Inogen (NASDAQ:INGN) and Abiomed (NASDAQ:ABMD) are innovative medical device companies that have put up impressive growth numbers in recent years. However, they both failed to meet Wall Street's expectations for their second-quarter earnings results and cut full-year guidance in response.
In this segment from Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi dig into these businesses' quarterly numbers and discuss whether they can get their growth engines back on track.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 21, 2019.
Shannon Jones: Let's start with the first loser coming out of earnings, and that would be none other than Inogen, ticker INGN. Brian, you and I did a show earlier this month about the very lucrative respiratory disease market. This was the company that was founded by college students on a mission inspired by one of their grandmothers who had to carry around a heavy oxygen tank, a story I can get around. We see a lot of the founders still involved with the business. In that show, we did talk about their business model, how they make money, but we also talked about some of the headwinds they had been experiencing up until that point. It sounds like second quarter, still, headwinds are ongoing. Before we dive into that, though, Brian, let's just do a quick refresher of what it is that they focus on.
Brian Feroldi: Yeah. Inogen was the innovator of portable oxygen concentrators. As we spoke about on our last show, there are a number of patients out there that need supplemental oxygen therapy to help them get the oxygen they need because they have reduced lung capacity for a variety of reasons. The No. 1 cause is typically a long life of smoking, where your lungs can no longer absorb the amount of oxygen that they need. A portable oxygen concentrator is a very miniaturized device that actually continuously creates concentrated oxygen from the surrounding area. It's smaller, it's very quiet, it's much more convenient for patients to carry this around than having to lug oxygen tanks behind them. These guys were taking heavy market share in the oxygen therapy market for years. This company came public a few years ago. It was a red-hot stock. This company was just humming along, growing at a double-digit rate, profitable, cash flow positive, clean balance sheet, everything was going splendidly. And then the wheels started to fall off the bus about six months ago. Their revenue growth significantly slowed due to reimbursement headwinds and some employee challenges with sales execution. We noted in our last show that perhaps the stock may have been a value, when we brought it up a month ago. Well, the stock price is now significantly cheaper than it was even a few weeks ago based on their Q2 results. Q2 results were just not good at all. Revenue growth slowed all the way to just 4% revenue growth. That was well shy of what Wall Street was looking for. Gross margin fell. Expenses jumped. That combination just caused net income to crater 30%. So, it dropped significantly vs. the year-ago period. And I think the thing that capped it off with Wall Street was that they cut their guidance for the year. Previously, they were expecting $405 million to $415 million in revenue. They dropped that number all the way down to $372 million to $375 million. Wall Street was not happy.
Jones: Not happy, to say the least. Last quarter, management, as you mentioned, was talking about some reimbursement headwinds, also talking about productivity with some of their new hires on the sales side. Also, we talked a little bit about them shifting their business model to more of that rental model, to try to see some of that recurring income. Obviously, anytime you're shifting revenue mix, there's going to be some short-term pain, which hopefully should play out over the long term, we hope. All in all, it still sounds like there's a lot of blame being put on the sales staff, and it sounds like they even had to cut some from the sales staff.
Feroldi: Yeah. That's exactly what the CEO, Scott Wilkinson, said. He basically said, "The level of sales representation attrition was higher than we expected, and many of our new hires were unable to meet their sales targets." That to me sounds like there's a hiring issue and potentially an internal cultural issue that is repelling salespeople. There could be something underlying going on that is preventing these new sales hires from meeting their targets. In my opinion, this could be a sign of something not going right at the company, as opposed to just a one-time blip.
Jones: Yeah. And, to the surprise of many, they also announced an acquisition, a company called New Aera that makes portable non-invasive ventilators. This was a $70 million in cash deal. Up to $31 million in potential earn-outs. What are your thoughts about this acquisition? Does that change where the company is within the short term? What do you think about that?
Feroldi: Quick look at the acquisition, I think it makes sense. The company that they acquired, as you said, $71 million, plus another $30 million in earn-outs if certain targets are met. They make non-invasive ventilators that are designed for patients with chronic lung disease that need higher levels of oxygen. They produce products that create higher flow rates, higher pressure. It looks like an acquisition that really makes sense for this business. They said it's going to be accretive to sales starting next year. Gross margin could increase from it. It will leverage a lot of their existing infrastructure. So, on the surface, this looks like a smart deal.
The thing that I worry about is, is this their way of buying growth because their core business is not executing? And, potentially, could this be an unwanted distraction for the business when they should be paying attention to reexecuting and getting their core business on target? So, high-level, I think the deal makes sense. I'm not sure if right now is the perfect time for them to make the acquisition.
Jones: Yeah, great points there. Management did say they're hoping to return to double-digit top-line growth here in 2020. This sounds like a story we're just going to have to wait and see. I'm not entirely confident. But let's keep the show going, because we've got another loser.
This one kind of hurts my heart, Brian. This is a company that has just been beaten down over the past year and a half. That is none other than Abiomed, ticker ABMD, a leader in what's known as the heart recovery field. The hits just keep on coming, Brian. When you look at the stock price just over the last year and a half, the stock is down right now about 56% from its high. You and I talked about this company in May most recently. Before we get into their fiscal first quarter of 2020, let's just give a quick refresher. What is it that Abiomed actually does, and what's their tech?
Feroldi: Sure. Abiomed makes minimally invasive temporary heart pumps that are put into a patient's heart either after they've had a heart attack, to keep the blood flowing and alleviate the pressure that's placed on the heart so it can recover; or, it's also used before a heart surgery is performed on a very high-risk patient, and it basically makes a high-risk surgery a lot safer, it lowers the risk profile. These guys have the data to show that when you use this device, it leads to much safer outcomes, faster recovery, so they're out of the hospital faster. Abiomed is really the only company that does what they do with minimally invasive heart pumps. These guys have been crushing it for years, and Wall Street really bid up this stock to very, very high levels. I mean, price-to-sales ratio was above 20 times, just about a year ago, 18 months ago. But they definitely deserved it. They were putting up unbelievably consistent growth, margins were expanding, they were profitable, they have tons of cash, no debt, they were just a rock star company.
But, as we talked about the last time we talked about them, in February of this year, the FDA issued a warning letter to healthcare providers that made it seem like one of their heart pumps was not safe to use, and it was being recalled. That was not the intent of the letter, but the media picked it up and it just spread like wildfire, and Abiomed has basically been in damage control mode since February. So, that letter came out, and they actually missed their first-quarter earnings targets for the first time in basically years. They said that they were going to refocus their efforts, redouble down on education to make sure that the medical community was aware of what's happening. In fact, in May -- just a couple of months ago -- the FDA issued another letter basically saying that the product in question was safe to use and was effective. So, Abiomed has been going around with that letter and letting the medical community know that, yes, indeed, everything is as we said. But, since that letter didn't come out until May, Abiomed hasn't had enough time to reverse the damage, and we saw that reflected in their Q2 sales results. Revenue grew 15% to $207 million in the quarter, which sounds really good, but that was short of the $211 million that Wall Street was expecting. The sales missed. The gross margin declined a little bit. Earnings did OK. GAAP earnings fell 1%, but adjusted earnings were actually up much more. This company has some one-time adjustments in its numbers based on some equity investments that it's made. But the big shocker here was that they lowered their full-year guidance. They were previously guiding for $900 million to $945 million in full-year revenue. They pulled that back to $885 million to $925 million. That represents growth of about 15% to 20%, but Wall Street was just not happy with the guidance reduction. On the day of this report, their stock was just crushed. Down 28% in one day on the news.
Jones: With the stock down like that, Brian, it looks like right now it's trading for about 11 times sales. Certainly off of its highs. Do you think perhaps right now Abiomed is past the worst of it? That's just going to take time for the reeducation to regain the trust of the physicians and patients? Do you feel like we've already hit a bottom, if you will?
Feroldi: In my personal opinion, I think the answer is yes. I view this as a wound that basically Abiomed had nothing to do with, and they've been in recovery mode ever since. But if you zoom out to the bigger picture, the opportunity here is still massive. Abiomed's market share in their treated fields are still single-digit, even in the U.S. They're expanding internationally, particularly in Germany and Japan. In fact, they knew that Wall Street wasn't going to react well to this, so they immediately announced a $200 million stock buyback authorization. They also won FDA approval for a new Impella device during the quarter, and their balance sheet remains flawless -- $527 million in cash and no debt, so they will have no problems affording every program that they have going on and being able to buy back stock. So, I personally view this as a blip in the road as opposed to something that damages the long-term story.