Inogen Gains In Oxygen Therapy By Making Innovations

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Portable oxygen concentrator maker Inogen, a recent IPO, isn't content being the leader in its market as a result of the lightweight, quiet and efficient technology it's incorporating into its products.

It's also at the forefront of a whole industry shift, thanks to its direct-to-consumer business model -- something that no other company is currently implementing in the oxygen-therapy space, according to one of its filings with the Securities and Exchange Commission.

"We've taken the approach of really focusing on the needs of the oxygen patient by doing it in a way that we can leverage our manufacturing process and reach those patients directly," saidInogen ( INGN ) Chief Financial Officer Alison Bauerlein. "We've achieved significant revenue growth once we made that shift."

Instead of following the classic model of making and then selling the machines to home medical-equipment providers, Inogen chose to market directly to consumers.

At about two-thirds rentals and one-third cash sales, this portion of the business has grown to about 60% of Inogen's revenue. The company's business-to-business segment accounts for 13% of revenue, while 27% is from outside the U.S., primarily Europe, Canada, Australia and Latin America.

Inogen logged $48.6 million in revenue during 2012. For the first nine months of 2013, revenue grew 60% from the same period a year earlier, to $55.7 million.

Q4 Report Thursday

The company is scheduled to report fourth-quarter 2013 results Thursday after the stock-market close. The consensus estimate of analysts polled by Thomson Reuters is for full-year revenue of $74.2 million and earnings per share of 23 cents.

The company's Inogen One machines work in real time by removing nitrogen from the air and delivering oxygen to the patient only when he or she inhales. They are portable, lightweight, quiet and provide up to nine hours run time. They don't require oxygen tanks or regular deliveries and can be used in cars, on airplanes and at night. They address the long-term oxygen needs of patients who live an active lifestyle.

In the U.S., approximately 24 million people live with chronic obstructive pulmonary disease, notes JPMorgan analyst Michael Weinstein in a research report. Called COPD for short, it includes two main conditions -- emphysema and chronic bronchitis.

"In terms of COPD patients, approximately 70% of the company's patient population have been diagnosed with the disease, which points to the underdiagnosis within this space," Weinstein said in his report.

The company was started in 2001 by three students at the University of California Santa Barbara with the goal of improving the life of Mae, a grandmother suffering from COPD, and those like her who struggled with the currently available oxygen therapies.

In 2004, the company launched Inogen One, which allowed for an improved quality of life due to its portability and ease of use. In 2010, the company released Inogen One G2, followed by Inogen One G3 in 2012. It stopped selling the older Inogen One in 2011. Today, about three quarters of its revenue comes from its flagship G3 model.

"Oxygen therapy is a large, historically sleepy market on the cusp of significant change," Weinstein noted. "Portable oxygen is quite simply a more attractive offering, allowing a degree of mobility and independence previously unattainable for those requiring oxygen therapy."

JPMorgan ( JPM ) helped bring the company public in an initial public offering on Feb. 13 of this year. The small-cap debuted at $16 per share and currently has a market capitalization of $300 million.

The U.S. market of patients needing oxygen therapy is estimated at 2.5 million, representing a $4 billion opportunity with expected 7% to 10% annual growth, Weinstein forecasts. Outside of the U.S., there are approximately 2 million potential patients.

About 85% of patients in the U.S. who get oxygen therapy receive standard oxygen technology, composed of stationary concentrators and oxygen tanks.

"Portable oxygen concentrators (POCs) have about 4% to 5% market penetration, but it's the fastest-growing segment. And we are the market leader of that segment," said Bauerlein.

Traditionally, durable medical equipment (DME) companies have used the delivery model to bring the stationary concentrators and cylinders to customers. As a result, they have built out extensive infrastructure and established strong client relationships along the way. Companies in this space include Lincare, Rotech Healthcare, Apria and American HomePatient.

Portable Oxygen

However, DME companies also offered POCs. "But these companies had little incentive to switch patients away from the standard of care and away from its existing infrastructure," Weinstein noted.

POCs address the issues of cost and mobility for patients. They cost between $2,000 and $4,000, and deliver higher levels of oxygen per minute. They have batteries and can be easily recharged. The G2 is Inogen's higher-capacity concentrator, weighing 7 to 10 pounds. The G3 is the company's most lightweight one at 3 to 6 pounds.

"Inogen's products score toward the top end of many major categories," wrote Weinstein.

They are light enough to be carried by patients yet robust enough to be used as a single solution, such as 24/7 therapy, he noted. Weinstein forecasts Inogen's sales to grow at a 16% annual rate from 2013 to 2016, above the peer group's average rate of 12%.

Along with the direct-to-consumer marketing model, better technology and reduced costs have been the growth drivers in the oxygen space. These factors also open the door to increased competition.

Inogen's main DME competitor on the POC side is Lincare, which "should continue to see strong growth in the POC market given its breadth, existing customer base, and the ongoing shift that's playing out in the marketplace," wrote Weinstein.

There are also multiple POC manufacturing companies, such asInvacare ( IVC ), Inova Labs and Respironics, a subsidiary ofPhilips ( PHG ). Other risks to Inogen's business include the company's dependence on regulatory approvals for its devices and Medicare rental reimbursement rates. As 25% of Inogen's revenue comes from Medicare, declines in reimbursement rates could negatively affect its results.

The company is already actively working on new models. It plans to release the Inogen At-Home stationary concentrator later this year.

"About 30% of the patients only require stationary oxygen; they do not need an ambulatory solution," said Bauerlein. "Either they only need oxygen at night when they are sleeping or they are on the sicker end and don't need oxygen and just aren't ambulatory as a result."

In 2015, the company expects to release the G4, incorporating more innovations into a smaller device.

Patients usually find out about Inogen's products from advertising, such as TV, print, the Internet and social media, as well as from physicians. All of the company's products are made in the U.S.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: INGN , JPM , IVC , PHG

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