Long Or Short: Inogen Oxygen Therapy

Jul.14.14 | About: Inogen, Inc (INGN)

Summary

Oxygen therapy may be delivered to chronic obstructive pulmonary disorder patients with enriched oxygen or surgical intervention.

Home and portable products with pressure swing adsorption enrich oxygen directly from air when powered by electricity.

INGN develops, manufactures and sells lightweight, compact and energy efficient oxygen concentrators based on pressure swing adsorption.

Oxygen therapy can be used to treat patients with chronic obstructive pulmonary disorders. These therapies may be administered in a number of ways with the use of concentrated oxygen or oxygen concentrators both central and portable along with surgical intervention.

Concentrated oxygen (O2) in its gas-phase may be enriched and compressed from air then stored in bottles of various sizes. Delivery is tuned with a regulator that limits the rate O2 is allowed to leave the tank similar to the way air is compressed and delivered for SCUBA and paintball. This method is quite old school.

An alternative is the use of liquid O2, which is stored in its liquid phase with a specialized tank then converted to its gas phase through heat and pressure regulation. This method allows for more O2 to be stored in a container than with compressed O2 stored in its gas phase. Thus increasing the amount of time a patient may go about their day without needing a refill. This liquid-gas phase conversion is exploited in Roam, which provides 2 - 3 hours of O2 for children with frequent asthma attacks. Recharging Roam after a few hours requires a new liquid O2 cylinder, which could be inconvenient in some circumstances.

A biological method for improving a patient's O2 intake is marketed by Uptake Medical where steam is delivered to the damaged part of the lung by a surgeon. This is often the top of the lung, which is the first to be exposed to a fresh breath making it the dominant source for O2 in the lung and the most damaged part of a smoker's lung. The steam damages this upper part of the lung in a controlled manner causing it to remodel and shrink increasing the O2 exposure of the lower and more efficient part of a smoker's lung. Surgical procedures are used for severe emphysema when less invasive treatment options, such as O2 therapy, prove ineffective.

An industry leading technology looks to be portable oxygen concentration via pressure swing adsorption. Pressure swing adsorption uses a molecular sieve to enrich a specific molecular species based on the target molecules' affinity or attraction to the sieve. In this case, that target molecule is O2. Basically, the sieve is designed to adsorb or catch O2 while other molecules found in air may pass freely through the sieve or filter. This is followed by an extraction step where the enriched O2 is sent from the sieve to a container. This container stores the enriched and compressed O2 until the patient requires it. Inogen (NASDAQ:INGN) - a major player for these types of portable oxygen concentrators - markets a device capable of delivering 8 - 9 hours of O2 on single charge in a compact 2.7 kg form factor. This compact, lightweight oxygen delivery device can provide O2 therapy around the clock by keeping an extra battery on hand, and plugging it in while a patient sleeps.

INGN succeeds in delivering oxygen concentrators that are significantly lighter, smaller and more energy efficient than competing devices. While both portable oxygen therapy and surgical intervention are safe and effective, O2 therapy via portable oxygen concentration may be less risky and more accessible than surgical intervention. And, portable oxygen concentration by pressure swing adsorption provides the patient with more freedom.

According to Don Dion, portable oxygen concentration accounts for only 5% of the United States oxygen therapy market. During 2013, INGN enjoyed a 30% profit margin from $83 million in revenue. If things keep going INGN's way, assuming revenue is largely generated from the United States, then revenue could increase by about 20-fold in the long term. Market share growth might require (1) smaller, lighter, quieter and more energy efficient home and portable oxygen concentrators; (2) a direct-to-consumer sales model; (3) a one-stop shop provider strategy; (4) a healthy intellectual property portfolio; and (5) a war chest.

INGN ticks these boxes quite well, especially after the recent IPO and FDA approval of the smaller, lighter, quieter and more energy efficient home oxygen concentrator.

The significantly improved products means consumers - once educated - may have to purchase INGN products. The direct-to-sale consumer model allows INGN to avoid distribution channels and third-party providers that may favor companies with larger market shares or products suitable to current infrastructure. The holistic provider approach makes things easier for the patient or consumer. The intellectual property portfolio acts as a deterrent for new entrants.

According to IPOdesktop, INGN plans to use most of the $53.4 million in net IPO proceeds to expand its rental program and to improve or expand facilities. Most of the remainder is for ongoing research and development, and expanding sales and marketing. Thus, improving INGN's ability to garner a larger share of the market.

Financially, INGN is quite sound according to Yahoo! Finance. INGN has about $60 million in cash with less than $10 million in debt and enjoys quarterly revenue growth of about 50% year over year. There is money in the bank, INGN turns a healthy profit and is enjoying plenty of growth.

INGN is enjoying a bit of patent litigation with Inova Labs. Briefly, INGN alleges Inova Labs is using their intellectual property surrounding pressure swing adsorption (US 6,605,136) and therapeutic delivery to a patient (US 7,841,343). According to the 2014 INGN 10-K, Inova Labs denies the complaint "asserting various sets of defenses" and responded with a counter suit "alleging patent invalidity, non-infringement and inequitable conduct."

The lawsuits could go a few ways, and if the verdicts are not favorable then INGN maintains other competitive advantages. These are core INGN patents, meaning the intellectual property is exploited in many of the INGN products. There may be significant event-based gains or losses when the verdicts are delivered.

If INGN wins the lawsuits and is granted injunctive relief then Inova Labs and others may not be able use pressure swing adsorption or pulsed oxygen delivery without some sort of licensing agreement from INGN - success in litigation adds significant value to a patent. If INGN loses, it will lose the temporary monopoly on these core patents, allowing Inova Labs and other companies to exploit the intellectual property that enables INGN's efficient products. We may see an uptick in price if INGN wins and a downtick if it loses. However, verdicts are not always binary.

A final note, INGN revenue is mostly driven by chronic obstructive pulmonary disorder - a global health disorder and leading cause of death. A primary cause of chronic obstructive pulmonary disorder is tobacco consumption. Generally speaking, the demand for O2 therapy is caused by historical tobacco consumption. The vast majority of smokers reside in low- and middle-income countries. Moreover, tobacco consumption is more prevalent in rural areas where surgical intervention may not be readily accessible.

For INGN, device cost may be prohibitive in low- and middle-income countries. However, the smaller, lighter and more energy efficient products along with its global distribution network may make INGN ideal for capturing the more prevalent portion of the global oxygen therapy market further down the road.

Disclosure: The author is long INGN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author previously interned at INGN from 2009 - 2010 with no business relationship with Roam nor Uptake Medical.