Published on July 6, 2018
Jim Callinan discusses how these three innovative MedTech firms are leveraging direct-to-consumer marketing to accelerate growth and disrupt their industry.
Technological innovation has always been a cornerstone of the health care industry. Some changes are incremental, while others are revolutionary, but the diagnostic tools and treatment techniques are constantly improving.
Our Emerging Growth Strategy specializes in finding disruptive companies that are able to upend the status quo. We look for firms that are simultaneously able to translate their innovative ideas into better outcomes for their patients and to deliver robust commercial success.
In this article we discuss three of our current holdings, all of which are transforming the industry and are well-positioned for long-term success.
These companies share a common strategy. They all market directly to consumers, bypassing traditional “gatekeepers.” Creating brand awareness drives steeper adoption curves as patients request these products from their providers.
Inogen (INGN) provides portable oxygen systems to patients around the world who require supplemental oxygen. Although it’s a specialty product targeted at a niche market, the company has clearly established itself as the rising star in a growing space. Their market share increased 19% per year from 2012 – 2016, and the addressable market is expanding 7-10% per year as the Baby Boomer generation ages.
The primary reason the company is doing so well is that they have developed a genuinely superior solution to an old problem. Previously, patients who required supplemental oxygen had only two options – a stationary concentrator (pump), which prevents the user from moving, or a so called “portable” oxygen tank, which is cumbersome to use and needs to be replaced constantly.
Inogen manufactures a truly portable concentrator that can be worn as a backpack, drastically improving the quality of life for supplemental oxygen patients. It’s convenient, lightweight, and never needs replacing. Plus, all models are approved for travel by the FAA.
Not surprisingly, it has gained traction quickly. The company has delivered 45.6% revenue CAGR since 2009, and it estimates 2018 revenues will increase to at least $315 million (from $249 in 2017). Much of Inogen’s success is based on its decision to advertise its products directly to consumers rather than rely on traditional, often bureaucratic, channels.
The long term picture looks promising as well. Based on their current trajectory, we estimate they can boost their per unit sales up to 800,000 per year by 2025, up from 128,000 in 2017.
Align Technology (ALGN) develops technology-forward, alternative orthodontic solutions. They are best known for their Invisalign® product, which is a removable, clear plastic teeth straightening device that replaces traditional metal/wire braces. In addition, they have developed intraoral scanning technology, which replaces the traditional stone cast models used to fit orthodontic appliances.
Not surprisingly, the Invisalign system has become quite popular. Patients have enthusiastically embraced the aesthetic benefits, while dental care providers appreciate the convenience and the seamless integration of the digital diagnostics.
The company has experienced robust growth for the past several years. In 2013 it recorded just over 400,000 Invisalign shipments, and in 2017 that figure jumped to just over 900,000 units. At the end of Q1, 2018, they had 5.5 million patients globally, representing a 43% increase year-over-year.
Their market share is growing also. On their current trajectory, we expect they will achieve 30% U.S. market share by 2023 and 20% internationally. Currently it is 17% and 6%, respectively.
Finally, the company has an innovative marketing strategy. In addition to their direct-to-consumer advertising channels, they are also establishing retail stores where prospective patients can walk in and learn more about the Invisalign process. Like Inogen, Align’s strategy of marketing its value proposition directly to consumers has led to increased awareness and a steeper inflection curve. This contrasts with their peer group which markets only to orthodontists and dentists.
The company is in a great position to continue its rapid expansion, and based on their track record we expect them to continue to execute successfully.
Insulet Corporation (PODD) creates high tech insulin delivery systems for patients with diabetes. The key advantage of their product, known as the Omnipod® system, is that it is tubeless and self-contained, meaning it attaches directly to the patient and can be managed remotely from the patient’s mobile phone. Traditional insulin pumps have a much heavier footprint, requiring the patient to wear a catheter that is connected via tubes to a small monitoring/pumping device that the patient must keep on their person at all times.
Like Inogen, Insulet’s solution substantially improves the quality of life for their patients, as they are no longer physically tethered to an external machine. As a result, the company has been experiencing rapid growth for the past several years. Revenues increased from $185 million in 2013 to $464 million in 2017, representing a 20% CAGR.
In addition to their basic Omnipod solution, Insulet is currently expanding their product line to leverage their flexible platform. Through a partnership with Dexcom, they are creating an integrated offering where their pump will automatically dose insulin based on blood glucose levels read by Dexcom’s sensor. This essentially takes human interaction out of the process, thereby creating an artificial pancreas. This system is scheduled to launch sometime in 2020 and we expect it will not only lead to share gains but also grow the category, as 40% of type 1 diabetics still do not use insulin pumps.
We believe there is considerable upside for this firm, based on their high-quality products and their direct-to-consumer marketing efforts. In addition, Insulet is competitively priced, which should further boost sales given the current trend toward high deductible insurance plans. Patients who are paying out of pocket are motivated to find cost-sensitive solutions, particularly if the treatment is better than the alternatives. Given all these factors, we are forecasting their market share to double from 15% in 2018 to 30% by 2023. We also expect their addressable market to increase substantially, as the global incidence of diabetes is projected to double by 2030.
We feel each of these companies is an excellent example of a medtech disruptor, and we expect more to emerge in the near-to-medium term. We will continue to carefully monitor the industry to find other attractive investment opportunities.
James L. Callinan
Vice President & Portfolio Manager
James L. CallinanView Bio
James L. Callinan
Vice President & Portfolio Manager
Jim Callinan graduated from Harvard College (B.A. Economics), New York University (M.S. Accounting) and Harvard Business School (M.B.A.). Mr. Callinan holds the Chartered Financial Analyst designation.
Prior to joining Osterweis Capital Management in 2016, Mr. Callinan was the CEO of Callinan Asset Management and Portfolio Manager of the Emerging Growth Partners, LP. Before that, he was Co-Founder & Chief Investment Officer at RS Investments and founded the RS Concentrated Small Cap Growth investment strategy. He also co-founded the RS Growth Group LLC at Robertson Stephens Investment Management in 1996 and managed the RS Emerging Growth Fund from 1996 until 2010.
He began his career at Putnam Investments as an equity research analyst in 1987 and served as portfolio manager for the Putnam OTC Emerging Growth Fund from 1994 to 1996.
Mr. Callinan is a member of the Bay Area Make-A-Wish Foundation Board of Trustees and the Jumpstart Northern California Advisory Board, the Weatherbie Capital Advisory Board, the President’s Committee on Communication for Harvard University and the Friends of Harvard Football Board.
Mr. Callinan is a principal of the firm and a Portfolio Manager for the emerging growth strategy.
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Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.
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