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An Incredible Investor Set-Up on Inogen Inc (INGN-NASDAQ)
Inogen is a medical device company that makes THE BEST portable oxygen concentrators for COPD patients and more.
- with a $300M+ run rate, (though in 2023 revenue will be down)
- $135 million NET cash (zero debt)
- With an EV/Sales ratio near-ZERO–about 0.2 by my math at $8.25 a share.
(Chronic obstructive pulmonary disease, or COPD, refers to a group of diseases that cause airflow blockage and breathing-related problems. It includes emphysema and chronic bronchitis. Nearly 16 million Americans are now diagnosed with it. You don’t have to smoke or be overweight, you just have to get old to potentially get it.)
The chart is horrible until recently, but the business may be looking much better–we find out Tues Feb 27 when they report.
Looking at the chart and market cap, you would never guess it has $130M cash levels with no debt, while prior to 2023, was sporting an 8.6% CAGR in revenue growth over the last five years. You see, this product really does work–it’s independently considered the best product in the US market – see here: https://www.usnews.com/360-reviews/services/best-portable-oxygen-concentrators
This is now a turnaround story for Inogen. The stock is beat up. It’s down 97% from all-time highs (which takes a 10 yr chart to show), and down 70% this year from ONE year of shrinking revenues and poor execution on guidance.
Up until a month ago, every bit of bad news possible was fully priced into the stock–on Jan 15 at $6, it had a market cap of $139 million and $135 million cash–basically zero EV (Enterprise Value)–on a $300 million run rate with rapidly improving fundamentals.
Then they were given a gift. In late January, their only other major competitor was forced out of the portable oxygen concentrator (POCs) market. Philips, a large multi-national, had been under review by the FDA for over a year on concerns about their products in the sleep apnea/oxygen market.
But on January 29, the FDA told them they were banned–and it usually take 5 years to get back into a market once the FDA bans you.
This leaves Inogen’s new management team an incredible opportunity to shift from defensive cost cutting to go on the offence. Philips was 25% of the US market for oxygen products–hundreds of millions of dollars–and Inogen can now aggressively market their products to this huge, wide open market.
This the catalyst that Citron Research (said in its X account), used to start touting the investment opportunity here.
There is still risk in this stock. The Market thinks the new GLP-1 (Ozempic) style drugs will make a HUGE dent in this industry, greatly reducing TAM–Total Addressable Market. And this is a new management team. But the valuation is so low, this stock has a great shot at making investors a lot of money this year.
Positives
- High cash, zero debt gives a stable bottom
- #1 competitor forcibly leaving the market by FDA
- Citron bringing buy side volume to the tight float
- New management starting to steer the company back in the right direction
Negatives
- Decreasing revenue in core business vertical (B2B domestic)
- Margins staying flat despite cost cutting efforts
- Still not profitable
- Momentum can be crushed with another poor quarter
Quick Facts:
Ticker INGN-NASDAQ
Shares Out 23,308,000 (24.4 M FD)
Market Cap $192 million
Cash $130M
Debt $0
Enterprise Value $57.3 million
Expected Revenue 2023 $320M
EV/S 0.1792
WHAT A SET UP!!!! Think of the math this way–for this stock to trade 1x EV/S–Enterprise Value to Sales–the market cap would have to be $450 million ($450 M – $130 M cash = $320 M, which is annual sales. Divide $450 M / 23,308,800 = $19.30 per share) Book Value Per Share = $9.45.
HERE ARE THE FOUR CATALYSTS
DRIVING THIS RUN IN THE STOCK NOW:
Catalyst #1: Phillips and ResMed out of the Game
This is the most important, and the most recent. Philips had a whopping 37% of the sleep apnea device market share in 2020 per iData Research. Only ResMed was ahead of them. Then on June 30, 2021, the FDA alerted the public of its potential health risks.
The sound abatement foam in the device, which is used to reduce sound and vibration in these affected devices, may break down and potentially enter the device’s air pathway. Inhaling that foam can cause nausea, headaches, inflammation and most notably, toxic carcinogenic effects. This is for many of their CPAP, BPAP and ventilators, in which over 500 deaths have been reported since the voluntary recall of 15 MILLION devices was placed.
Then on January 29th 2024, the FDA cracked down on them again, agreeing to halt the sales of their sleep and respiratory products in the US altogether via a consent decree.
Analyst Anthony Petrone from Mizuho Securities thinks they won’t be re-entering the market for at least another 5 years because of this. The road to recovery for them will be long and prone to setbacks with the regular FDA check-ins, audits and inspections.
ResMed also had an FDA recall of 20 million of their CPAP devices starting in November 2023. This happened after ResMed had left the market of portable oxygen concentrators (POCs) in 2021, with their CFO stating “Going forward, the cessation of the POC business will have an immaterial impact on both group revenue and earnings per share”.
They also noted the reimbursement market being unfavorable, with “payers and HME providers relying less on POCs for Stage 2 and Stage 3 COPD patients, dampening demand for the device”
Resmed will continue to be a large player in the at-home solutions.
Inogen doesn’t need to undercut margins or throw money at R&D to fight for market share. They are independently recognized as having the best product in the USA, and the only two major competitors are dropping like flies beside them.
Sometimes you have to be lucky in the market and Inogen has just that, even if the market isn’t as lucrative as others.
Catalyst #2: Citron Research Bump
Citron Research, the famous former short seller that got burned on the GameStop craze and switched to buy side, gave a big catalyst earlier in January for Inogen.
https://x.com/citronresearch/status/1752716775521738962?s=46&t=avZRDI_AE0N44Lz4jN3qQw
This thread of tweets on X (formerly Twitter), garnered 37k views and got picked up by many news networks (and me!).
It highlighted how Inogen is now the #1 player in the COPD market, with close to 50% market share since Resmed left in 2021 and now Philips seizing operations (who still had 25% of the market) not just in the CPAP products, but all oxygen and portable oxygen machines.
Blackrock also increased its position in INGN from 14.8% to 17.5%, an increase of 18.88% from 2022 to 2023. There is a little bit of conflict in that because we don’t see them as a 10%+ filer, but either way, they’re upping their position.
While Citron was quick to point this out, they didn’t mention that the other large shareholder Brown Capital Management was trimming its position from 3.35M to 2.68M shares (11.7% ownership).
Catalyst #3: New Management
In November 2023, the board appointed a new President and CEO in Kevin Smith. A 20 year medical device veteran, most recently working at Sirtex Medical which was doing $180M+ revenue before being bought out and went private in 2018.
That, combined with an even more recent CFO Michael Borque, they’ve been trimming lots of fat and have a clear focus on profitability. The trailing 9 months’ operating cash flow is just about break even already.
Catalyst #4: Upcoming Quarterly on Feb 27
The last catalyst is neither good nor bad – it just is. Inogen is reporting its full-year financials on February 27th, 2024. If they are able to post a beat, or even give more positive guidance moving forward, it will provide a huge validator on the previous 3 catalysts I’ve mentioned and should help send this stock running.
If they continue to provide a mixed bag of results as they have been previously, it really hurts the investment thesis of a turnaround story. The stock has doubled off a $4.13 bottom in October to over $8 now–much of that gain last week after Citron jumped on the story.
What I mean by its previous quarterlies being mediocre at best, take a look at this snapshot:
Previous management has had a history of disappointing investors with underperforming expectations and changing that narrative is a large focus for the new team. This quarterly has a lot riding on it and will likely determine if I make or lose money off this trade.
Inogen’s Products and Financials
Inogen is now the presumed #1 manufacturer of portable oxygen concentrators (POCs), targeting customers who have issues getting satisfactory oxygen levels in their body, most commonly COPD patients.
They do also have at-home oxygen concentrators but are most known for their POCs, in which they do have two new products rolling out soon.
These POCs are typically Bluetooth-connected to an app, which means you need semiconductors to run it. The 2020-2021 shortage of semiconductors produced a lot of backlog of orders which Inogen was able to clear later in 2022, inflating these numbers greatly.
Because of the inflated 2022 numbers, the 2023 results looked more lacklustre than normal.
Two out of the four verticals were negative y/o/y. Domestic B2B revenue was down 59.4% to $17.3M. This is of biggest area of concern because this is what should be the largest revenue driver with your two biggest competitors leaving the space. This is what everyone will have their eyes on come February 27th.
Direct-to-consumer sales decreased substantially too, down 24.1% to $25.1M, which they attributed to lower sales and advertising spending, which decreased 22.7%.
International B2B being up 69.8% and their rental business up 8.7% were not enough to hold up overall growth, with total revenue down a hefty 20.3%.
The last thing that hurt them the previous quarter was a one-time $32.9M impairment charge, in which if you excluded that, they would’ve lowered their operating costs double digits y/o/y.
So the (lack of) growth is the ugly part of the stock, but a big part of this turnaround is just due to fundamentals. If the stock was trading at an enterprise value to sales of just 0.1X, the share price would be at $9.45 today.
Author Martin Fjledhoj from SeekingAlpha also notes that with its $225M in assets, $138M in cash and only $113M in liabilities (notably with ZERO debt), it has $112M in cash after liabilities are paid. It was essentially trading at cash value earlier in January when the share price was $5.
If you haven’t figured it out yet, 2023 revenue will be DOWN by $50 million–which is why the stock is so cheap.
Nonetheless, the share price still doesn’t reflect a $300M run rate business with new management on the verge of pushing them into positive cash flow.
Even if they continued at their current burn rate, they wouldn’t have to raise in over 5 years with their heavy cash position.
While profitability is the new management’s focus, the latest quarter’s gross margin of 40.2% didn’t put it on a clear path to higher margins. They attributed this to lower demand for premium, high-margin products.
Inogen is far from perfect and has some major issues it needs to address, but after a 70% decline in share price last year, its financial fundamentals were disconnected from the market. Now, with a few catalysts occurring, most notably the market opportunity of losing your only 2 major competitors, this is ripe for a turnaround story IF the new management can execute. It’s a big if, and that comes with lots of risk but it provides a lot of upside too.
Disclosure–I am long INOGEN.
