Inogen, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparative results are for FY 2018 unless noted. The filing also reports Q4 results. Inogen develops, manufactures and sells portable oxygen concentrators and related products, with sales and rentals through direct-to-consumer and business-to-business channels. It acquired non-invasive ventilation developer New Aera in August 2019.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $361.9 million | $358.1 million | +1.1% |
| Sales revenue | $340.5 million | $336.0 million | +1.3% |
| Rental revenue | $21.4 million | $22.1 million | -3.2% |
| Gross profit / margin | $171.9 million / 47.5% | $178.6 million / 49.9% | Margin down 2.4 percentage points |
| Operating income | $19.8 million | $37.9 million | -47.8% |
| Net income / diluted EPS | $21.0 million / $0.94 | $51.8 million / $2.30 | Net income down 59.6% |
| Adjusted EBITDA (non-GAAP) | $43.3 million | $61.3 million | Down 29.3% |
| Cash from operations | $40.6 million | $60.0 million | Down $19.4 million |
Domestic direct-to-consumer sales rose 9.9% to $156.2 million, while domestic business-to-business sales fell 8.7% to $106.4 million. International business-to-business sales were nearly flat at $78.0 million; international revenue was 21.5% of total revenue. The decline in domestic business-to-business sales was driven in part by one national provider’s purchases through Inogen’s private-label partner falling to $2.5 million from $22.9 million.
Sales gross margin decreased to 48.3% from 51.2%, primarily reflecting higher cost of goods sold, including labor and overhead, channel and product mix, and higher unit costs for the newly launched G5. Rental gross margin improved to 34.1% from 29.7%, helped by lower depreciation and logistics costs and higher rental revenue per patient. Sales and marketing expense increased 10.4% to $105.6 million, including $40.3 million of media and advertising spend versus $30.8 million in 2018. R&D expense rose 33.7% to $9.4 million, including New Aera-related intangible amortization.
FY 2019 net income was also affected by a higher effective tax rate: 13.7%, compared with a tax benefit and effective rate of -28.2% in 2018. The 2018 result included $21.2 million of excess tax benefits from stock-based compensation; the corresponding 2019 benefit was $0.5 million.
Q4 2019: Revenue was $78.9 million, compared with $86.5 million in Q4 2018. Gross profit was $33.9 million versus $43.6 million. Inogen recorded a net loss of $1.4 million, or $0.06 per diluted share, versus net income of $10.0 million, or $0.44 per diluted share, in Q4 2018.
At year-end, cash and cash equivalents were $198.0 million and marketable securities were $11.1 million; working capital was $242.0 million. The company reported no indebtedness. Cash from operations was $40.6 million; investing activities used $44.1 million, including $70.4 million net cash paid for New Aera, and financing activities provided $4.9 million. Capital expenditures and rental-equipment purchases totaled $6.5 million. Total liabilities were $102.7 million, including $26.6 million of New Aera earnout liability and $6.7 million of recognized operating lease liabilities.
Material changes, outlook and risks
- Acquisition and product expansion: New Aera was acquired for up to $101.9 million, including $70.5 million paid at closing and up to $31.4 million in earnout payments. The acquisition added the Tidal Assist Ventilator (TAV); Inogen began a limited launch in December 2019 and expected limited 2020 revenue contribution. It plans to integrate the technology into future oxygen and ventilation products.
- Sales capacity and marketing: Inside sales representatives declined to 329 from 446 at year-end 2018. Management reported improved productivity in the second half of 2019 and planned measured hiring, continued marketing investment, and a 2020 pricing trial. It expected higher marketing spend to partly offset productivity gains.
- Management outlook: Inogen expected modest rental revenue growth in 2020 as it scaled its rental intake team and benefited from Medicare rate increases effective January 1, 2020. It planned continued investment in R&D, sales, marketing and manufacturing, and expected to begin sales in China as early as 2021. The filing provides no numerical revenue or earnings guidance.
- Medicare reimbursement: Round 2021 competitive bidding was expected to start January 1, 2021, with awards and pricing anticipated in 2020. Management estimated that E1392 reimbursement could fall about 42% under the lead-item methodology, potentially reducing combined E1390/E1392 payments about 15%; actual pricing and contract awards were uncertain. Approximately 20.3% of rental patients were in the capped period, generally requiring continued service without additional equipment reimbursement for months 37–60.
- TAV reimbursement uncertainty: Medicare coding for TAV was disputed. An initial E0466 coding confirmation was revised; CMS denied Inogen’s appeal in January 2020, and the company was pursuing further appeal options. Coding and Round 2021 outcomes may constrain adoption and rental growth.
- Manufacturing and product issues: The company disclosed G3 battery and G5 motherboard issues in 2019, and G5 component supply constraints in Q4 2019 and Q1 2020 that delayed orders and manufacturing. Several key components are single-sourced. Competitive bidding, customer capital constraints, competition, foreign exchange and reimbursement changes also pose risks.
- Litigation: Breathe Technologies sued Inogen, New Aera and others in November 2019, alleging patent infringement and related claims; damages sought were unspecified. A securities class action and multiple shareholder derivative actions were also pending; the class complaint had been dismissed with leave to amend, and a motion to dismiss the amended complaint was pending. Inogen stated it intended to defend the cases. No litigation accrual was recorded at year-end.
- Other notable items: The company reported no material off-balance-sheet arrangements. Auditors issued unqualified opinions on the financial statements and internal controls; management concluded controls were effective as of December 31, 2019.
Key facts for investors to verify
- Whether 2020 Medicare Round 2021 contract awards and reimbursement rates match management’s assumptions, especially for E1392 and NIV.
- Progress on TAV reimbursement coding, commercial adoption, integration costs and earnout milestones.
- Whether G5 supply constraints and previously disclosed product issues are resolved, and whether product costs and sales gross margin improve.
- Durability of domestic direct-to-consumer growth, sales-force productivity and marketing efficiency, alongside the loss of business from the large national provider.
- Rental patient trends, capped-patient mix and service costs, and whether the expected modest rental growth materializes.
- Outcomes and potential financial exposure from the Breathe patent litigation and securities and derivative lawsuits.
- Cash generation after the New Aera acquisition and planned facility leases, and the assumptions underlying management’s stated liquidity outlook.