Inogen Inc (INGN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Inogen's 2015 third-quarter financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, November 10, 2015. I would now like to turn the call over to Leigh Salvo, Investor Relations. Please go ahead.

Thank you, Jonathan, and thank you for participating in today's call. Joining me from Inogen is President and CEO Ray Huggenberger and CFO and Co-founder, Ali Bauerlein.

Earlier today, Inogen released financial results for the third quarter ended September 30, 2015. Inogen's earnings release and a corporate presentation are currently available in the Investor Relations section of the Company's website.

During the call and subsequent Q&A sessions, we will be discussing plans and projections for our business, future financial results and market trends and opportunities, including among others, statements regarding future product releases and improvements, our expectations with respect to the need for regulatory approval, reimbursement rate expectations and guidance. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current anticipated events or results.

Additional information about risks and other factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC including our annual report on form 10-K and most recent quarterly report on form 10-Q to be filed with the SEC. We advise investors to review these risk factors carefully. The forward-looking statements in this call are based on information available to us as of today's date, November 10, 2015, and we disclaim any obligation to update any forward-looking statements except as required by law.

During the call, we also present certain financial information on a non-GAAP basis. A reconciliation between US GAAP and non-GAAP results is presented in a table accompanying our earnings release, which can be found in the Investor section of our website.

I will now turn the call over to Ray Huggenberger. Ray?

Thank you, Leigh. Good afternoon, everyone, and thank you for joining our third-quarter 2015 conference call.

On our call today, I will start with the financial highlights followed by remarks on our recent business trends and operational accomplishments. Ali will then review the Q3 financials in more detail and provide our updated 2015 and initial 2016 guidance. At that point, we will open the call up for your questions.

In the third quarter of 2015, demand for our portfolio of innovative oxygen concentrators once again increased across all of our revenue channels. Revenues in the third quarter were $40.8 million, which represented 38.7% growth from the same period last year. We continued to see strong demand in our domestic and international business-to-business sales channels as well as a positive impact on our direct to consumer channel from the strategic investment we made in expanding our sales team and brand awareness campaigns.

In light of the strong growth we've seen throughout the year, and the continued demand we anticipate in 2016, we felt this was an opportune time to make investments to further increase our direct to consumer sales capacity. We were successful in finding great candidates in the third quarter across both of our California and Texas facilities. Even with the increased investment in sales personnel, we still delivered adjusted EBITDA of $8.2 million and net income of $2.7 million for the third quarter of 2015.

Domestic business-to-business sales were once again our strongest growth channel in the quarter with 77.1% growth over the same period in the prior year. We believe the strength we are seeing in this channel comes from several factors, including private label sales, which contributed to the majority of the upside in the third quarter of 2015 over the same period in the prior year.

This approach to reach DME providers that Inogen currently does not serve was introduced earlier this year, and while early, we are optimistic that private label sales could provide continued revenue contribution in our domestic B2B channel. Increasing reseller demand was also a contributer to domestic B2B sales growth as we believe there is likely a pull-through effect from the direct to consumer media campaigns that demonstrate the benefits of Inogen's portable oxygen concentrators.

Strong sales growth Europe continued in the third quarter of 2015 and represented approximately 89% of our total international sales. Our recently added sales rep in Europe is focused on expanding international distributer and key account relationships as well as working with our existing partners to drive conversion from the traditional delivery-based systems to our portable oxygen concentrators.

Growth in our to consumer channels demonstrated both our growing brand awareness as well as the ramp up in productivity from our growing in-house sales team that came on board in the fourth quarter of 2014 and throughout 2015. US direct to consumer sales and rental revenue in the third quarter of 2015 combined represented more than 35% growth over the same period in the prior year and more than half of our total revenue, highlighting the strength of our direct to consumer marketing model.

We continue to shift our emphasis toward the sale over our rental ahead of the competitive bidding environment where we expect additional cuts to medical reimbursement rates in 2016. As I mentioned earlier, we made the decision to increase sales capacity in Q3 based on the solid demand growth we've seen this year and the anticipated demand we see as we approach 2016. We have been very successful in adding qualified salespeople to our team, and we are continuing to recruit.

I would also like to comment on the recently released Medicare market data from CMS for the full year of 2014. While the information provided has some limitations when used to assemble a picture of the oxygen therapy market, such as the absence of brand or manufacturing information, we believe that the information can serve as a proxy for the entire oxygen therapy market.

Based on the data sets, the share of portable oxygen concentrators in the oxygen therapy market grew from 5.9% in 2013 to 6.9% over the course of 2014. However, this estimate does not include direct to consumer cash sales or private insurance transactions.

Our direct to consumer cash sales in 2014 grew faster than rentals, so we believe that this data from CMS likely represents a conservative estimate of actual portable oxygen concentrator market penetration. Inogen is still the market leader of portable oxygen concentrators in the US based on 2014 Medicare billing data.

So let's turn to product updates. Maintaining our leadership position in the portable oxygen concentrator space through continuous innovation and new product development is a key strategy for us. We plan to continue to make R&D investments to stay at the forefront of patient preference and product capabilities.

As we highlighted last quarter, we are developing an upgrade to our Inogen One G3 and remain on track for product availability towards the end of 2015. After this upgrade, the Inogen One G3 will be capable of producing up to 1050 milliliters per minute of oxygen, a 25% increase in output with no change in weight or size. This will allow us to service more oxygen patients with this product. The product will also feature additional improvements in sound level and lower production costs.

Final design of our fourth generation portable oxygen concentrator, the Inogen One G4, is on track for completion by the end of 2015 with commercial launch planned for the second quarter of 2016. The Inogen One G4 is expected to be smaller, lighter and less expensive to manufacture than our current Inogen One G2 and G3 products. And we do not expect that it will require a new 510k clearance based on the regulatory assessment because it is the same indications of use and core design technology, and the changes do not impact the safety or effectiveness of the device.

We have completed the buildout of our former manufacturing facility in Texas in preparation for the expansion of our sales, customer service, and billing personnel that we will add as we execute our growth plans.

With that, I will now turn the call over to Ali to cover our financial performance and talk about our guidance.

Hey, thanks, Ray and good afternoon, everyone.

During my prepared remarks, I will review the details of our third-quarter financial performance, and then I will provide our current guidance for full year 2015 as well as initial revenue guidance for 2016.

Revenue for the third quarter of 2015 was $40.8 million, representing 38.7% growth over the third quarter of 2014. Once again, we saw continued strong performance on the top line and period-over-period growth in all revenue streams.

Looking at each of our revenue streams, direct to consumer rental revenue in the third quarter was $11.5 million, representing 15.7% growth over the same period in the prior year. Rental revenue represented 28.3% of total revenue in the quarter. We continue to ship sales capacity towards consumer sales instead of rentals, primarily due to the upcoming additional Medicare reimbursement [fund].

Rental revenue was down 1% from the second quarter of 2015, where we saw rental revenue of $11.6 million. Rental revenue was down primarily due to the higher rental revenue adjustment per patients on service, which more than offset the additional rental revenue from the addition of 800 net patients in the third quarter of 2015. At the end of the third quarter, we had 32,400 rental patients on service, a 20.9% increase over the number of patients on service as of September 30, 2014 and a 2.5% increase over the number of patients on service as of June 30, 2015.

Total sales revenue was $29.2 million, reflecting 50.6% growth over the same quarter of the prior year. Total units sold increased to 14,700 in the third quarter of 2015, up 67% from the third quarter of 2014.

Direct to consumer sales for the third quarter of 2015 were $11.6 million, representing 63.7% growth over the third quarter of 2014, primarily due to the impact of the additional sales headcount we added at the end of 2014 and continue to add in 2015. As expected, in the third quarter of 2015, the direct to consumer sales channels showed typical seasonality with sales slightly down from the second quarter where we see a peak due to consumer buying patterns, partially offset by the increased sales capacity versus the same period in the prior year.

International business-to-business sales were in line with expectations at $7.9 million with 15.4% growth versus the same period in the prior year. This growth was in line with our expectations based on normal seasonal trends and unusually strong third quarter in 2014 following reimbursement approval of the Inogen One G3 in France.

International average selling prices in the third quarter of 2015 declined over the same period in the prior year primarily due to currency headwinds and additional discounts associated with the increased sales volume. Domestic business-to-business sales were $9.8 million in the third quarter of 2015 and was our fastest-growing channel in the quarter, with a growth rate of 77.1% over the same period in the prior year, primarily due to growing reseller and private label demand for our portal oxygen concentrators.

Turning to gross margin, since third quarter of 2015, total gross margin was 47.5% as compared to 49.8% in the third quarter of 2014, down approximately 230 basis points. Our sales gross margin was 45.1% in the third quarter of 2015 versus 47.8% in the third quarter of 2014.

The decline in sales gross margin percentage was primarily related to faster growth in the lower gross margin business-to-business sales domestically than the direct to consumer sales. In addition, average selling prices declined across business-to-business sales primarily due to currency headwinds and increased volume discounts to resellers, private label partners, and international customers. Our rental gross margin was 53.5% in the third quarter of 2015 versus 53.9% in the third quarter of 2014, primarily due to lower net revenue per rental patient partially offset by lower servicing cost per rental patient.

In terms of operating expenses, overall operating expense was up 41.3% to $15.7 million in the third quarter of 2015 versus $11.1 million in the same 2014 period and was up as a percentage of revenue to 38.4% versus 37.7% in the same 2014 period as we hired additional personnel and transitioned our former manufacturing facility to support projected growth. For research and development expense, we had $1.1 million in R&D expenditures in the third quarter of 2015 versus $0.8 million in the same 2014 period. The increase was primarily associated with additional personnel-related expenses for engineering projects, primarily the Inogen One G3 upgrade and the Inogen One G4 project.

For selling, general and administrative expense, sales and marketing expense was $8.1 million for the third quarter versus $5.6 million in the same 2014 period, primarily due to increased direct to consumer personnel-related expenses, media expenses, and related customer and clinical services personnel-related expenses. General and administrative expense was $6.4 million for the third quarter compared to $4.7 million in the same 2014 period. The increase was primarily related to increased personnel-related and facilities-related expenses. Total SG&A expenses increased 41.4% to $14.5 million in the third quarter of 2015 versus $10.3 million in the same 2014 period due to the additional investments we made of this year in sales staff and capacity expansion that we expect to help our growth in 2016 and beyond.

In the third quarter of 2015, we reported income tax expense of $1 million compared to $1.3 million in the third quarter of 2014. Our effective tax rate was 26.7% in the third quarter of 2015 versus 38.6% in the third quarter of 2014, primarily due to a decrease in the valuation allowance related to California net operating losses.

As a result, our net income after tax in the third quarter of 2015 was $2.7 million, compared to $2.1 million in the third quarter of 2014, an increase of 26.4% in the comparative period and representing a return on revenue of 6.6%. Earnings per diluted common share was $0.13 in the third quarter of 2015 and $0.11 in the third quarter of 2014.

Moving to our cash balance, we ended of the third quarter with $74.1 million of cash, cash equivalents, and short-term investments, an increase of $8.1 million from June 30, 2015. This increase in cash, cash equivalents, and short-term investments was partially offset by investments in property and equipment of $2 million during the quarter, primarily for our rental fleet addition. As of the end of the third quarter of 2015, we had no bank debt outstanding and our entire $15 million credit facility was available.

In addition, I would like to cover some key non-GAAP financial measures. Adjusted EBITDA for the third quarter was $8.2 million, which was a 20.2% return on revenue. Adjusted EBITDA increased 14% in the third quarter of 2015 versus the third quarter of 2014 where adjusted EBITDA was $7.2 million.

Turning to our guidance, we are increasing our 2015 revenue guidance to a range of $150 million to $153 million, which represents year-over-year growth of 33.3% to 36%. This compares to our previous revenue expectation of $145 million to $149 million.

We are also providing a guidance range for the full-year 2016 total revenue of $177 million to $183 million, representing 16.8% to 20.8% growth over the 2015 guidance midpoint of $151.5 million. This revenue growth is in spite of the additional revenue headwinds expected in 2016 associated with the national application of competitive bid prices to Medicare areas currently not subject to competitive bidding.

Adjusted EBITDA guidance for 2015 is unchanged from prior guidance of $29 million to $32 million, representing an increase of 21.1% to 33.6% over 2014. Net income guidance for 2015 is also unchanged and currently expected to be in a range of $8.5 million to $10 million, representing an approximate increase of 24.5% to 46.5% over 2014.

We currently expect our effective tax rate in 2015 to be approximately 34%. In addition, we continue to expect net positive cash flow for 2015 with no additional equity capital required to meet our plans.

With that, Ray and I would now be happy to take your questions.

(Operator Instructions)

Our first question comes from the line of Mike Weinstein from JPMorgan. Your question, please.

Hi, this is Robbie Marcus in for Mike. Congratulations on the quarter, guys.

Thank you, Robbie.

Was wondering if you could start off by -- give us a little flavor for 2016 guidance that came in well above the Street. Maybe you could help us break down the different categories and how you see sales, rental, B2B breaking out.

Yes, at this point, we're just giving a high level guidance, but on a qualitative basis, we do expect direct to consumer sales to be a strong contributor to our growth rates and our success in 2016. So that certainly is the area where we expect to see the largest growth rate.

Okay. And then --

And obviously, rentals will be impacted by the fact that we have the reimbursement cuts coming our way in 2016. So rentals will actually be down slightly despite an increase in patients, but because of the -- we're expecting 40% of the market to be subject to a 30% to 40% cut, we will see a, at best, probably slightly down development of rentals offset by relatively strong growth in the direct to consumer sales area.

All right. Then maybe on 2015 guidance, can you help us understand how the sales was raised but EBITDA and net income guidance was maintained? What is the driver there, and was that something that popped up in the third quarter or was that something that was planned from the beginning of the year?

It's really something -- when we look at the results that we've seen thus far, we really saw an opportunity in the third quarter to invest in our sales force. And so when we look at guidance for the rest of the year, we want to if we have the opportunity to continue to invest in the right candidates, we think it's the right thing to do to set ourselves up for a very strong 2016.

So we are certainly looking at levels of investments and where it is right to continue to add sales capacity and attempting to increase the number of sales reps that we have. So that's the primary driver. The increase also is associated with the business-to-business side, and that side of the business especially on the private label side does not have as strong of a contribution on the same percent of net income contribution versus say the direct to consumer side.

And then last one for me, along those lines, we are seeing unit sales growing 67% in the quarter but revenue growing 51%. So that -- can you give us a sense of what the difference in margins are, and is that a trend you think that should narrow over the course of 2016? Or do you still expect that trend to widen next year?

Part of that is just associated with the addition of private label sales in the mix. Those are obviously sold at a lower price in order for the distributor to also make a margin on those sales.

So part of it is just the strength of that private label as well as the overall strength of the business-to-business side where that continues to be our fastest-growing segment. And because those are at lower average selling prices, you see a hiring uptick of units versus the average selling price.

And it gets compounded a little bit by volume just going up, and if customers buy more and in larger volumes, they negotiate lower prices, that's perfectly normal. And then another thing that compounds it is if we have a little bit of revenue headwind, currency translation headwinds or -- out of Europe, which is 89% of our international business. So all of that compounded gives you that spread between the growth rate in the unit volume and the growth rate in the revenue.

Your second part of the question, is that going to level off. Well, we hope it won't because typically, again, if you have volumes growing, you have prices declining. As long as that does not outstrip our ability to reduce cost, it shouldn't -- it should strategically actually not be a bad move.

So I do expect that business-to-business sales will continue to be at a lower gross margin than retail sales. And as volumes increase in either channel, you may see a little bit of pricing pressure, but that's not necessarily a bad thing. Did I answer your question?

Yes, thanks a lot.

Thank you. Our next question comes from the line of Margaret Kaczor from William Blair. Your question, please.

Hi, guys. It is Scott in for Margaret actually. Thanks for taking a few questions. I wanted to start with the sales force expansion you guys mentioned.

Last year at this time, you were investing in growing the sales force close to 20% year over year. Should we be expecting something similar for this year at the end, or is it -- should we expect it going faster? And overall, should we expect the same strong correlation to sales rep growth to revenue growth that we've seen in the past?

So as we've done last year, we are not providing guidance on headcount. But we will give you a snapshot update on where our sales headcount is at the end of the year.

In terms of the third quarter relative to the fourth quarter, in the third quarter we have somewhat unique conditions to make additional investments in the sales headcount. Because what we had experienced was better than what we had expected year-to-date sales and at the same time we were able to find good candidates. And therefore, we have not planned to see that conflagration of better than expected sales and finding good candidates, which historically we've had not had the resume flow or the candidate flow that we've seen in the third quarter.

The other element is that the sales managers need to have time to recruit good candidates and then spend time to onboard them and train them. And each of these activities is critical, but it does take them away for mentoring and coaching and managing their teams. So adding headcount is -- we have to balance the managerial time that we have to spend to bring these new recruits onboard and the available management resources.

And again, so, we had a bump in the fourth -- in the third quarter this year. We had a bump in the fourth quarter last year. We had a bump in the third quarter this year. I don't think you can assume that we will have the same luck with the candidate flow in future quarters as we had in the third quarter.

But if you look at the year, we had a very successful year. We thought now is the time when you have the opportunity and the means to actually make that investment and set ourselves up for 2016. Don't forget, the people we have hired in the third quarter will not really hit their stride until January, February.

Yes, and just to expand a little bit on that, when we compared to last year, obviously in the direct to consumer sales side, we saw an increase of almost 64% year over year. Part of that is the fact that last year when we look at when we invested in the sales force, we invested in the fourth quarter. So the third quarter really didn't have significant increases in sales personnel.

And we know we didn't do much investing in the first or second quarter of 2014 because we were working on productivity improvement. So the fact that we really have more sales reps is the largest reason why you see such an increase on a year-over-year basis in the third quarter.

Yes, that's helpful. Thanks. The second question is -- so the last few quarters, the highlight's been the growth in the B2B domestic obviously, but the DTC came in stronger this quarter and accelerated a little bit faster than we were expecting.

What's the main driver there? Is it a more productive sales force like you just mentioned, are those new hires becoming more productive sooner, are you closing more Inogen at homes? Just give us some flavor as to what's more of a sustainable growth there and what drove the growth in the quarter.

It's a resounding, yes, to all of the above. Yes, we're closing more Inogen at homes, but those are packages. It helps.

We have the effects of the bump in the sales force that we added in the fourth quarter of last year has reached maturity, they are fully productive. And we have hired additional people, so all of that combined helps.

And then on top of that, we keep emphasizing sales over rentals. So in part, you have to look at the 63% growth in the sales area alongside the 15% growth in the rental area because of the reimbursement cuts that are coming our way in 2016.

We're trying to manage our exposure to rentals and to reimbursement and have successfully done so because we were able to and actually deliver pretty decent growth every quarter. And yet our -- the portion of the rentals of our total business has gone from somewhere in the 34% range last year to 28% or so this year in the third quarter. So we are balancing and managing the exposure to reimbursement by not giving up on growth, but in some respect, you cannot look at the 63% without looking at the 15% at the same time.

Yes. One last one if I could, Ray, more of a big picture question. Are you seeing any new evidence of stress on the HME providers that would suggest the market conversion to a non delivery model is accelerating?

I'm trying to get your sense of what some of those catalysts might look like. And would you categorize the success that you're seeing with applied home healthcare as a strong indicator of that market stress? Thank you.

So, if we work off of not assumptions or interpretations but just hard data, in 2014 -- we've been asked this question every time as well -- in 2014, POCs increased, went from 5.9% penetration to 6.9% penetration. That to me is not a broad scale adoption.

Now, we don't have 2015 data yet, and I am personally predicting that POCs will again increase in adoption, but it's not a tipping point. It's not an event that all of a sudden in one year we're going from 6% to 30% or something like that, which is the -- is there a recognition that POCS are probably the more economic way of providing oxygen therapy? I think that recognition is spreading.

Is there a -- do we see a volume pick up of significant proportions? No, I don't. We see volume increasing, but that's because POCs are increasing of penetration. I have no evidence that says the tipping point is upon us.

All right. Thanks.

Thank you. Our next question comes from the line of Danielle Antalffy from Leerink Partners. Your question please.

Hi, good afternoon, guys. Thanks for taking the question and congrats on yet another great quarter. I was hoping to touch on the focus on direct to consumer sales and what do you think the business mix could look like a few years from now from a rental versus direct to consumer sales?

That's the first part of the question. I guess the second part of the question would be, what sort of impact that could have on margins because presumably margins are higher on the DTC side of things.

Well, they will be next year. And right now we still have a very solid margin on rentals, but that is clearly a challenge in terms of for us to manage cost in the rental business because it's coming down. We have another reimbursement ahead of us. It is still going to be decent margin, but it is not without presenting a challenge to us to reduce our cost which we are actively doing.

To your first question as to what's that business going to look like two or three years from now in sales versus rentals, it's very, very hard for me to answer that because I would have to start every aspect of that with, it depends. It depends on how many other providers default to POCs. It depends on where reimbursement is going to be at the next round of competitive bidding. It depends on a lot of other things. So it's really hard for me to say that.

The only thing that I'm convinced of is that two or three years from now, penetration of POCs in the overall market will be higher than it is today. But whether that goes from -- right now we are at 7% or gives a range, call it 6% to 8%, whether that is then 10% to 12% or 14% to 18% or 20%. I don't know. I don't know because we are certainly not by ourselves going to drag the market to 20% penetration in the next two to three years.

Yes, just to provide a little bit more flavor for 2016, right now, rentals is the largest individual revenue channel of the business at 28.6% of total revenue year to date. And so given that we expect that business, because of the reimbursement cuts, to decrease next year compared to this year and we expect our largest segment to increase being that direct to consumer sales side, I would expect that to be our largest segment next year and rentals to be our second largest segment.

Okay. Got it. That's helpful. And just as we think about 2016 and some of the moving parts, can you remind us how quickly it takes sales -- direct to consumer sales people to ramp productivity, because I assume the ads that are coming online right now are a pretty significant driver to the 2016 guidance and how meaningful the next gen product is to hitting that guidance. I guess another way to ask that part of the question is, if that were to slip at all, does that change your view on the 2016 guidance that you've laid out today? Thank you so much.

Yes. So what we've seen historically is about four to six months for a sales rep to come up to full productivity. It's fairly consistent across the hiring rounds that we've done in the past, so we don't expect that to change significantly with the rounds that we've recently hired and that we expect to hire in the future. That certainly is a contributing factor to what we expect to be our success drivers in 2016 is the reps we've just added as well as the reps that we expect to continue to add in the rest of 2015 and in 2016.

So if there was a change in that representative curve or in productivity per rep, that certainly would have an impact. We do -- when looking at the new product, particularly the G4 product which is expected in the second quarter of next year, we do expect that to have a positive impact on rep productivity because it will be -- have higher patient preference, but how much that will impact productivity is still unknown.

So that is not something that -- something will see how the productivity develops based on the new product. But we will want to shift as much sales to the G4 as we can because it will be less expensive for us to manufacture that product and hopefully higher patient preference and interest in the product.

Okay. Thanks so much.

Thank you.

(Operator Instructions)

Our next question comes from the line of Mike Matson from Needham & Company. Your question, please.

Hi. Thanks for taking my questions. Just curious, you've talked about the national expansion into the rural areas for bidding, but I was curious on the round 2 rebid, have you heard anything from Medicare yet in terms of number of contracts that you've won and where the reimbursement levels are going to end up for that round?

No, we have not yet heard anything. The latest information that we've heard is that the single payment amounts will be announced in winter of 2016, so we expect now that to come out sometime January, February, the single payment amounts. And then they will start the contracting process.

Which usually takes about three months.

Right. Right. So we do expect to know something in the first quarter, second quarter of next year. But at this point, there hasn't been any information announced on the round 2 rebid.

The round 1 areas are going through the rebid process currently. And those contracts are for January 1 of 2017 through December 31 of 2018. Those bids are due by December 16 of this year, and we do plan on bidding for the contracts for the respiratory contract.

The other announcement that is new on the CMS side was they did announce the specific rural zip codes that would be eligible to receive the 110% of the competitive bid area pricing. Our analysis is that less than 10% of our total patients would qualify for this additional reimbursement given our current mix.

Okay. And then, just given that the round 2 is still an unknown known then for you, what are your assumptions that you used in the guidance? I mean, I guess based on what you've said before that you expect it to be pretty close to the original round 2, but just want to see if that's the case.

Yes, so we still believe that the 2.5% to 3.5% revenue headwind in 2016 is a reasonable estimate due to those cuts to reimbursement rates.

But I guess I was getting at the round 2 rebid, right? Because if the round 2 rebid were to come in 10%, 20%, 30% below the last round 2, that would be an incremental headwind.

Yes, and that's part of the reason why we give a range on this 2.5% to 3.5%. If you did the calculations, the straight math would say, around 2.5% to 3.0%. So we have another half percentage point in there for potential other changes in reimbursement.

Okay. Got it. And then the rental revenue per patient has been declining. I know you've probably addressed this before, but I've got a few questions on it. So I just wanted to have you give your chance to comment on it on the call.

Yes, so in the quarter, we added 800 net rental patients on service. Obviously, when you add those patients in the quarter does have an impact on how much revenue that you can recognize for those patients, but call those patients on average about $300,000 of revenue for the quarter.

So if we would have just had status quo plus adding those patients, we would have been at about $11.9 million, and so we did have higher adjustments of about $400,000. Part of this is an increase in the number of capped patients that we have on service. We saw an increase from 13.7% to about 15% of our patient population was in the capped period.

We also -- churn of those patients has a big impact as well as adjustments for write-offs. So all of those have an impact, but the total impact of those items was about $0.4 million.

Okay. And it's been heading down for some time. I mean, does that -- would you expect that trend to continue or do you expect it to stabilize and level off at some point?

We do expect in 2016 for it to trend down because of the changes in reimbursement.

For different reasons.

Right. Outside of that, no, we don't expect additional declines in that rental revenue per patient from where we are at.

All right. And then just last question, the prices and margins on the DTC sales. Where those up, down, or stable in the quarter?

They were stable on the direct to consumer side. We did not conduct any pricing trials, so the pricing has been consistent all year, frankly. So there's a little bit of mix differences in the prices depending on what configurations people buy, but that's relatively immaterial. So the prices have been very stable.

All right. Thanks a lot.

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you for your participation in today's conference. You may now disconnect. Good day.