Greetings, and welcome to the Inogen's Fourth Quarter and Year-End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Pigeon, Investor Relations. Please go ahead.

Thank you for participating in today's call. Joining me from Inogen are newly appointed CEO, Nabil Shabshab; and CFO and Co-Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the fourth quarter and full year 2020. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2021 and beyond; expectations related to our operating results for the 2021, including directional revenue commentary for the first quarter of 2021; our ability to create shareholder value by driving awareness of our products; expectations regarding our international and domestic sales channels; expectations related to our rental channel; expectations related to our physician sales office; hiring expectations and expectations regarding our sales and marketing roles and related investments; product development expectations; expectations regarding reimbursement and regulatory changes; and our expectations regarding the market for our products; and the impact of the COVID-19 pandemic on our business and demand for our products in both the short-term and long-term. The forward-looking statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligations to update these forward-looking statements, except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release. With that, I will now turn the call over to Inogen's President and CEO, Nabil Shabshab. Nabil?

Thank you, Matt. Good afternoon and thank you for joining our fourth quarter 2020 conference call. Before I discuss our recent performance for the fourth quarter of 2020, I would like to say that I'm really excited to have joined the Inogen team as I believe that this company has a real opportunity to impact the quality of patient's lives by providing them increased freedom and independence of their oxygen therapy needs. Also, I believe that Inogen is in a great position to continue to be a leader in the oxygen therapy market while driving patient access to portable oxygen concentrators or POCs. And what I believe is a large and currently underpenetrated market. With that, I would like to turn to the review of our fourth quarter 2020 performance. While the COVID-19 pandemic continued to have a significant effect on our business in the fourth quarter of 2020, primarily in the direct-to-consumer and international business-to-business sales channels, we are pleased with the rebound in performance in our domestic business-to-business channel, which exhibited double-digit growth over the comparable period of the prior year. Additionally, our recent focus on the rental channel produced strong operating performance with rental revenue growing significantly in the fourth quarter of 2020 versus the comparable period in the prior year. With that, I will now provide details of our fourth quarter 2020 revenue by channel. For the fourth quarter, we generated total revenue of $74 million, compared to $78.9 million in the fourth quarter of 2019, a decline of 6.3% from the comparative period in 2019. Domestic business-to-business sales in the fourth quarter of 2020 increased 17.9% to $24.2 million, compared to $20.6 million in the fourth quarter of 2019. We believe this increase was primarily a result of the unfulfilled orders in the fourth quarter…

Thanks, Nabil; and good afternoon, everyone. As Nabil noted, total revenue for the fourth quarter of 2020 was $74 million, representing a decline of 6.3% from the comparative period in 2019. Turning to gross margin, for the fourth quarter of 2020, total gross margin was 46% compared to 43% in the fourth quarter of 2019. Our sales revenue gross margin increased to 44.5% in the fourth quarter of 2020 versus 43% in the same period of 2019. This increase was primarily due to lower manufacturing cost per unit versus certain manufacturing inefficiencies we experienced in the comparable period of 2019 and lower warranty cost per unit. These increases were partially offset by higher labor and overhead cost per unit and lower average selling prices due to an increased mix of domestic business-to-business sales, which have a lower gross margin versus our direct-to-consumer sales. Rental revenue gross margin increased to 56.5% in the fourth quarter of 2020 versus 43.3% in the fourth quarter of 2019, primarily due to higher billable patients as a percent of total patients on service, higher Medicare reimbursement rates, lower rental revenue adjustments and lower depreciation expense per patient on service. As for operating expense, total operating expense increased to $39.6 million in the fourth quarter of 2020 versus $39.2 million in the fourth quarter of 2019, primarily due to an increase in the fair value of the New Aera earnout liability and higher personnel-related expenses, partially offset by lower legal and consulting expense and a reduction in product incentives and advertising expense. Research and development expense increased to $3.7 million in the fourth quarter of 2020 compared to $3.6 million in the fourth quarter of 2019, primarily associated with increased product development-related expenses. Sales and marketing expense decreased to $25.4 million in the fourth quarter of…

We will now be conducting the question-and-answer session. [Operator Instructions] The first question is from Robbie Marcus from JP Morgan. Please go ahead.

Great. Nice quarter and thanks for taking the question. Nabil, I thought I'd start off with two questions. One maybe high level, one maybe more focused on the business here. But for a lot of us, this is the first time we get to hear from you and it would be great if you just give us your thoughts on what attracted you to the role, what do you think you can achieve in the next six to 12 months here with Inogen and what do you think you might be doing differently versus the prior CEO?

Hi, Robbie, thank you for the question. So, let me go through first part of the question to address what attracted me to Inogen and the role. So, a few things standout in my mind, specifically, how underpenetrated POC oxygen therapy market remains not only in the U.S., but around the world and opportunity for the company like Inogen that has truly a best-in-class portfolio of products to meet the needs of patients that require such therapy. Also, what attracted me is the fact that Inogen is a company with a focus basically, focused on really improving respiratory therapy around the world. But that coupled with, as I mentioned the portfolio strength, the commitment of the team that I saw during the discussions we were having provides for a unique opportunity to serve patients' needs and deliver on their expectations as well as expectations of shareholders. So – but with that said, there is a lot of work ahead of us. The division is real and the capabilities are strong and the portfolio is good and I look forward on working with the team on improving that. Now, to the second part of your question Robbie, in terms of what can we do in the short and then the medium-term. Like any incoming CEO into the organization, I'm spending a lot of time doing deep dives with the team specifically, around two things, the strength of the portfolio, both existing as well what's in the innovation pipeline in terms of what's coming next, as well as the strength of the go-to market model and its durability and how we can continue to build on that and leverage the strength that we have there. So, the market itself is as I said not penetrated that much and leaves a lot of room for us to grow as well as our partners in the channel. So, we'll be looking as part of that into what areas can we double-down and strengthening some of the investments or where we're placing our bets, including some of the capabilities we have, some of the underlying technology systems that we need to look at, looking at the business model, as well as revisiting the strategic imperatives and tweaking them for us to get to that aspired growth rate.

Thanks. And maybe just as a follow-up, you talked about under-penetrated market. How are you thinking about the business strategically, because on the one hand DTC is the most profitable on a net income dollar basis for the company. Yet a lot of patients like to get it through their HME suppliers and you've done well in that bucket over the past several years and it's the company at one point was moving away from rental now coming back to rental. So, where do you think the market is in terms of penetration, in terms of available units for patients and where do you think the key focus for Inogen will be in the next 12 to 24 months? Is it returning to D2C? Is it building a big aggressive B2B presence? Is it getting more aggressive on rental? How do you think about balancing the three because you know, they don't always works perfectly well together?

Yes. So, I'm going to take a first pass and since I've only been here three weeks or 2.5 weeks, I'll let Ali chime in after I give you my thoughts. So, I think in terms of the balance between the three channels, let me start with the penetration of the market. Based on the CMS data that we have and it's difficult to put all the datasets together, what we believe that the penetration is around 18%. So, there is still a lot of room left in the market in terms of how do you tackle that upside based on the channel and field of play that you go into. So on the – let me start with the smaller side, the business-to-business. So, of course, it remains a focus, but we need to balance it with the direct-to-patient or direct-to-consumer as well as the rental market. The rental market that we have started focusing on again recently has shown some positive signs in terms of how it responded to our efforts and us increasing the exposure and attention of the patients within that space. We will continue to double-down on that because we are seeing good growth rates there, as well as continue to refine our model for the direct-to-consumer and see how we can leverage some of our strengths and optimize our performance and spend in that space. So the answer is, we're not going to take our eye off any of them, but we are going to be placing bets a little bit differently after I have a little bit more time with the team to look at the return in terms of the investment in one of the three channels, as well as what tweaks are required in each one of them. Ali, you want to weigh in a little bit?

Yes sure. So, Robbie, as you know, our vision of the future is really to make POCs the standard of care for ambulatory oxygen therapy patients and certainly it's been difficult the last couple of years to really see improvement, significant improvements in the penetration there and we're really about trying to drive that patient access to the product and we think the combination efforts of creating patient awareness that we've done through our D2C efforts, creating physician awareness that we do with our rental efforts as well as our physician facing sales team and then also through our partners who are also creating that awareness. We believe that's the best way to get to POCs becoming the standard of care. So, we're about trying to drive that access, certainly, we're proud of what we've been able to accomplish in the rental business and it shows the true patient interest in POCs and the high demand that's there, if they can get access using their insurance benefits. And as you rightly said, a large portion of patients can't afford to buy a POC out of pocket. So, the more we can give patients access to using their rental benefits as a way to get POCs, the higher conversion rates that we would expect in our business and the pathway to achieving our vision for the company.

So, maybe I'll just add something that Ali mentioned, which is getting to those prescriptions at the onset of care. So, the efforts we're putting behind our direct-to-physician sales force, it's part of the strategy that Ali and I covered in terms of making sure that we give the patients the options, we give the physicians the awareness required and we are capable of either serving it through their insurance and/or through cash sales.

Great. Thanks for all the insight. Appreciate it.

The next question is from Matthew Mishan from KeyBanc. Please go ahead.

Good afternoon and Nabil, congratulations on the new role. Before I ask a longer-term question, I just wanted to ask around, what are some of the early signals of activity you're seeing from your DTC customers at this point? Now that the vaccines are rolling through, have you seen call volumes or inquiries start to improve?

Yes, I'd say it's a little early to say that still. We're just now getting into what would be our typical higher seasonality period. Usually that starts in March or April for us, where we will see consumers increasing both seeing our cost per lead decline as well as our conversion rate increase. But we certainly have sensed a significant amount of optimism from the patient population that they do plan to get vaccinated and they plan to resume traveling once they do receive those vaccinations. So, I think that we've seen some hopeful signs there. But still, it's a little too early to say that we've seen a trend in our business that would immediately drive an impact to our results.

And then on the international side, it would seem as if there are several potential catalyst for some improvement into 2021. Can you talk about what the UK tender timing and some of the launches in France and reimbursement in Germany and what that could mean?

Sure. Yes, I'm happy to take that question and the tenders have been resolved in the UK. There has been a little bit of delay in the implementation of those given the pandemic and the impact that that has, but the contracts have been awarded. We have visibility on the winners and we believe that, that should be a tailwind to growth as those markets start returning to normalcy. We have seen in the past that when we launch new products and get reimbursement approval in markets like Germany and France that does lead to heightened interest in the product and conversions of that product. So, we are excited about those two markets. Of course, COVID still has an overall impact on the business in the short-term, but we know giving our partners access to the best product on the market with the G5, certainly will help enable them to provide POCs and provide that patient preferred product. So, we do expect those customers in those markets to convert to the G5 since it is better than the G3 in any way and that's – that's the standard product that has been used across most of Europe and we have already seen that in other accounts where that product was available. So, we would expect that and we do think that that will continue to strengthen our competitive position and market position in those markets.

And maybe Matthew the other thing is, hopefully with the assessment center starting to reopen again, as people get vaccinated, that will definitely be a little bit of help in terms of the demand that we expect.

Okay, excellent. And then last question is just Nabil, can you just give us a sense of what you're going to be trying to prove out with clinical evidence and what you think you're going to be able to show?

Yes. I think this is to be determined but I'll frame it at a high level that people actually get to better clinical outcomes and lower hospital admissions hopefully if we can get to that level if they are on oxygen therapy, especially if they're on a POC that allows them to get a higher level of compliance and adherence to the required therapy versus using intermittently because they are tied to a unit or to a tank. We'd like to be able to do some clinical studies to prove the value of POCs and its superiority over other modalities of therapy. It's established that oxygen therapy is definitely very helpful and beneficial. We believe that there is an added plus to adherence and compliance, which I think is at the core of the offering that we have. So, we're having a discussion as a team in terms of how do we go about getting to that evidence, because it will definitely be some of the health that we require in terms of tailwinds.

Thank you very much.

Yes. And just to add on to that, all of that is certainly true. And we also want to do more clinical work with the combination product that we've talked about of the POC with the TAV technology and really showing the differences between that product and a traditional POC. So that will be a another leg to this clinical evidence approach.

Thank you, Ali.

The next question is from Mike Matson from Needham. Please go ahead.

Hi, this is Joseph on from Mike. The first question maybe frame it around COVID, just curious why it took so long to get a benefit from COVID related to demand. Like what changed and why wasn't this seen earlier and maybe going back to the POCs as well. Any information on how long these COVID patients need to use the POCs and specifically, what happens to the units after they're no longer needed. Thank you.

Yes, sure. Great question. And we did actually see that early in the pandemic as well. Back in March and April, there was a heightened interest in POCs. And of course, there was just a lot of unknowns at that moment about what the best treatment was for COVID patients. But we have seen oxygen therapy emerge as a common treatment for patients who need – who have COVID-19. And particularly as we saw hospital systems trying to increase discharges of patients because they have limited capacity, we saw more patients going home with oxygen therapy versus staying in the hospitals. And we've seen a shortage of what would traditionally these patients would be treated with stationary concentrators because if they're still recovering from COVID ambulation is not their biggest priority. It typically would be a higher flow unit. And a unit that doesn't have that ambulation, but as that supply got more constrained in the fourth quarter, we did see a pull through into POC demand for that use, since they couldn't get access to more traditional oxygen therapy. So that's the main driver of why we didn't see this earlier and kind of what we are currently seeing, this is a little different than historical trends. We don't have good data on how long these patients do stay on oxygen therapy, if they are prescribed oxygen therapy, obviously a large percentage of COVID patients do not need oxygen therapy, they recover on their own. But for those who do have severe cases, there is a portion who needs oxygen therapy. It does appear to be short-term in nature thus far. But it's really hard to tell any long-term impacts at this point.

Okay. Thank you. That's very helpful. And then maybe one more, I know you guys aren't giving guidance, but if you could give maybe a sense of the magnitude of the increase of operating expenses in 2021, that would be very helpful.

Yes, thanks. And we aren't giving guidance today, so we're not going to quantify the exact level of investments, but it is a step up from the operating expenses that we saw in 2020. And we do hope at some point during the year, we will be able to give more details, give more guidance. But this is something that will grow over time as we continue to make those investments on both the R&D side, as well as the physician sales forces, you'll see incremental costs growing as we make those investments.

Okay, great. Thank you.

The next question is from Margaret Kaczor from William Blair. Please go ahead.

Hi, this is Brandon on for Margaret. Thanks for taking the questions. First is, in the fourth quarter, can you just talk a little bit about what lead generation looks like and maybe even going into so far into the first quarter? And part of what I'm trying to think about is, are you able to, even as we move through COVID, are you able to kind of keep a solid pipeline of patients, maybe this is more applicable to DTC. And so as we move past COVID, or is the sales team kind of hitting the floor running with a strong pipeline, do they have good leads or do we kind of need to rebuild that once we move past COVID?

Yes, so the lead flow was still strong in the fourth quarter and going into 2021. Of course, with the election that occurred in the fourth quarter during those periods, we tend to see higher cost per lead, particularly with TV campaigns. But outside of that anomaly, media was performing as expected in the period. Again, as I said earlier, there is seasonality to cost per lead and kind of conversion rates of those sales. And we're a little early in that cycle. We usually see that pickup in the March, April timeframe. But we do still see strong patient interest in the product high conversions and high interest in the product from our direct-to-consumer side. And of course, as you would expect the rental conversion rate for those who qualify to use their rental benefits is significantly higher than a cash sale conversion rate where somebody needs to pay out of pocket. So that is certainly a factor in looking at the lead pool as well.

Got it. Thanks. And we spent a little bit of time today talking about kind of reducing the friction points for market access for patients. I was just curious if you could kind of go over what specifically are some of the friction points that you'll be focused on that you hope to lower those barriers over the next few years? Like, what are you going to be focusing those, your reps on or your reimbursement teams in order to help patients get this in their hands easier? Thanks.

Yes. So at a high level, what we're looking to do is really make physicians aware that POCs are available for the patients. Right now in our rental business, we are heavily Medicare focused. So our ability to expand contracting coverage is another way to expand access to the products and expanding the clinical evidence to also show those things that physicians care about and their patient outcomes that will also be important. As we look to interact more with the physician community around the benefits of POCs versus standard oxygen, and really help them see also the quality of life improvements that the patients experience and really enjoy about POC. So all of those things are things that we will be focused on in interactions with the physicians and this is one thing that we think that physician awareness should help both us and our partners just like when we drove patient awareness for our products that also helped our partners to create more awareness for POCs and drive that interest in the product and create that retail sale. We think driving more physician awareness of POCs and the options that patients have and why the technology really does work for the mass majority of the ambulatory long-term oxygen therapy patients. That's something that we think will help supplement the work that the provider community is already doing on physician education.

So Brandon, let me just show you and bring it to life with an example. So today, like you referred to the friction or the experience that the patients go through. And today, instead of me going to a physician and I have to advocate for what unit I want, I want the POC or what modality, the hypothesis and the investment thesis behind the direct-to-physicians like Ali said is to increase awareness of the benefit of this modality and of the Inogen product and brand to be able to remove that friction so the patients don't have to advocate for themselves. Of course, it will still happen. And then we referred to, as that friction is removed from the process. Can I really get it covered either if I'm on a private insurance or I'm on Medicare as an example. But we're focused on both in terms of contracting as well as the one that's upstream at the point of prescription.

Got it. Thank you.

The next question is from Danielle Antalffy from SVB Leerink. Please go ahead.

Hi, this is actually Rebecca on for Danielle. I want to touch based on the New Aera product. When can we actually expand New Aera to become a revenue contributor? As a barriers to adoption for this technology if we want to think about the next few years when you started to ramp adoption. Thank you.

Yes, Rebecca, thanks for the question. And certainly, we're still in the early stages of the benefits of the New Aera technology, the TAV product today that we sell either B2B or through our D2C channel. Only works with tanks and certain stationary concentrators. So it doesn't provide the full freedom and independence that POCs provide. So we really see the benefit of the TAV technology to be when we can integrate that into the POC product. And that still is ongoing in development. It will require an additional FDA clearance. So we haven't given specific timing there, both given the uncertainty there as well as for competitive reasons. But that is something that we are focused on in terms of really utilizing that technology to its fullest is the integrated product, not the stand-alone product.

All right. Thank you. Next question, I know you guys don't want get guidance for 2021, but comparables will become very easy next year or this year. So what are the key headwinds and tailwinds, we need to consider when we think about 2021 and maybe into 2022, if you think…

Great question, Rebecca. And certainly the comps get significantly easier when you get into the second quarter and onward throughout 2021. So we would expect that to be a tailwind once you kind of lap the COVID-19 impacts in the business. Of course, on the rental side of the business, we've been able to continue to grow that business in spite of the COVID-19 pandemic and the impacts of that, because we've really been able to continue to grow our patients on service. So we would expect that business to continue to grow. There is some reimbursement uncertainty of what the rates will be after the public health emergency is over, but given the growth in patients, that's an area that we see as a true opportunity in our business going forward. Looking at the other channels, D2C will be watching the leading indicators there of how – patients return to travel, the vaccine rollouts broadly across the U.S. and just the consumer confidence there. But as you said, comps get easier in the second quarter. And typically, we see seasonality that was very different than last year. So we would normally see second quarter being the high followed by the third and then the fourth and the first being the low, which is of course not what we saw in 2020. So that can create some tailwinds to growth in the D2C side. Of course, assuming patients do return to travel, which is a big assumption and uncertainty at the moment. On the B2B side, we certainly have looked at our partners and we see great partner opportunities to continue to convert their businesses from the traditional delivery based models to non-delivery models both here in the U.S. and internationally. And being able to go back into patients' homes and feel comfortable, converting out equipment is a critical part of that. So vaccinations of their staff and their ability to, want to proactively go into homes is a critical component of returning to growth in those channels.

Great. Super helpful. Thank you.

Ladies and gentlemen, this concludes the question-and-answer session. And I would like to turn the call back to Nabil Shabshab for closing remarks.

Thank you. So while the COVID-19 pandemic has and will continue to have a significant effect on our business, we as a company are excited about the future as a leader in POCs and the focus we are placing to drive rentals and expand patient access to our oxygen solutions. We believe this strategic initiative will help us ensure that we'll continue to be a leader in improving freedom and independence of patients with respiratory disorders. Thank you for the time today, and I look forward to many engaging conversations with our investors about Inogen’s future.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.