Price Target $46
Q4 hedge fund letters, conference, scoops etc
Background
Last week, respected short seller Carson Block put out a insightful 27 page report detailing how Inogen management has misled the market with its wildly overstated claims on TAM. These TAM estimates originated from an obscure research firm that Muddy Waters referred to as “amateurish”. We recommend all shareholders read the Muddy Waters piece and its 27 pages of detail on how Inogen is deceiving the market.
http://d.muddywatersresearch.com/content/uploads/2019/02/MW_INGN_20190208.pdf
While the original Citron report on valuation and the recent MW report on TAM are interesting, they are nothing compared to what you will read in this presentation.
Whenever a new medical device is released (e.g., portable oxygen concentrators), the potential for abuse and fraud increases exponentially. No one will deny that portable oxygen concentrators are a great advancement for people suffering from COPD. Citron will acknowledge that Inogen was the first company to capitalize on this growing market.
However, we are now unveiling the dirty secrets that we have discovered through months of research. In this report, we will expose Inogen’s dirty reseller network, the systematic abuse of elders by Inogen and resellers, and why the stock will quickly rerate lower to $46.
Exploiting Elders for Financial Gain
Whereas most people think of elder abuse as a physical act it is more often than not a financial crime that preys on the vulnerabilities of an age group that is more trusting and less internet savvy than the next generation.
Elder Abuse is defined in the Older Americans Act of 2006 as:
“The fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual, including a caregiver or fiduciary, that uses the resources of an older individual for monetary or personal benefit, profit, or gain, or that results in depriving an older individual of rightful access to, or use of, benefits, resources, belongings, or assets.”
It is important to note, that elder abuse is most commonly committed through acts that are technically legal. As stated on the Medicare website:
“Elder financial abuse is big business. It’s estimated that older adults lose more than $36 billion every year to scams, fraud and exploitation.¹ It’s even more alarming that almost half of that money is lost due to tactics that – while deceptive in nature – are technically legal.”
In the following presentation Citron will show how Inogen along with its distribution network through legal and illegal tactics are committing elder abuse to sell portable oxygen concentrators for the highest price without proper disclosure of benefits to seniors at the most vulnerable time of their life.
The Disturbing Truth Why Medicare Revenue is Low For Inogen?
For a company that sells a product to a customer whose average age is 75+ and on the lower end of the socio- economic scale, what % of total revenue would you expect to be derived from Medicare?
Why is this surprising?
Because Medicare covers 80% of the cost as long as they are 65+.
Dirty Deeds Done Dirt Cheap
Inogen’s domestic B2B business has accounted for about half of the company’s revenue growth since its IPO. Last quarter, the domestic B2B business accounted for about one third of total revenue.
This network has driven a material portion of the company’s growth.
Citron believes that Inogen has conspired with the reseller network to dominate Google listings and used tactics to deceive the sick elderly.
Citron exposes that the top reseller of Inogen products is secretly controlled by a convicted felon who was recently released after 5 years in federal prison for deceptive internet marketing practices.
The Largest Distributor of Inogen Products
1st Class Medical claims to be the largest distributor of Inogen products in the world. They are listed at the top of Inogen’s authorized internet resellers list on Inogen’s website.
https://www.inogen.com/internet- resellers
A Google search for anything related to portable oxygen concentrators will bring you to the top paid ads of 1st Class Medical who also owns LPT, The COPD, and SpryLyfe.
The Scheme
Citron has proof through many transcripts that 1st Class Medical is lying to the elderly about their Medicare benefits to make a sale. This allows Inogen to record higher margins through B2B sales at the expense of the elderly who are lied to about their Medicare benefits. Every conversation we’ve had goes something like this.
Obviously, these “oxygen specialists” are not aware of Medicare code E1392 for a portable oxygen concentrator.
Effective January 1, 2017, the Medicare allowable for stationary oxygen rentals (E1390) ranges from $66.53 to $77.16 per month and the OGPE rentals (E1392) ranges from $36.14 to $41.91 per month. These are the two primary codes that we bill to Medicare and other payors for our oxygen product rentals.– Inogen 10-K
https://www.sec.gov/Archives/edgar/data/1294133/000156459018003518/Inogen-10k_20171231.htm
This action is done intentionally when patients/customers are at their weakest point in life.
Citron can’t expect the Medicare system to buy Google search ads to save seniors from the tactics of 1st Class Medical and its owner Gary Luckner… Gary Luckner?
Who 1st Class Medical Wants You to Think Runs the Company
1st Class Medical, the largest Inogen online distributor, claims on its website that it is owned and operated by Caleb Umstead.
However, Caleb’s LinkedIn profile notes that he works in “customer education” at the company.
https://www.linkedin.com/in/calebumstead/
In reality, the 1st Class Medical / Inogen scheme is operated by Gary Luckner who was recently sentenced to 90 months in prison for running a fraudulent online operation.
https://www.justice.gov/opa/pr/leaders-colorado-based- vending-machine-fraud-sentenced-prison
The Real Founder of Inogen’s Largest Distributor
The following videos prove by self admission that Gary owns and operates 1st Class Medical.
Below is a video of Inogen’s largest reseller bragging about how his son bought a G-Wagon… from deceiving the sick elderly.
The Deception Doesn’t End With 1st Class Medical
One of the top search results for oxygen concentrators is a website called https://seniorsreviews.com/, a lead gen for Pure Medical.
Pure Medical runs a review site for seniors. The volume of rave reviews that never mention the word “Medicare” is presented as a way to deceive seniors and most importantly keep the word “Medicare” out of the conversation.
We remind the reader that the use of fake reviews is fraudulent and was part of the case that sent Gary Luckner to prison.
Inogen’s distribution channel has become a collection of rogue operators whose business is based on deception.
What Citron found to be most appalling came from a company called Main Clinic Supply, which is listed at the top of Inogen’s authorized internet resellers list on Inogen’s website.
https://www.inogen.com/internet-resellers/
The top paid ad for portable oxygen claims “Beware of Cheap Machines”. This is a tactic used to scare the sick elderly from utilizing their Medicare benefits, which cover these “cheap machines”.
Needless to say this site is also riddled with fraudulent reviews, which get posted daily.
All of the disturbing tactics of authorized internet resellers have resulted in higher revenue at the expense of the well- being of senior citizens and the law.
Inogen’s DTC Business is Running Out of Air
The Inogen scheme doesn’t stop with its distributors. DTC is Inogen’s highest margin channel, which is why the sales force has been trained to upsell Medicare patients to cash pay.
While competitors have invested in R&D (e.g., ResMed’s recent investment in remote patient monitoring), Inogen has invested in its sales force.
https://hme-business.com/Articles/2018/12/06/resmed.aspx
“the [advertising] spend will continue to ramp as we hire new people. So we’ve always kind of matched our spend to our sales capacity. So as we hire more reps, you’ve got to have more leads, or else you choke the reps off and starve them”
Inogen CEO Q1 2018 earnings call
Through a 4 month investigation and numerous conversations with Inogen reps, Citron believes that these multiple sales reps steer Medicare patients away from enforcing their benefits through evasive and deceptive tactics .
Inogen’s DTC Business is Running Out of Air
Inogen has previously capitalized on its position as the 1st DME for Medicare patients in many areas. Inogen would take these leads from Medicare to convert them into cash sales. However, the competitive bidding process has changed as we read in a new risk factor in its 10Q.
“On July 11, 2018, CMS released a new proposal to change the payment rules for Durable Medical Equipment Prosthetics, Orthotics, and Supplies (DMEPOS), including our portable oxygen concentrators. This includes a proposal that when the current competitive bidding contracts expire December 31, 2018, beneficiaries can obtain DMEPOS items from any enrolled Medicare supplier. ”
Now that any DME can offer you a portable oxygen concentrator, Inogen will get much fewer Medicare leads that can be turned into cash sales.
Inogen’s Tactics Have Not Been Lost on the Employees
Indeed
“This company is very unethical and they do everything they can to try to get over on senior citizens by harassing them to buy this portable oxygen concentrator for $3000 to $5000 and most of these people see the crooked advertisement saying the machine is covered by Medicare.” – Former Employee (August 16, 2018)
“I could no longer work here because the company is severely unethical.” – Former Employee (December 12, 2018)
Glassdoor
“I would just say that it seems the company is overly obsessed with pumping up their stock price and being considered a ‘hyper growth’ company.” – Current Employee (January 9, 2019)
“Lots of rules that don’t get followed except what to say to Medicare shoppers.” – Current Employee (January 2, 2019)
“They have been investigate by medicare 2 times in the last 3 years, and currently still are doing many things that violate medicare guidelines.” – Current Employee (June 4, 2018)
“Medicare should take long hard look at the business practice. Advice to any patient, read the small print. The call objective is to switch from what consumer has seen in advertisement to CASH purchase” – Current Employee (October 18, 2017)
Inogen’s Scheme Can be Found in Customer Reviews
BBB
“These people prey on sick and generous folks, it’s inconceivable that a company in medical industry would be so unprofessional.” – Customer (January 17, 2019)
“This company is suppose to cater to the elderly to me they rip off the elderly.” – Customer (August 13, 2018)
“FRAUD by salesperson: Before buying a $2500 portable oxygen unit from Inogen I asked the sales rep if Medicare covered such equipment and he said no. This was blatantly deceptive. I discovered the truth when the unit I purchased from Inogen with my credit card for $2500 in December 2017 failed. My oxygen level dipped into the 70s and I am still having health issues (lethargy, fatigue, etc.) from the failure. I talked to another equipment provided who assured me that Medicare indeed covered the equipment. That company got me another unit and Medicare paid. My daughter, Valerie Mills, phoned Inogen and complained that I had been defrauded. The rep confirmed that Medicare does pay for the units but Inogen is not an authorized provider in my area. The rep deliberately withheld that information from me to make the sale.” – Customer (August 7, 2018)
“I was intending to use my Medicare benefits to help with the purchase of the device… it is fairly easy to understand what’s going on. It’s what is referred to as the old “bait an switch”. – Customer (November 21, 2017)
The Whole Bull Case of Inogen
The whole bull case is predicated on a TAM number that was derived from WinterGreen Research, which management touts in presentations and conferences.
While Carson wrote 27 pages ripping apart WinterGreen and the TAM, Citron will show just one picture.
Here is a photo of the WinterGreen Research headquarters.
A Copy of This Report Has Been Sent to:
CFPB’s Office for Older Americans
Federal Trade Commission
U.S. Department of Justice
National Institute of Justice
Elder Financial Protection Network
National Adult Protective Services Association
National Center on Elder Abuse
National Committee for the Prevention of Elder Abuse
Conclusion
How can a company who sells portable oxygen concentrators to the elderly only get a mid-single digit% of its sales from Medicare?
By pushing a carefully crafted pitch to distributors that is both unethical and often illegal and is designed to deceive the sick and elderly. While this tactic has proven profitable for Inogen, it certainly cannot be considered a trend. Whether it be competition, oversight, or increasing customer awareness, Inogen’s margins and growth trajectory will contract and eventually its lack of R&D will leave it as an inferior player in the increasingly competitive COPD market.
Citron estimates that Inogen sells about 90% of its POC units vs. only renting about 10% through Medicare. Assuming 40% of POC units were rented through Medicare, Inogen’s revenue would decline by about 20% while EPS would decline by about 80% due to the negative mix shift to Medicare’s much lower margins.
Evidently, the multiple would see meaningful contraction as well.
Citron jumps into muddy waters and assigns a conservative $46 target on Inogen.
Cautious Investing to All
Article by Citron Research
