Infusystems was written up in 2016 by Ray Palmer. Much has changed since then, and I believe the company is in the midst of a fundamental business transformation that will support years of double digit top line and operating earnings growth.
Background and History
Infusystem has historically leased, serviced and collected insurance payments for pumps used to administer chemotherapy drugs and to a lessor extent pain medications. When the company was last discussed here it faced competition from a subscale a private equity backed servicer, and growing competition from disposable infusion pumps. In 2017 the private equity competitor was sold to McKesson, who subsequently exited the sub-scale infusion pump leasing business (ie the business that competed with Infusystem). Subsequent to that, the most price competitive of the disposable infusion pumps was forced by the FDA to exit the market due to quality issues. That left Infusystem as the dominant provider of out of office infusion pumps, with roughly 65% market share. Most of the remaining market is serviced by home health providers, for whom out of home infusion is a courtesty, break even business, due to different billing codes. As such, they are not actively competing to maintain market share, and Infusystem will likely take a few points of market share per year, as they have for many years. This supports low single digit organic growth.
Around the time of last discussion INFU was also navigating a change in CMS reimbursement which eliminated Medicare payments to doctors for pumps. That raised some concern that commercial insurers might follow suit. However, that has not happened, and in fact the company broadened its commercial insurance relationships to now cover 96% of the country, and reimbursement rates have held steady or in some cases gone slightly higher. The company did have to change its operating model slightly post CMS changes, so that providers now pay directly for pumps used by Medicare patients. That change now appears to be widely accepted by the company’s customers.
Infusystem is now expanding into new markets, with a long runway for growth. The company has begun leasing, servicing, and billing for devices that use vacuum suction to treat wounds – essentially leveraging the core competencies of its legacy business. Cardinal Health will supply the devices. The wound care market is dominated by a single company, KCI, that was acquired by 3M in 2019. There are indications that 3M has reduced service levels, frustrating some customers and providing a window for Infusystems to more quickly gain share.
Infusystem has always generated a good deal of free cash flow, but for several years the company struggled to reinvest those funds. With its move into wound care the company has identified a large new market in which to invest. Early results suggest a high rate of return on investments in this market, with somewhat better economics than in the legacy pump business due to higher reimbursement rates. The company anticipates adding more products to its lease and service portfolio, supporting further growth.
The move into wound care represents a fundamental business shift - from a business focused on infusion pumps to one focused on leasing, servicing, and collecting reimbursement for high cost out of office medical devices. There is a long runway to apply this model to other medical areas, and Infusystem has already identified several that will launch over the next few years. There’s also an opportunity to expand further in the small, but fast growing market for off-site infusion of pain medication.
Management has conservatively estimated a one-year revenue payback on devices purchased for wound care, with an average life of at least five years. Assuming the company invests roughly $15 million per year with that return profile, it will generate $15 million incremental revenue per year, or 15% top line growth, in addition to the company’s low single digit organic growth.
The company should realize operating leverage on those incremental revenues. Assuming incremental gross margins of 60% (consistent with its existing service business), and incremental SG&A of roughly 10% of sales, the company would achieve incremental EBITDA margins of 50%, well above its current 30% EBITDA margin. $7.5 million of incremental EBITDA on $15 million of sales represents 25% EBITDA growth relative to the estimated EBITDA for 2022 of $30 million. The company sees a runway to continue rolling out this model for many years. In effect, Infusystem is becoming a growth story that still trades at a value multiple.
The company is leveraged at 1x, so has ample capacity to fund growth, both through expansion of leasable pumps and through one-off acquisitions. While its possible M&A will play a role in the company expanding into new product categories, I’d expect most of the growth to be internally funded greenfield opportunities.
At last quote of $22.60, INFU has a market cap of $460 million and enterprise value of $490. Assuming $38 million of EBITDA next year results in EV/EBITDA of 12.9x. Fixed costs are roughly $15, with roughly $10 million in maintenance cap ex, $1 million of interest, and $4 million of taxes. That implies roughly $23 million of free cash flow, putting price to free cash flow for 2022 at 21x. I think that’s a reasonable price given the company’s strong market position and long growth runway.
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Continued re-rating on growth and continued execution. Announcement of new therapeutic category in months ahead.