March 17, 2016 - 12:58pm EST by
Ray Palmer
2016 2017
Price: 3.35 EPS 0 0
Shares Out. (in M): 23 P/E 0 0
Market Cap (in $M): 80 P/FCF 0 0
Net Debt (in $M): 28 EBIT 18 0
TEV ($): 108 TEV/EBIT 6 0

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Infusystem provides infusion pumps and related products and services. They are a “dominant” provider for the at-home oncology infusion pump market, with 30%+ market share.

The market for oncology infusion has been consolidating over the years, and INFU has been gaining market share both through winning new customers and from their customers growing through continued consolidation. It’s reasonable to think INFU will continue to gain share going forward; there are a few reasons for this belief, but the biggest reason is the business does have advantages to scale: increased size allows for less costly purchase and management of pumps, a deeper inventory of pumps (for better and faster responsiveness to pump needs by customers), contracts with more third party payors (reducing out of pocket costs for patients and allowing for faster collections of accounts payable), and improved IT systems.

It’s worth spending an extra second on the IT systems. Until a few years ago, INFU’s business was basically all done through faxing and paper based systems. INFU hired their first CIO in 2013 and has spent significantly on investing in IT (~$9m over the past two years). This is a large investment, but it should be a point of differentiation going forward.  It embeds INFU deeper into their customer’s systems and should make them more convenient to use than any of their smaller competitors who are still using paper systems. It should also increase renewal rates (INFU had >98% customer retention in 2015) and decrease costs. On their Q3 call, INFU mentioned that their investments in EMR had already brought in $1m in incremental run rate revenue, with plans to bring in another $2m in the near future. With ~70% gross margins, if the company can get to $3m in annual revenue from their EMR investment, the investments will have been a home run even with no further incremental growth.

In addition to growth in their core oncology infusion business, INFU has a few other interesting growth initiatives. The company is trying to expand into other types of infusion to increase their addressable market; in particular, the company has looked to expand into the at-home pain management market. INFU has also been increasing their direct sales of disposable infusion products (IV sets, valves, etc.), and they have even suggested that their technology for integrating with electronic medical records and hospitals could have value as a standalone business licensing to other healthcare companies.

The company should also be able to acquire accretively going forward, as they can buy smaller companies and effectively retain just their customer list, assets, and maybe some sales people. All other costs / overhead can be cut as INFU plugs the acquisition into their distribution systems. The Ciscura acquisition makes for a good example of this: INFU acquired Ciscura in April 2015. On their Q2’15 earnings call, they suggested the acquisition was done at ~3.5x EBITDA after synergies. INFU bought Ciscura and cut all costs except for a few sales people and Ciscura’s Southeast Service Center, which they kept to help leverage growth in the Southeast. Future acquisitions should be similarly accretive; in addition, organic growth through purchasing pumps has shown solid ROIs.

INFU is guiding to high-single digit revenue growth in 2016. It’s tough to estimate a fully organic number, as 2016 will include ~$2m of headwinds from a Medicare / CMS price cut which will be offset by a full year of Ciscura, continued growth in their pump fleet, and some increases in their commercial insurance contracts. Looking longer term, I think the business can continue to grow mid-single digits organically through a combination of slight increases in rates and continued pump purchases at solid ROIs.

For a company that should be able to continue to grow at attractive rates and margins, INFU does not trade very expensively. At today’s price of ~$3.40, fully diluted market cap is roughly $85m and the company’s EV is ~$107m. LTM EBITDA is $17.8m (note: the company’s number is $18.8m, but I take out $1m of stock comp), and free cash flow generation should be very solid ($17.8m in EBITDA less $1-2m in maintaince capex (source: Q4’14 earnings call), $1m in interest expense, $3m in capitalized IT costs, and limited taxes given $15.5m in net operating losses gets me to ~$11m in FCF to equity ($0.45/share)). On those numbers, the company is trading at ~6x EV / EBITDA and 7.6x cash flow to equity, and the numbers get cheaper if you believe in the company’s guidance for high single digit revenue growth with constant margins. On the downside, INFU’s cost basis in their pumps is $56m and they say the replacement value of the pumps is $90m (see p. 29), so the market doesn’t appear to be valuing the ongoing business as worth much more than the pumps.

While the company has been pretty sleepy over the past few years, there’s reason to think there are some upcoming catalysts. The most obvious is this 8-k from January amending the CEO’s employment agreement to add a relatively generous payout in case of a Change of Control (CoC). The CEO had been working without a CoC agreement since he joined the company in April 2013, so it’s curious that they would add one now. I talked to management about it and they indicated that the addition didn’t indicate anything pending; in fact, the CEO said the board had been promising him one for a while and he seemed upset that he had been working without one while the rest of his management team had one. Still, the addition of a CoC certainly could incentivize a sale. The company would be a very obvious buyout candidate for a private equity firm given their strong cash flows and roll up opportunity; it’s worth noting the number two player in the industry (Outpatient Infusion Systems / OIS) is owned by MSD, who is owned by New Mountain, and a merger between the two would make a ton of sense.

Short of a sale, I think investors could expect some form of capital return in the near term. Net leverage is ~1.5x EBITDA, and the company’s credit agreement currently allows for restricted payments up to 2.5x leverage. If they went all the way to 2.5x, they could buyback ~20% of their shares outstanding. The interest rate on their term loans are <3%, so increasing leverage a bit to buy back a significant amount of shares at a 10%+ FCF yield would likely create significant value for shareholders. Given the consistency of their cash flows, they could also look into a dividend program, though I’d prefer acquisitions and share buybacks at today’s stock price.

While I think management has done a terrific job running the company and growing intrinsic value over the past few years, it’s also worth noting that the company would be ripe for activism. Insiders own ~10% of the company, which is enough to give them skin in the game but not so much to prevent an activist from thwarting any non-shareholder friendly moves. The current management team was installed after the prior management team lost an activist fight and was replaced by the core of the current board, so the board should be keenly aware of their duty to build shareholder value and what would happen if they failed to do so.

There are, of course, risks here, though investors at today’s prices seem well compensated for them. The most obvious would be some big change to 3rd party reimbursement for infusion equipment. In particular, Medicare makes up ~30% of sales, so any change to Medicare reimbursement could have an impact. As mentioned above, the company has already seen some changes to Medicare reimbursement in the past and has guided to an annual headwind of $3m going forward ($1-2m revenue headwind in 2016) from recent CMS changes; however, they also should have clarity on Medicare guidance through 2019. It’s difficult to predict what happens to CMS changes going forward, but with medium term clarity and the cost savings of infusing at home versus in the hospital, it’s difficult to see too dramatic of a headwind from Medicare changes. The other big risk would be dramatic changes to how cancer, particular colorectal cancer, is treated. There does not appear to be anything on the horizon, but medical technology evolves quickly and a rapid shift could seriously harm INFU’s business.  

All in, INFU is a very interesting play at today’s prices. The company is quite cheap and growing, and investors would likely do well just from continued growth in intrinsic value from today’s prices. However, there are also a few interesting catalysts and options in the company, and if any of them play out it would result in serious upside.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



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