InfuSystem Holdings

Summary

Infusystem rents infusion pumps to primary care givers in the United States and Canada. It has a recurring revenue stream that is growing at a moderate rate.  They are the largest outside services player in the industry, much larger than their nearest competitor and are gaining market share.   The company is trading at 4.5x depressed FCF.  An activist group has taken control of the company and is focused on growing the value of the company, cutting unnecessary costs and intelligently investing excess cash. 

Management has already identified ways to reduce costs and grow revenues.  The former lame duck management team was forced out and the new chairman is Ryan Morris along with 4 new members of the board and a new CEO.  The stock has fallen more than 20% from its already depressed price since activist shareholders took control.  Insiders continue to buy stock. Ryan Morris bought 1,000,000 shares (5% of stock) on May 11^th at a price of $2.25 and director Joe Whitters purchased 100,000 shares at the same price.  The market has significantly discounted the value of the company based on the previous value destroying management. With new management in place that thinks like owners and owns a significant amount of stock, the potential for better performance seems possible. 

Business:

The company was formed as a blank check company is 2005 and acquired Infusystem Inc during October of 2007.

“InfuSystem Holdings, Inc., through its subsidiaries, provides infusion pumps and related services in the United States and Canada. The company supplies electronic ambulatory infusion pumps and associated disposable kits to oncology clinics, infusion clinics, and hospital outpatient chemotherapy clinics for the treatment of various cancers, including colorectal cancer. It is also involved in selling, renting, and leasing pole mounted and ambulatory infusion pumps to oncology practices; and provides biomedical maintenance, repair, and certification services for oncology practices and other alternate site settings, including home care and home infusion providers, nursing facilities, and pain centers. In addition, InfuSystem Holdings, Inc. sells various primary and secondary tubing, cassettes, catheters, and other disposable items that are utilized with infusion pumps. Further, it provides pump management services for the pumps and associated disposable supply kits to approximately 1,400 oncology clinics. The company delivers local, field-based customer support, as well as operates pump service and repair centers. It owns a fleet of approximately 20,000 new and used pole mounted and ambulatory pumps. The company is headquartered in Madison Heights, Michigan.”

Infusystem has no nationwide competitor. Its competition comes from regional providers that have more limited sales staff, smaller variety of inventory, usually no 24/7 nursing services and few third party payer contracts that result in higher costs for customers. Other competition comes from in house hospital owned DME (durable medical equipment) providers and physicians that own their own equipment. The market structure is 70% in house, 20% INFU, 4% OIS, and 6% all other regional players combined. Since the early decade they’ve been the leader in this market due to being first to market. Since companies can’t compete on price due to reimbursement, with the advantages outlined above, competition doesn’t appear to pose much of a threat to the company.

Activist Shareholder Group:

A group of activist investors lead the proxy contest including Kleinheinz Capital (longtime shareholder), Boston Avenue Capital (Chuck Gillman) and Meson Capital (Ryan Morris). On April 26^th, Ryan Morris became chairman and Chuck Gillman joined the board of directors. Three additional directors were announced including a new interim CEO Dilip Sigh.

Some of the comments from Ryan Morris in the press release regarding current plans. 

"Our prime mandate is to create value for all shareholders," says new Executive Chairman Morris.  "Further, we believe that our personal economic fates should continue to be entirely tied to performance.  Accordingly, new board members will be compensated solely in stock options.”

"My immediate priorities as Executive Chairman will be to ensure sound operational performance, and the development of a strategic growth plan that leverages InfuSystem's market strengths with emerging growth opportunities," Morris states.  "Directors David Dreyer and Wayne Yetter have each been instrumental to making this a smooth transition.  I am also pleased to report that Dilip Singh, our new

Operations:

Currently, 80% of revenue comes from colorectal cancer treatments and 20% from head and neck cancer. The company is looking to expand into treatments of other cancers and ailments. There are currently drugs in clinical trial that could obtain regulatory approval in the next few years and be administered using continuous infusion protocols which would add additional revenue sources. 

The previous management and board of directors were paid excessively.  In 2011 the board of directors was paid $714,500 in cash and fees. The new board will only be paid in options, eliminating the cash expenditure. In addition, the new CEO’s compensation doesn’t include massive options payouts that the former CEO received.

A cost saving and sales opportunity exists with the integration and cross selling of products from First Biomedical, an prior acquisition that was never integrated with the systems and sales staff of Infusystem.   It has a broader product line then the Infusystem portion of the business. They also offer secondary products such as tubing, cassettes, catheters and other disposable items that are utilized with infusion pumps.  Eliminating redundant costs and cross selling into 3,000 physician clinics creates a nice opportunity for the company. 

In addition, Infusystem’s inventory management system is very antiquated.  Inventory management is very inefficient and could be significantly improved.  Management has stated that this is a priority.  This will lower costs, free up a large amount of inventory (in range of $5 to $10 million) which is substantial for a company with an EV of $70 million. 

Longer term, it’s possible other products could be sold by the sales team into the existing large customer base of clinics. 

Financials:

EV is $73 million (the company has $27.8 million in debt).  FCF in 2011 was $9 million and was $4 million in first half 2012.  In the second quarter, management said costs can be cut by one million or more, specifically compensation expenses and closing of an office in New York (used by the SPAC promoters).   They also stated that further cost cutting initiatives will be implemented in the third quarter.

FCF 6 months ended June 30^th:

Due to the impairment charge. Tax loss carry forwards will offset taxes and result in zero taxes for at least the next few years. 

In 2011, adjusted EBITDA was $14.6 million and first half 2012 adjusted EBITDA was $7 million. After cost cuts hit the bottom line and are fully implemented it’s not unreasonable for EBITDA to get to $17 million (according to Ryan Morris). 

Infusystem is now trading at 5x depressed FCF and 5.3x EV/EBITDA.  At 7x EV/EBITDA the company would trade for $3.40.  After including the near term cash flow improvements discussed above with EBITDA of $17 million, the same 7X EBITDA multiple would yield at price of $3.90 per share, a gain of 120%. 

In the first 6 months of 2012, revenue growth was 9%.   This is a company that has been steady in growing revenue in the mid single digit range. 

Cash was wasted by previous management on excessive compensation and overpriced acquisitions.  I think Ryan and his team of owner/managers will run the company much differently than in the recent past under the SPAC investment banker managers.   Once the company has a clean quarter or two of numbers and investor awareness builds, the shares may get re-rated higher. 

Risks:

Adoption of a new delivery method that displaces continuous infusion therapy is a risk. It’s unlikely that an oral drug would be effective enough to treat cancer over the continuous infusion pump. Also doctors are slow to change. Switching costs would also prevent a quick change to another treatment.

Reliance on Medicare reimbursement.

Catalysts:

New board of directors and management will unlock value by reducing unnecessary costs and allocating capital intelligently.

Investors are nervous about the new management team (stock price has fallen considerably after they took over). Once management communicates more with investors and produces good results, the stock should return to fair value.