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Infusystems INFU Value Investors Club

Infusystems INFU Value Investors Club

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Published by Jae Jun
Infusystems INFU Value Investors Club
Infusystems INFU Value Investors Club

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Published by: Jae Jun on Jul 22, 2013
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10/25/2013

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7/22/13 View Printer Friendly Ideawww.valueinvestorsclub.com/value2/Idea/ViewPrinterFriendlyIdea?ideaId=80577 1/4
Idea
INFUSYSTEM HOLDINGS INC ( INFU ) - $1.77
Posted on 09/28/12 09:32 AM by pat110
Description
InfuSystem Holdings Summary
Infusystem rents infusion pumps to primary care givers in the United States and Canada. It has arecurring revenue stream that is growing at a moderate rate. They are the largest outside servicesplayer in the industry, much larger than their nearest competitor and are gaining market share. Thecompany is trading at 4.5x depressed FCF. An activist group has taken control of the company and isfocused on growing the value of the company, cutting unnecessary costs and intelligently investingexcess cash.Management has already identified ways to reduce costs and grow revenues. The former lame duckmanagement 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 sinceactivist shareholders took control. Insiders continue to buy stock. Ryan Morris bought 1,000,000shares (5% of stock) on May 11
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at a price of $2.25 and director Joe Whitters purchased 100,000shares at the same price. The market has significantly discounted the value of the company based onthe previous value destroying management. With new management in place that thinks like ownersand 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 duringOctober of 2007. “InfuSystem Holdings, Inc., through its subsidiaries, provides infusion pumps and related services inthe United States and Canada. The company supplies electronic ambulatory infusion pumps andassociated disposable kits to oncology clinics, infusion clinics, and hospital outpatient chemotherapyclinics 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 providesbiomedical maintenance, repair, and certification servicesfor oncology practices and other alternatesite settings, including home care and home infusion providers, nursing facilities, and pain centers. Inaddition, InfuSystem Holdings, Inc. sells various primaryand secondary tubing, cassettes, catheters,and other disposable items that are utilized with infusionpumps. Further, it provides pumpmanagement services for the pumps and associated disposable supply kits to approximately 1,400oncology clinics. The company delivers local, field-based customer support, as well as operates pumpservice and repair centers. It owns a fleet of approximately 20,000 new and used pole mounted andambulatory pumps. The company is headquartered in Madison Heights, Michigan.” Infusystem has no nationwide competitor. Its competition comes from regional providers that havemore limited sales staff, smaller variety of inventory, usually no 24/7 nursing services and few thirdparty payer contracts that result in higher costs for customers. Other competition comes from in househospital owned DME (durable medical equipment) providers and physicians that own their ownequipment. The market structure is 70% in house, 20% INFU, 4% OIS, and 6% all other regionalplayers combined. Since the early decade they’ve been the leader in this market due to being first to
 
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market. Since companies can’t compete on price due to reimbursement, with the advantages outlinedabove, 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 (longtimeshareholder), Boston Avenue Capital (Chuck Gillman) and Meson Capital (Ryan Morris). On April 26
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,Ryan Morris became chairman and Chuck Gillman joined the board of directors. Three additionaldirectors 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 thedevelopment of a strategic growth plan that leverages InfuSystem's market strengths with emerginggrowth opportunities," Morris states. "Directors David Dreyer and Wayne Yetter have each beeninstrumental 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 neckcancer. The company is looking to expand into treatments of other cancers and ailments. There arecurrently drugs in clinical trial that could obtain regulatory approval in the next few years and beadministered 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, eliminatingthe cash expenditure. In addition, the new CEO’s compensation doesn’t include massive optionspayouts that the former CEO received.A cost saving and sales opportunity exists with the integration and cross selling of products from FirstBiomedical, 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 alsooffer secondary products such as tubing, cassettes, catheters and other disposable items that areutilized with infusion pumps. Eliminating redundant costs and cross selling into 3,000 physician clinicscreates a nice opportunity for the company.In addition, Infusystem’s inventory management system is very antiquated. Inventory management isvery 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 issubstantial 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 largecustomer base of clinics.
Financials:
EV is $73 million (the company has $27.8 million in debt). FCF in 2011 was $9 million and was $4million in first half 2012. In the second quarter, management said costs can be cut by one million ormore, specifically compensation expenses and closing of an office in New York (used by the SPACpromoters). They also stated that further cost cutting initiatives will be implemented in the thirdquarter.
FCF 6 months ended June 30
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: 
Net loss before income tax($2,298)
 
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Depreciation$2,903Amortization$1,495Restructuring Charges$3,200Capital Expenditures($1,733)Loss on cash flow hedge$111Stock based compensation$310
FCF$3,988
 Due to the impairment charge. Tax loss carry forwards will offset taxes and result in zero taxes for atleast the next few years.In 2011, adjusted EBITDA was $14.6 million and first half 2012 adjusted EBITDA was $7 million. Aftercost cuts hit the bottom line and are fully implemented it’s not unreasonable for EBITDA to get to $17million (according to Ryan Morris).Infusystem is now trading at 5x depressed FCF and 5.3x EV/EBITDA. At 7x EV/EBITDA the companywould trade for $3.40. After including the near term cash flow improvements discussed above withEBITDA of $17 million, the same 7X EBITDA multiple would yield at price of $3.90 per share, a gain o120%.In the first 6 months of 2012, revenue growth was 9%. This is a company that has been steady ingrowing revenue in the mid single digit range.Cash was wasted by previous management on excessive compensation and overpriced acquisitions. Ithink Ryan and his team of owner/managers will run the company much differently than in the recentpast 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 unlikelythat an oral drug would be effective enough to treat cancer over the continuous infusion pump. Alsodoctors are slow to change. Switching costs would also prevent a quick change to another treatment.Reliance on Medicare reimbursement.
I do not hold a position of employment, directorship, or consultancy with theissuer.I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalysts:
New board of directors and management will unlock value by reducing unnecessary costs andallocating capital intelligently.Investors are nervous about the new management team (stock price has fallen considerably after

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