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January 1, 2018 Issue

CEOCFO MAGAZINE

 

Q&A with Scott Wilkinson, President, CEO and Director of Inogen Inc bringing to market an Oxygen Therapy Medical Device that Recovers Oxygen from the Atmosphere or Room Air providing an Oxygen Rich Stream to Patients Anytime Anywhere

 

 

Scott Wilkinson

President, CEO, and Director

 

Inogen Inc (NASDAQ: INGN)

www.inogen.com

 

Interview conducted by:

Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – January 1, 2018

 

CEOCFO: Mr. Wilkinson, would you tell us the focus at Inogen?

Mr. Wilkinson: We are an oxygen therapy medical device company. We operate globally, we fill product in 46 countries including the USA. Our focus beyond product category is twofold. We are blessed to be a high-growth company. Over the last nine years we have delivered compound annual growth of over 40%. We have sustained that with an innovative go-to-market strategy differentiated from our competitors, coupled with industry dynamics that have the winds of change blowing in our direction.

 

CEOCFO: Would you tell us about the market for oxygen in general?

Mr. Wilkinson: Over the last thirty to forty years there have been patients that were subscribed oxygen therapy and the reason they would be prescribed oxygen therapy is due to their lungs not functioning at an efficient level compared to the average person, so they are not able to convert enough oxygen out of room air, so they need a supplemental oxygen stream. The majority of these folks are long-term smokers that have damaged their lungs over thirty to forty years of smoking. The way they have been treated is they will be prescribed these scuba like oxygen tanks. You may see a few of these folks in public where they pull a three-foot tank behind them in a cart, you will see a plastic tube that runs up to their nose and that is how they get their therapy when they are outside of their home. The problem with that modality is that they have a finite supply of oxygen in that tank, so they can only be away from the home for so long and they are dependent on a homecare provider to replenish their tank. That limits them physically and emotionally. We found a lot of patients stay home because they just have a fear of running out of oxygen. You couple that with the ongoing delivery, which is very expensive for the provider. Our solution and what differentiates us is we have developed a portable oxygen concentrator that takes room air and with an electrical mechanical device, it separates pure oxygen from the room. Instead of a patient dragging a tank behind them, they can have a small device which weighs less than 5 lbs., of which they can carry easily in a shoulder bag. It makes its own oxygen as they go. What it does for the patient is give them portable oxygen without the fear of running out with a tank. Our Inogen products foster mobility, independence, and peace of mind as our patients do not have to worry about running out of oxygen. On the other side of the equation, from a homecare provider perspective, it is much more cost effective because they do not have all of the labor involved with ongoing deliveries. They can put this device on a patient’s hands and then the patient is self-sufficient. Therefore, they eliminate the cost of deliveries, and in healthcare it is what they call a win-win solution. Many times in healthcare it is a win/lose solution; a lot of times that is a win for an insurance company or provider but patient care might be compromised and that is a ‘lose’ for a patient. It is better care, better mobility, at a lower cost.
 

CEOCFO: How do you make oxygen?

Mr. Wilkinson: It is quite simple actually. If you go back to grade school or middle school, you remember that room air is composed of about 21% oxygen, about 78% nitrogen and about 1% argon. What our device does is take in room air and strips out the nitrogen and leaves you with an oxygen rich stream. We do not manufacturer oxygen but recover oxygen from the atmosphere around us. That is why you have an unlimited supply of oxygen because you have an unlimited supply of air. Then our POCs deliver that oxygen rich stream to the patient. If you think about it, patients breathing room air inhale 21% oxygen, but when we separating out the nitrogen we are delivering a roughly 94% to 95% pure oxygen stream to the patient.

 

CEOCFO: Does quality of the room air make a difference or is air just air?

Mr. Wilkinson: It is more or less in room air. Oxygen is Oxygen. One thing that is a little different, is that our device will automatically adjust for high altitudes, so it can be used in Denver, the Mile High City, at 5,000 feet. There is a little less oxygen and room air there, but our device compensates for that by delivering an oxygen rich stream. If you look at some of the other environments, particularly in some third-world countries where they have air quality problems, there is a lot of dirt in the air and the device will also scrub that dirt out with the filtration process. Other than those two things, air is air.

 

CEOCFO: Would you tell us about the range of products offered by Inogen?

Mr. Wilkinson: Yes, right now we have three portable oxygen concentrators. They vary in size. Ultimately the tradeoffs are output of each device for size. We have an innovative, very small unit that is 2.8 lbs. It is our flagship product that we launched a little over a year ago. That product has oxygen output that will fit roughly 80% of the patients’ oxygen needs. There are some patients who require higher flow rates, which translate into larger devices. Usually a patient will choose and want the smallest possible product that will deliver the flow rate they need. Think of flow rate as kind of a proxy for dosage, just like a sicker patient might take more pills than a healthy patient. It is the same thing with oxygen therapy. The more progressed a patient is in their disease state, they may need a higher flow rate. That is the tradeoff, but we try to match the smallest possible unit versus the patient’s flow rate.

 

CEOCFO: What is the competitive landscape?

Mr. Wilkinson: There are other manufacturers that make portable oxygen concentrators. We are the only manufacturer that sells and services directly to the patient and that is what has been innovative about our company. When we talk to a patient we ask them what they would like in the next generation product. They tell us they want it lighter, a longer batter runtime, quieter and that is what we design for. Our competitors all sell to an intermediary healthcare provider. They do not care for patients directly. When they go to their customers, the homecare provider, they ask what they would like in the next generation product, and most of the time they hear they would like a lower price. There is a focus by other manufacturers on a lower cost and sometimes they will compromise on what patients really want, to achieve a lower cost. We maintain a differentiated strategy by focusing on what patients want. As a result, our 3 portable oxygen concentrators are the quietest on the market. We built the position where we are a premium product. We are preferred by patients and have been able to command a small reasonable premium in our sales price because of the demand patients have for our products. That has set us on a different path. We are on a different plain than our competitors because of our different approach, versus their business-to-business approach.

 

CEOCFO: What have you learned from your patients that surprised you?

Mr. Wilkinson: Some of it is pretty basic. You focus on the customer and go beyond what they need. You give them what they want and you can be successful. I think that this is business 101, but I think sometimes those simple concepts get ignored by folks and they miss the opportunities. If you go back ten years, we changed our strategy to this direct approach and that is when we saw our business results improve. We used to compete just like all the other manufacturers and sell to providers. I think that simple formula is a change in really listening to that end-user of the product; a basic business rule, once we paid more attention to that, we had more business success.

 

CEOCFO: How did you decide to shift gears?

Mr. Wilkinson: More out of frustration because we had a great product and the little bit of patient interaction that we had, patients told us how much they loved the product and it set them free. When we sold to the homecare community, they wanted to use the products that they already had in stock. They had been using tank systems for the last forty years, so they had a bias to use what they were used to and build an infrastructure around it. We also had patients complain to us and say “I wanted your product, you sent me to a healthcare provider and they talked me into something else.” Our business just was not growing and we were stagnant. We said we have to change our strategy. It was a fork in the road. We decided we either needed to focus on the homecare provider and try to build a less expensive product or we need to stay true to ourselves if we are going to focus on what patients want by serving them directly. That was a fork in the road about ten years ago and we decided to write our own history book and we needed to go a different direction instead of following all the other competitors.

 

CEOCFO: Is it different in foreign countries? How do you interact with patients there?

Mr. Wilkinson: About two thirds of the four and a half million patients globally, which is about three million, are in the US. We use that direct-to-patient strategy in the USA and it is very cost effective because primarily most of the patients are covered by Medicare and for the most part they speak one language and we are able to advertise using mass media and build awareness with the patient so that strategy works very well here. Outside of the USA, where we have already had tremendous success, we do not go directly to the patient with our marketing strategy. We do work through homecare providers more like the traditional approach of the other manufacturers. We have had tremendous success and the providers outside of the USA seem to focus a little bit more on what the patients want beyond their needs. Ten years ago, we started building success and continue built on top of that. We do have a little different strategy outside the USA. Never the less, we are successful by focusing on the end user, the patient, when we design the product.

 

CEOCFO: Have the materials used to manufacture changed much since it was first designed and are there newer, more durable materials that you may look at in the future?

Mr. Wilkinson: That is another great question. One of the key components of our product is the internal compressor. You have to pull in room air and pressurize it through what is called a Packed Bed. It is a tube, which is packed with a white powder called a molecular sieve and that molecular sieve is what strips the nitrogen out of room air. About eight years ago we decided to vertically integrate and build our own compressors and that allowed us from a product development standpoint, to determine what the patient wanted and then design a compressor around that. We were able to differentiate ourselves. Many of our competitors buy an off-the-shelf compressor, so they all have the same compressor in their products, so from performance standpoint they are all pretty similar. That vertical integration of that key component, the compressor, was able to set us apart. One of the other key components is the batteries, we use lithium ion batteries. We do not develop them ourselves, but all of our competitors have been able to reap the benefits of advancement in battery technology over the last ten years, which has been driven by the cell phone and computer industry. Batteries now last longer and are more durable than they were ten years ago and we have ridden the coattails there of the consumer electronics industry, which had tremendous growth over that timeframe.

 

CEOCFO: How did you reach out to individual consumers?

Mr. Wilkinson: We advertise to patients. We are the only manufacturer to advertise directly to patients. It is interesting because ten years ago almost 100% television commercials, we would run 50-second and two-minute commercials around the USA. The patients all called us and they were interested in the product. Today our mix has migrated to one-third TV and one-third print advertising; we run a lot of ads in the Sunday paper and AARP publications. Interestingly now about one-third of our advertising is through the internet. We have seen our patient demographics change over the last 10 years, and now we have so many seniors on the internet, which makes it very cost effective to advertise on the internet. We use those three media to reach patients. We have an in-house team that optimizes that media mix on a weekly basis, depending on what the supply and demand is for advertising in the market.

 

CEOCFO: What is ahead?

Mr. Wilkinson: The great news for us is while we have had great success over the last ten years, these portable oxygen concentrators are still in their infant stages of market penetration. If we keep our head down, continue to execute and scale our business, we will generate high growth just in the USA, over the next several years. If we look a little bit longer than the next seven or ten years, at maybe ten to twenty years out, you have huge market opportunities like China. China is the largest population on the globe, has a large percentage of heavy smokers, a tremendous air quality problem and oxygen therapy is not used in China right now. From an economic standpoint, as countries like China develop, one of the things that always happens is their healthcare system develops. We see China in the future as a huge opportunity so once we get to a market saturation standpoint in the USA, we have opportunities like China and India where we think we can keep the high-growth train rolling for many years in the future.

 

CEOCFO: Why pay attention to Inogen?

Mr. Wilkinson: We are a company that has a great track record. Nine years of high growth with a track record of performance. We compete on a different plain than our other manufacturing competitors, which sets us apart in a unique position. We have had a core management team that has been together for ten years and I think that is part of our success as well. If you look at the market opportunity in front of us, tremendous opportunity to continue to deliver stellar growth results and opportunities to leverage our expertise even into other products. Today we focus on oxygen therapy. We are in a great position to add products to our portfolio and use our unique direct to consumer model from a healthcare perspective. We have a strong balance sheet with no debt, so it puts us in a great position to make selective acquisitions to add to our product portfolio.


 

“Our Inogen products foster mobility, independence, and peace of mind as our patients do not have to worry about running out of oxygen.”- Scott Wilkinson


 

Inogen Inc (NASDAQ: INGN)

www.inogen.com

 

Contact:

Matt Bacso, CFA          

805-879-8205

mbacso@inogen.net



 


 

 



 

 

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