Inogen Is Packed With Potential

Patients with respiratory disease are often prescribed oxygen therapy to help them breathe more easily. However, lugging around an oxygen tank isn't easy. This is a problem that an innovative medical device company named Inogen (INGN -4.51%) is trying to solve.

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones is joined by Motley Fool contributor Brian Feroldi to talk about Inogen's founding, financials, and the big opportunity ahead.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the clip.

This video was recorded on Aug. 7, 2019.

Shannon Jones: Let's talk about the first company on your radar and that investors should be paying attention to, Brian. That's a company called Inogen, ticker INGN. Brian, for me, I love a good founder story and I really love founders that start at an early age and are driven to solve a problem, and not just make money. This company currently with the market cap just north of $1.3 billion was actually inspired by a college student's grandmother name Mae. What can you tell us about Inogen and how they got their start?

Brian Feroldi: Really interesting story here. As you mentioned, one of the co-founders had a grandma named Mae. She had a respiratory disease. And her doctor prescribed her oxygen therapy to supplement her breathing disorder. Most listeners have probably seen people that are carrying around a heavy oxygen tank, and they have the tubes going up underneath their nose to provide the oxygen. Well, that's exactly what the grandma was prescribed here. The grandma openly complained to the founder of this business, her granddaughter, that it was not convenient to have this therapy at all. Yes, the treatment was good, but carrying around this huge, heavy device was bulky, it was expensive, it was inconvenient, and it really limited her mobility. So, the granddaughter took it upon herself to figure out a way to make oxygen therapy easier to use, and lower the cost at the same time.

What they developed was the world's first portable oxygen concentrator. The idea was to actually create concentrated oxygen by simply using the surrounding air. This is a device that's battery powered, and it's carried around, and it's completely wireless. It pulls in the surrounding air and concentrates the oxygen that's in the existing air, then pumps it up to tubes so that the patient can get a higher concentration of oxygen. It's a really innovative treatment option, and it's a very big convenience when compared to having to lug around the heavy oxygen tanks.

Jones: Yeah. Like Mae, the grandmother that inspired the start of Inogen, these patients are limited in their ability to leave their homes. Literally every trip out of the house has to be calculated and precisely planned just to make sure they don't run out of oxygen. So, the more portable, the more convenient, the better.

I love the technology. I love the founding story. But, at the end of the day, do they actually make money?

Feroldi: Inogen was founded many, many years ago. The idea of portable oxygen concentrators has really caught on. These guys now sell both directly to patients as well as to other companies. They do rentals and they do direct sales. This company has just been a rocket ship. Sales were about $10 million in 2009. That figure rocketed to $410 million for this year. That's their estimate for this year. That's 44% compound annual growth rate. And they're now big enough that they are profitable, they're producing free cash flow, and they have about a 10% operating margin. So, the financials here are actually very, very good.

Jones: And this is a company that checks a lot of the boxes that I like to see as an investor. You mentioned, they are a company that's been exploding in terms of sales. They also have plenty of cash on the books, no debt. You mentioned that they're free cash flow positive. They're profitable. And, they still have founders that are still there, and an experienced CEO at the helm. For me, those are the things I love to see. But for a company like this, it doesn't mean there aren't speed bumps along the way. Sounds like the future is bright, but they have been pivoting their business model recently, too. Is that right?

Feroldi: Yeah, exactly. And when I say that this was a red hot stock, I mean red hot. This company came public at $15 a share in about 2014. Last September, they were trading at $280. Enormous growth. But more recently, their business has experienced, I think it's fair to say, a speed bump. Their growth has really slowed down. Management said that basically, the reimbursement environment is changing. Competition has also picked up. And their sales hires that they have have not had been as effective as their previous sales hires. So, because of that, their growth rate has really slowed down. More recently, they guided down for the full year, and their stock has dropped basically from $280 less than a year ago to about $60 today. It's been a pretty gut-wrenching stock to hold for the last couple of months.

But a lot of the attributes that we still like about this company are still in place. Like you mentioned before, debt-free balance sheet. They are still growing. They are still profitable. Just not nearly as fast as they were previously.

Jones: I like that they have an expanding product portfolio. It's not just a one-and-done, one hit wonder. They've got, of course, their flagship product, the One G4. It actually recently received reimbursement coverage in France. They've got Inogen At Home. This is for patients who need oxygen therapy during sleep. It's this patient group that's actually estimated to represent more than about 30% of the total oxygen patient base in the U.S. Just in the first quarter of this year, they launched the Inogen One G5 in their direct to consumer channel. That's rolling out domestically in the business to business channel, then to international business to business channel, by the end of the year.

For me, on the business side, it sounds like they're shifting toward more of a rental revenue model, which basically gives them some reoccurring revenue, even though you're probably going to see some more short-term headwinds as they shift over here. But all in all, I think, because the stock has gotten a little bit beat up, especially with that guidance change that you mentioned in May, this could be a company that, even though it's going to be a bumpy road, could actually be a good buying opportunity now, especially as things start to smooth out, hopefully in 2020, especially on their bottom line.

Feroldi: This is a company that I've actually admired from afar for a long time because their valuation has just been so extreme that it's really hard for me to get excited about owning the stock. But their huge drop that they've experienced over the last nine or 10 months have actually pulled their valuation down to a much more palatable level. This company is trading currently about 30X forward earnings estimates, which is, I think, completely reasonable given the opportunity and the quality of the business thus far. The estimate for future profitable growth has come down, but analysts are still estimating about 15% profit growth over the next five years. Those are fairly attractive numbers. As you said, it could be a good time to buy the stock, given that its valuation has been so compressed.