business, but we are simultaneously in parallel looking for opportunities to diversify the portfolio of course, so that is an ongoing effort. We continue to look at potential.
<unk> components or targets they strategically fit the very strict criteria that we've developed so we are openly looking at that as we continue to fix the core business and as you see increasing productivity and making sure that we deliver on the promises we have.
All right excellent. Thank you very much.
Thanks.
Our next question comes from the line of Mathew Blackman with Stifel. Please proceed with your question.
Hi, good afternoon, everybody apologies in advance.
Turning now after a little bit off.
Very soft period, we're seeing some relaxation in terms of available quantities now the other two criteria when they ship on time as promised and other authentic which we go through a very very thorough evaluation process. Those two things are always variable within the scope of the weekly.
Milestones that we look at.
Okay, I really appreciate that color and then maybe Ali.
Rental gross margins continue to March higher.
Where can that was ultimately go.
I think.
Is the question I'm asking.
Yeah, we're really proud of the fact that we've been able to continue to show improving rental gross margin percentage.
I think given the current race I think we'll continue to see small incremental improvements there.
But we are looking to see what.
We talked about in a prior question.
What will happen with inflation adjustments in pricing after the phe is over so those are the two I'd say major.
<unk> changes in gross margin, but we are very proud of the impacts we've had and continue to expect incremental improvement there.
Alright, thank you so much.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Okay. Thank you.
I am encouraged by the revenue growth we saw in the third quarter of 2021, and I believe the strong underlying demand for our industry, leading solutions, coupled with our multi year investments that we are making will position us to reach our vision of becoming a global market leader with innovative evidence based chronic respiratory care solutions. Thank you for your time today and then the.
Forward to engaging conversations with our investors as we make progress on our strategy to build a stronger I mentioned have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you.
You may disconnect your lines at this time and have a wonderful day.