Inogen: Solid Bet For End Of 2019

Dec. 01, 2019 2:14 PM ETInogen, Inc. (INGN)3 Comments
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Healthcare on the Move


  • Inogen is the first company to offer portable oxygen concentrators to respiratory disease patients.
  • The company’s weak performance in third quarter has opened up an entry point for investors.
  • Here, we will analyze recent earnings results and analyst commentary for Inogen.

Today, we will be studying why Inogen (NASDAQ:INGN) is an attractive investment at the end of 2019.

Company overview

Inogen is a MedTech company that pioneered the development of POT (portable oxygen technology) for patients prescribed oxygen therapy for their respiratory disease. Previously, these patients had to move around carrying a heavy oxygen tank with tubes that would go up underneath their nose to provide the oxygen. Although the treatment was good, it involved carrying a huge, bulky, and expensive device. It was pretty inconvenient and severely restricted the patients' mobility.

Inogen's portable oxygen concentrator works by pulling the surrounding air, concentrating the oxygen, and supplying higher concentration oxygen to patients. This is a battery-powered wireless device. The company is now aiming to make portable oxygen therapy the standard of care for ambulatory oxygen therapy patients worldwide. Inogen is also coming up with new versions of its POC (portable oxygen concentrator) to penetrate in the non-invasive ventilation markets in 2021.

Inogen has managed to build a well-diversified business around its portable POC. The company is involved in DTC (direct-to-consumer) sales, DTC rentals, domestic B2B (business-to-business) sales, as well as international B2B sales. The company currently has a presence in 47 countries across the world.

Why do I like Inogen?

Inogen has come a long way since it started trading at $15 in 2014. In September 2018, the stock had reached as high as $282. However, reducing revenue and earnings growth rate pushed down the stock as low as $42.18 in August 2019. Management reduced the company's fiscal 2019 and fiscal 2020 guidance due to changing reimbursement environment, increasing competition, and less productive sales staff. Last, the company closed at $73.89. I have strong faith in this opportunity. Here, I am listing the reasons for the same.

Inogen is taking steps to remedy at least some of its problems. The company has reduced its headcount and also improved productivity in the remaining sales team. The company is hiring new sales representatives with the expected level of productivity. At the end of December 2018, the company had 20 physicians in its sales and support team.

The company also seems to be gradually increasing revenue exposure towards the rental business. To that effect, the company is creating a separate sales team to focus on new rentals. Although this may lead to a short-term rise in expenses, the company will benefit from recurring revenue sources in the long term.

The company has managed to diversify its revenue base across geographies and sales channels. In the first nine months of 2019, DTC sales, DTC rentals, Domestic B2B sales, and International B2B sales accounted for 42.6%, 5.6%, 30.3%, and 21.5%, of the company's total revenues.

Inogen also boasts of a robust product portfolio. The company's flagship product, One G4, recently secured reimbursement in France. The company has Inogen At Home, for patients who need oxygen therapy during sleep. These patients account for 30% of the company's addressable market in the U.S. In the first quarter, Inogen launched One G5 in the domestic DTC channel. In the third quarter, it was launched in the domestic B2B channel. In the third quarter, One G5 accounted for more than 40% of total domestic shipments, indicating strong demand from both patients and providers. The company has applied for CE marking for One G5 and has commenced shipments to international customers in the fourth quarter of 2019. To have a ready supply for its European customers, Inogen plans to commence manufacturing of the Inogen One G5 at its contract manufacturer in the Czech Republic in the first half of 2020 for European customers. Besides, the company also expects sales of the Inogen tidal assist ventilator, a non-invasive ventilator for patients with chronic lung diseases, to begin in 2020.

Inogen is a profitable company with positive free cash flows. At end of the third quarter, the company's net operating cash flow was $43.54 million and free cash flow was $22.84 million. The company also expects net positive cash flow for 2020 with no additional capital required to meet the current operating plan. The company has cash of $200.65 million and no debt on its balance sheet.

In response to these efforts, the stock seems to be making a comeback, albeit a slow one. I believe that this can be a good entry point for investors to pick up Inogen.

Inogen's Earnings performance

Inogen's third-quarter revenues of $91.8 million saw a YoY decline of 3.70%, but ahead of the consensus by $0.11 million. The company's non-GAAP EPS also surpassed the consensus by $0.09.

DTC sales declined YoY by 1.4% to $37.8 million, despite almost 40% YoY reduction in headcount. The company expects to increase its DTC sales in 2020 based on productivity improvements and the planned expansion of the sales and rental intake teams. Inogen's B2B sales of $30.1 million were almost flat due to reduced orders from one large national provider. The company's third-quarter international sales also dropped YoY by 12.5% on a reported basis and 10.2% on a constant-currency basis to $18.5 million. Third-quarter rental revenue of $5.4 million also declined YoY by 3.8%.

For 2019, the company has guided for revenues of $370 million to $375 million, implying a YoY rise of 3.3-4.7%. Inogen is guiding for 2019 net income of $23 million to $25 million, operating income of $26 million to $28 million, and adjusted EBITDA of $49 million to $51 million. Here, DTC sales and international B2B sales are expected to be the fastest-growing channels in 2019.

For 2020, the company expects revenues to be $410 to $415 million, implying a YoY rise of 10.1% to 11.4% versus the midpoint of 2019 guidance. The midpoint of fiscal 2020 guidance implies an 11-year CAGR (compounded average growth rate) of 39%. Inogen is guiding for 2020 net income of $25 million to $27 million, implying a YoY rise of 4.2-12.5% over the 2019 guidance midpoint of $24 million. The company has assumed a fiscal 2020 tax rate of 25% and New Aera intangible amortization expenses of $7.8 million while calculating net income. The company has also guided for fiscal 2020 adjusted EBITDA of $56 million to $58 million, representing 12% to 16% growth of 2019 guidance midpoint of $50 million. Here again, DTC sales are expected to be the key revenue driver. Domestic B2B and international B2B sales are also expected to pick up in 2020.

The probability of the company attaining the guidance also remains high. The company has already assumed challenges face by its HME (home medical equipment) partners as well as constraints in expanding direct to the consumer sales team. The company also does not expect a national provider discussed previously to increase its order rate in 2020.

Investors should be aware of certain risks

Slower-than-anticipated DTC sales due to reimbursement uncertainties and increasing competition are the major challenges for Inogen. Its weak revenue growth has already dampened the investor sentiment for the company. In case the company misses or lowers its fiscal 2019 and fiscal 2020 revenue guidance, it can result in another dramatic decline in its share prices.

The company's focus on shifting towards rental business will lead to increased expenses and lower margins in the short-term.

What price seems right for the stock?

Wall Street analysts have tagged the 12-month consensus for this stock at $68.70. I believe this price is too low considering Inogen's strong financials, robust business strategy, an experienced CEO, and founders who continue to believe in the story. The growth potential for the company is also significant, considering that the share of portable oxygen concentrators in the Medicare long-term oxygen therapy market was only 10.8% in 2017 and 13.9% in 2018. Inogen estimates full penetration of portable oxygen concentrators to account for 68% of long-term oxygen therapy patients. This assumes that 90% of the ambulatory long-term oxygen therapy patients should be served by portable oxygen concentrators over time.

Inogen is also seeing a continued shift to portable oxygen concentrators from home transfill devices and oxygen tanks. This assumption is based on a 20% YoY increase in beneficiary claims for portable oxygen concentrators in 2018. There was also an 11.5% and 4.4% YoY decline in claims associated with HCPCS Code: K0738 for home transfill devices and HCPCS Code: E0431 for oxygen tanks, respectively. The company has submitted bids for 129 of the 130 regions for the 2021 competitive bidding.

In this backdrop, I believe Needham's target price is more reflective of the true growth potential of Inogen. On November 6, Needham analyst Mike Matson upgraded the stock from "Hold" to "Buy" and set the target price to $90. In September, Piper Jaffray analyst J.P. McKim had reiterated the "Overweight" rating and target price of $80. Hence, despite the recent share price debacle, I also see the stock as a relatively safe investment. Hence, I recommend investors with average risk appetite to consider Inogen as a long-term investment.

This article was written by

Healthcare on the Move profile picture
I am an MBA in finance and an engineering graduate. I have also completed the CFA certification.I am involved in international trade and have been passionately tracking global equity markets for more than 7 years. I mainly focus on spotting long-term value investments in biotechnology, pharmaceutical, hospital, and medical device sectors. In the last two years, I have also been studying cannabis and hemp sectors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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