Description
RMS Medical is a medical device company based in Chester, NY.
At the current price of $1.70 per share, the stock represents a very attractive entry price for investors to participate in what could be a very rapid rate of sales growth and earnings.
fully diluted shares out: 42.7m
price: $1.70
market cap:
debt: $0
cash: $4m
EV: $68.5m
Sales: $20m run rate
EBITDA run rate: $3.6m
EV / Sales: 3.4x
There are several reasons that RMS is interesting today:
- Founder overhang of shares addressed earlier this year when new and existing investors participated in a private placement to take the founder out.
- Board reconsituted with serious healthcare and sales professionals, and led by Horton Fund activist Joe Manko - also the company's largest shareholder.
- New CEO -- Don Pettigrew promoted to CEO - Don was the the creator of the company's new strategic plan with the goal of becoming the leading subcutaneous drug delivery partner for targeted markets on a global level.
- Company is debt free, EBITDA positive and has $4m in cash.
- Global market for subcutaneous infusion to benefit from lower cost of delivery, convenience, and better economics to drug makers.
Background
RMS designs, manufactures and markets innovative, proprietary portable medical devices and supplies, primarily for the ambulatory infusion market and emergency medical applications. REPR’s main products include the RMS FREEDOM Integrated Infusion System which consists of a syringe driver (currently either the FREEDOM60 or the FreedomEdge), RMS Precision Flow Rate Tubing and HIGH-Flo Subcutaneous Safety Needle Sets. The Company also markets the RES-Q-VAC Portable Medical Suction System (RES-Q-VAC).
The FREEDOM infusion system consists of a $350 pump that lasts for 5-7 years and disposables (used weekly by patients) that cost around $15 per week.
The product is sold via specialty pharmacies.
Who Uses this Product?
The product is used to treat PIDD, Primary Immunodeficiency Disease and CIDP, a neurological disorder.
PIDD is a group of more than 300 chronic disorders in which part of the body’s immune system fails to function properly. Patients with PIDD commonly have an increased likelihood of becoming ill or getting infections, sometimes severe.
How is PIDD treated?
PIDD is treated via administering Immunoglobulin replacement therapy. Immunoglobulin is the fraction of blood plasma which contains immunoglobulins or antibodies.eplacement therapy is generally administered either intravenously (IVIg), or subcutaneously (SCIg). According to the Immune Deficiency Foundation, infusions are typically given once every three to four weeks. SCIg infusions may be given daily, weekly or as infrequently as every three to four weeks.
Market Size / Customers
Make no mistake, this is a very niche product / condition. However, there are reasons to believe that the market for RMS could grow substantially. We will address that later.
Today, 270,000 patients suffer from PIDD
70,000 of these patients receive therapy via infusion.
20,000 of these patients use the RMS FREEDOM system.
The PIDD market is $185m - $260m in total.
The CIDP market is $25m-$36m (with a 25,000 patient population)
Why is Subcutaneous infusion better than Intravenous Infusion?
Subcutaneous infusion (administered by patients in their own home):
- provides patients greater flexibility and convenience.
- improves quality of life
- results in substantial cost savings
- has high levels of efficacy
- results in far fewer side effects than intravenous infusion
- less nursing time / fewer adverse events
- more attractive to patients with poor venous access
The FREEDOM SYSTEM
RMS's FREEDOM system is a mechanical pump. It is FDA approved for both subcutaneous and intravenous infusions, and is on label for numerous differnet drugs including the two main drugs in the space, Hizentra and Cuvitru. It is also approved for a wide range of antibiotics. Note that Hizentra (a CSL Behring product) is the first and only Subcutaneous product for treatement of CIDP.
FREEDOM has 16 patents, a proven history and safety profile, and is broadly indicated as an infusion system, specifically indicated for subcutaneous infusion and IV and certain antibiotics.
There is a well established reimbursement profile for both the devices and consumables.
FREEDOM is maintenace free, requires no batteries or electricity, has a highly accurate dispension mechanism at any fill volume and results in minimal drug waste. Easy to use and easy to train, patient satisfaction is high.
All of RMS's tubing sets are proprietary and the unit won't function with knockoffs.
Drug companies are highly motivated to prescibe home infusion immunoglobullin products.
RMS estimates that drug companies earn $3,000-$4,000 per month when a patient is home infusing with FREEDOM versus appearing at a clinic (less frequently) for IV infusion.
Growth Drivers
Each new patient to RMS generates around $750 per year in recurring revenue.
There are several reasons to be excited by the growth profile here:
- Newly diagnosed PIDD patients are expected to be prescribed subcutaneous therapy given the multitude of reasons above -- this will bring in many of the 270,000 cases.
- Of the 70k patients currently receiving therapy, many are transitioning to at home care.
- Indications for FREEDOM are expanding and the new mgmt team is, for the first time ever, working closely with drug companies to get the system integrated into their delivery plans.
- RMS estimates that there are 1m patients out there that pharma companies are actively working on subcutaneous administration drugs for large molecules and biosimilars using the FREEDOM system. This dramatically expands the market opportunity.
The Opportunity
We think that the reconsituted Board and Management at RMS, led by some very well resected healthcare veterans and investors, sees an enormous opportunity to take what was a sleepy (yet profitable) niche device company to the next level.
For all of 2018, RMS did $17.5m in sales.
In the first quarter of this year, they did $5m -- this came in the midst of a management and stockholder transition.
The organic growth here is quite interesting just given the forces at work in the industry.
As opposed to trying to figure out what earnings or EBITDA will be this year, we prefer to look at the bigger picture.
Below is an illustration of revenue and ebitda assumptions at various levels of patients managed.
With almost no real capital or R&D needs, we think that the company can focus its efforts on dramatically increasing the number of patients that use FREEDOM.
A 60% gross margin healthcare company with recurring revenue in a niche space that is too small for large players to care about but where there is significant barrier to entry could easily be worth 5x sales.
In the meantime, you have a very profitable company with a clean balance sheet, zero solvency risk, no real need for capital, that is supervised by a very strong Board. The Company recently appointed two new Board members that would not waste their time with a company of this size unless they thought that the market size here was set to grow substantially.
The company's largest competitor is a private co called eMed. We think that a long running patent dispute is bleeding out eMed and that RMS could ultimiately buy the company. We don't know what sales are for eMed given that it is private.
I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Continued migration from IV to home infustion for these chronic conditions given substantial benefits.
Vastly expanding the TAM for the FREEDOM market based on patient size.
Company expands use of FREEDOM to more and more drug platforms that are being developed for subcutaneous infusion.