Description

Infusystem Holdings (INFU) was last written up on the VIC by xds68 in April 2021.

Setup:

While the business transformation that xds68 mentioned has been slower to materialize in the numbers than expected for various reasons, I believe the potential remains and has actually been enhanced and that the Company is at the midst of an inflection point in topline growth and profitability.

Historically speaking, INFU is primarily known as a slow growing traditional DME supplier with an always changing management team and tumultuous boardroom. For years this was another small cap, orphaned $2 stock that no one paid any attention to.

My how things have changed. The business has undergone a significant transformation over the last 5 years or so and is at an inflection point. Peeling back the onion, Patient Services’ differentiated turnkey solution is a competitive advantage and will likely result in significant share gains and growth across 2 new indications over the next several years. Additionally, the Company has another significant growth opportunity in Biomedical Services. These 3 opportunities should drive the next wave of significant growth, profitability and shareholder returns for the Company.

Sentiment towards the stock is quite negative as the Company has missed guidance the last 2 years and shares are now trading at a 5 turn discount to peers even though INFU has a stronger growth and margin future profile. I think management is being very conservative with this year’s guidance and that the numbers will likely come in better than expected. I believe INFU is worth revisiting and offers an attractive risk reward profile with 100% upside over the next 12-24 months.

Profile:

INFU is a healthcare company that provides products and services to facilitate outpatient care. INFU is capitalizing on the trend of treating more patients in the home setting. This trend has been going on for several decades but is not nearly as ubiquitous across the US as it could, should or is expected to be. Why is this the case? The #1 reason is the nightmare that is the last mile of care which involves getting the equipment needed to treat the patient into the home, teaching the patient how to use the equipment, providing customer service, handling reimbursement, etc. Providers are simply not suited to handle these issues.

INFU solves this critical pain point by offering a turnkey service / solution that essentially allows providers to offload all aspects of at-home care once the patient has been diagnosed and a treatment gameplan has been established. This is INFU’s key value proposition and competitive advantage. They also have extensive and long-lasting relationships with payors which creates a high barrier to entry and helps them take market share from existing incumbent providers. INFU’s turnkey solution has enabled them to build a $60MM+ Oncology business or ~60% market share in less than 5 years. The success in Oncology is a proof point and informs their strategy to target much larger and even more attractive markets in Pain and Wound Care.

Additionally, INFU is pursuing another opportunity in their legacy business that could be even larger than the Oncology business in several years time. INFU recently partnered with GE Healthcare to perform maintenance services in the acute care setting for GE’s 300K infusion pumps across 800 hospital systems in the US and Canada. The roll out is going exceedingly well and they are ahead of their expectations of reaching a $12MM annual revenue run rate by the end of the year. There are many more opportunities with GE, hospitals, and other manufacturers for INFU to perform similar services.

The opportunities in Pain Management, Wound Care, and Biomedical Services each have the potential to step change the growth and profitability profile and lead to a doubling of revenue over the next 5 years or so. Each of these opportunities is starting to ramp up and offer significant upside to expectations. Further, INFU has a strong management team that have prudently allocated capital to these significant growth opportunities and has delivered strong returns for shareholders - since the current CEO took over the CEO reigns in November 2017, shares have compounded at a 34% annual rate.

At 11x forward EBITDA, I believe the shares are trading at an attractive valuation especially considering the future trajectory of the business. Assuming a multiple in line with peers, I see 2x upside in the shares over the next 12-24 months.

Business Summary:

INFU has 2 operating segments: Patient Services (63% of revenue) and Device Solutions (37% of revenue).

Patient Services

INFU’s mission in Patient Services is enabling healthcare patients to go home and get out of the hospital and continue their treatment in their home where they are happier, safer / lower risk, less cost to the healthcare system and experience better treatment outcomes. There is a strong secular trend of treating more patients at home rather than in the hospital or clinic.

While the benefits to at-home care are clear and adoption has been steadily increasing, significantly more treatments can and should be done at the patient’s home. The primary reason at-home care is not more prevalent today is due to the added complexities that come with durable medical equipment (DME) in the at-home setting. Traditionally, at-home care was done in a piecemeal fashion whereby the provider would rent or purchase the DME from a regional DME supplier who would then transfer the DME from the manufacturer to the provider. The provider then had to get the DME to the patient, service and manage the DME, educate the patient, provide customer service/support, handle billing and reimbursement, keep track of patient progress, etc.

Providers are ill equipped to deal with all these challenges. This challenge is commonly referred to as the last mile of care conundrum. As a result, at-home care is a logistical nightmare and is not as widely implemented and utilized in the US as it can and should be.

INFU’s Patient Services business attempts to solve the aforementioned last mile of care conundrum by providing a turnkey service to patients and providers. ITS manages and services DME in the home, provides customer service, handles patient logistics, and takes care of all billing and patient tracking. Essentially, Patient Services enables providers to turn over all aspects of at-home care to INFU. So, when a provider shifts treatment to the home, Patient Services takes over the entire continuum of care going forward. The core concept is that Patient Services is a comprehensive package service sold to providers to offload the use of DME in the home to INFU. Patient Services is the link between the patient, equipment manufacturer, payor and provider.

The core concept behind Patient Services is a comprehensive service package sold to the physician’s practice offloading use of medical device at-home related activities to INFU. The Patient Services platform at its core is really a service wrapped around a device. The device can be an infusion pump, it can be a negative pressure vacuum, it can be a ventilator, a compression device, etc. The platform is device agnostic. The service includes DME order logistics, 24x7 nursing support, billing and biomedical services. INFU’s clinical support team truly sets the gold standard from a support standpoint and the Patient Services platform allows the Company to leverage its third-party payer contracts. INFU’s revenue cycle management team is second to none at working with payors to maximize reimbursement.

Most of INFU’s competitors, whether they be DME companies or manufacturers, can get a device from their dock to the loading dock of their customer, which is usually the clinic or the hospital. INFU does that too. But INFU’s Patient Services platform differentiator thrives in the “last mile” when you go from the clinic or hospital to the patient's home. INFU triages problems over the phone. When the treatment is complete, INFU gets the device back, cleans it, maintains it, and eventually redeploys it, which restarts the cycle. They bill the appropriate insurance company on the patient’s behalf. When you wrap all that around a device, that is really the secret sauce for INFU and what makes the Patient Services platform unique.

An important aspect, and I believe competitive advantage, which cannot be understated is INFU’s payor relationships. Today they have relationships with over 800 health insurance plans that cover 96% of the US population. Further they serve 18 of the top 20 hospitals nationwide and have relationships with 2,450+ sites of care. Patient Services is a third-party payor model where INFU gets reimbursed by the patients’ medical insurance provider. So, you can see the importance of their vast payor relationships.

INFU has the most extensive payor relationships in the industry. And it is not easy to establish these relationships. It takes time and resources to do so. Larger companies cannot buy their way in, and smaller companies simply do not have the wherewithal or resources to break in. This dynamic creates a high barrier to entry and establishes a strong moat around the business.

INFU’s Patient Services business was started in 2017 when the Company hired current CEO Rich DiIorio to run the business. He was previously a VP of Sales for INFU in the oncology pumps business. He identified the last mile of care issue and orchestrated INFU’s idea and strategy for the Patient Services’ service / solution. The first area they focused on was Oncology which has grown into a $60MM+ business in less than 5 years. More recently, Patient Services has expanded into 2 additional indications: Pain Management and Wound Care.

Oncology

This is Patient Services’ legacy business and accounts for ~80-90% of Patient Services’ revenues. Essentially, Patient Services is responsible for servicing patients who complete their constant infusion chemotherapy at home. Roughly 60% of INFU’s oncology revenue comes from colorectal cancer, with the remaining portion derived from head & neck, pancreatic and esophageal cancers.

In Oncology, Patient Services is responsible for servicing patients who complete their constant infusion chemotherapy at home. Over time, more and more chemotherapy is being done in the home. Home treatment for chemotherapy is relatively straightforward and mostly provided universally under the right conditions. If the chemo prescribed requires a continuous infusion over several hours or days, infusion is eligible in the patient’s home. In this case, patients are issued a pump (provided by INFU) and told to arrive at the clinic to begin infusion. Once the patient arrives, the drug is dosed, and infusion begins on the pump. The patient is then able to return home to proceed with activities as the drug is dosed. If there are any complications or device malfunctions, INFU is the primary point of contact for the patient. Once the drug dosage is complete, the patient disconnects the pump from the central line catheter and repeats the process throughout the chemo cycles.

Management estimates the current market size is about $100MM and growing low single digits annually. INFU has very little competition in Oncology and retains the dominant market share. They have picked up significant market share in the last couple of years after their primary competitor, McKesson, withdrew from the market. I see INFU as highly entrenched in Oncology and think this business will grow mid-single digits due to: (1) Incremental market share gains and overall market growth; (2) More patients opting for at home chemotherapy; (3) New therapeutics designed for the home – 100+ active clinical trials; and (4) Existing chemo regimens becoming pump eligible.

Oncology is a great business for INFU. Not only does this business fund future endeavors, but it shows clear demand by everyone (physicians, payers, patients, manufacturers) for a turnkey at-home solution. Perhaps most importantly, Oncology has served as a proof of concept and beachhead for Patient Services to get into adjacent and much larger indications. Although cancer is well tapped today, it is a proof of concept showing the turnkey third-party model works and there is a need for a third party to navigate the last mile of care for a clinic. The infrastructure to run the oncology business is the platform on which all newer Patient Services’ indications are being built.

Pain Management

In 2018, INFU got into Pain Management which now represents about 10% of Patient Services’ revenues. Here they offer pumps that infuse local anesthetic continuous nerve blocks following surgery or for other debilitating pain situations. A continuous peripheral nerve block (CPNB) typically uses an anesthetic infused directly into a nerve or bundle of nerves to block pain. CPNB usually lasts two to three days after surgery and can result in reduced need for postoperative opioid pain medication. This limits the potential for a patient to become addicted to opioid’s.

Pain Management is a roughly $150MM market that is growing high single digits. INFU management believes this can be a $30MM+ business in the next 3-5 years. Avanos Medical (AVNS) is the primary competitor in this market with about $100MM in revenue although this business has declined in recent years. Seems like AVNS is focused on other products and as a result has seen sales reps leave INFU believes they can gain market share here for 2 primary reasons: (1) AVNS is more of a DME manufacturer rather than a service provider; (2) and AVNS’ device is not reimbursable.

INFU’s Pain business has been somewhat slow to ramp. The business slowed during COVID and subsequent waves of the virus as patients delayed procedures to avoid the hospital setting. They have also experienced some supply chain issues – for example for some time they could not source a piece of tubing needed for the pumps. I believe these headwinds are in the rear-view mirror and that we should see strong growth going forward.

On the Q4 2022 call, the CEO mentioned that they were de-emphasizing the Pain business and focusing on other areas. In speaking afterwards with him, I believe that he mischaracterized their view and outlook on the Pain business. They have already made the necessary investments in the Pain business and are merely reallocating capital to Wound Care and Biomedical Services. They remain very confident in the growth trajectory for Pain. Although off a low base, the Pain business has grown 26%, 37%, 45% and 28% yoy in the last 4 quarters.

Wound Care

At a high level, Wound Care is a particularly attractive opportunity for INFU. In addition to having a large addressable market of $600MM+, wound care epitomizes the need in healthcare for solutions that can help facilitate an effective transition from the hospital or clinic to the patient's home. Wounds can take significant time to heal, and hospitals, due to high cost and focus on stabilizing patients before moving them to the next care setting, are not the ideal place for patients and clinicians to advance wound healing over a long period of time.

INFU originally entered the Wound Care market in February 2020 when they announced an agreement with Cardinal Health to supply their wound care devices. Sometime in 2022 Cardinal decided to exit this market so INFU changed its strategy. In November 2022, INFU announced a new relationship with Sanara MedTech (SMTI).

Sanara has two products that have very strong efficacy, according to primary diligence. Sanara has BIAKŌS which is an antimicrobial gel and HYCOL, which is a collagen treatment. There is nothing in the market that competes with those 2 products from an efficacy standpoint. Between the Cork and Genadyne devices (INFU’s wound care device suppliers) and the BIAKŌS and HYCOL products from Sanara, I believe INFU has a very strong product and service to take to market to actually heal wounds.

While the INFU and Sanara partnership is still in the early stages, they have made significant progress towards getting ready to launch. They currently expect to be ready to go to market this year with material revenue contribution starting next year in 2024. Over time 5-7 years, management believes the Wound Care business can easily surpass the legacy Oncology business (~$60MM) as there is a significant need in the market to heal rather than just treat wounds.

Further, the largest competitor in the market today, KCI a subsidiary of 3M, has experienced challenges as 3M has cut significant S&M personnel and moved customer service to Mexico to save $300MM of costs. This may be a good move for 3M, but it is likely to hurt their KCI business as Wound Care is a high touch service business and 3M is a “catalog” not a service company.

Device Solutions

The Device Solutions segment’s core service is to (i) sell or rent new and used ambulatory infusion pumps, (ii) sell treatment-related consumables, and (iii) provide biomedical recertification, maintenance, and repair services for provider facilities. INFU purchases new and used pole-mounted and ambulatory infusion pumps from a variety of manufacturers on a non-exclusive basis. INFU repairs, refurbishes, and provides biomedical certification for the devices as needed. The pumps are then available for sale, rental or to be used within INFU’s Patient Services business. Device Solutions has 100+ different infusion pumps, etc. that they provide to 2,200+ customers for a total fleet of ~50K pumps. Just like other DME suppliers, they hold their pumps in inventory and then lease them out to hospitals and clinics across the US. Device Solutions is a high-turn, lower margin business. Device Solutions has a direct payor model where INFU gets paid by the providers directly.

Until early 2022, for years Device Solutions has just been puddling along while they have focused most of their efforts on the exciting opportunity in Patient Services. The Device Solutions platform was historically somewhat capital intensive as former leaders focused on buying equipment to sell or rent. Now the focus is much more on servicing equipment for customers which is a higher margin business with minimal needs for capital investment. With the acquisitions of Filamed in February 2021 and OB Health in April 2021, Device Solutions is shifting its focus to Biomedical Services.

Biomedical Services

Biomedical services are the repair and servicing of medical equipment within the hospital environment. This opportunity exists because the biggest players in biomedical repair, GE Healthcare and Agility, are primarily focused on larger Imaging systems and not smaller mobile devices. INFU has cited most hospitals have between 200-300 pumps waiting to be serviced and many smaller, non-pump mobile devices. This is a direct result from restricted access to technicians during COVID and budget constraints prohibiting fleet upgrades. And while INFU had no capacity to handle this demand before, Filamed and OB Health together unlocked the opportunity.

The acute care setting is where all the devices are. A hospital could have 5 to 10K devices that need to be serviced. The hospital is not going to want to ship back 1,000 pumps for preventative maintenance. They would rather do it in the basement. Hospitals are financially strained. They are not going to necessarily go out and replace all pumps and spend capital. They want to repair and maintain what they have. Hospitals in house teams are more focused on servicing higher revenue generating machines (CT scanner, etc.).

In April 2022, INFU signed a breakthrough master services agreement with GE Healthcare to provide its Biomedical Services, which include annual preventative maintenance and repair solutions, to a majority of the fleet of infusion pumps at hospitals and other medical facilities under contract with GE Healthcare. Service is conducted on-site at the acute care facility or off-site at one of INFU’s 7 service centers. GE’s infusion pump fleet consists of more than 300K pumps located in 1.2K medical facilities, including 800 hospital systems in the US and Canada. After the ramp-up period, this agreement is expected to generate more than $12MM of annual revenue for INFU.

INFU and GE are currently in the ramp up phase and are progressing ahead of plan. INFU expects to be at a $12MM annual revenue run rate by the end of the year. The partnership has gotten off to a very strong start. GE has been extremely impressed and pleased with INFU’s level of service. As a result, I believe there will be significant additional work for INFU to do with GE (ie EKGs, defibrillators, ventilators, etc).

Management believes Biomedical Services will be the first business to surpass the size of the legacy Oncology business (~$60MM). This will not come from just GE. While there is significantly more opportunity with GE, there are many hospitals and manufacturers that need INFU’s Biomedical Services and GE will be a strong reference account for INFU. Once, INFU has completed the GE rollout, they will have the infrastructure and systems in place to onboard many more customers across the US and Canada.

Valuation

Based on the current stock price, INFU has a current equity valuation of $218MM and enterprise value of $253MM. On a TTM basis the stock is trading for 12.2x EBITDA and 2.2x sales. On the Q1 release, the Company reaffirmed full year guidance for sales growth of 8-10% or $118-121MM and EBITDA to be greater than $22MM or 19%. At the midpoint, this implies a valuation of 11.2x EBITDA and 2.1x sales. Comparable home health services business trade for an average forward EBITDA multiple of ~16.0x. Agility, closest Biomedical Services peer, trades for 11.4x forward EBITDA. From an M&A standpoint, the best comp for the Patient Services business is 3M’s acquisition of Acelity (KCI). 3M paid $6.7BN which implied a sales multiple of 4.5x and an EBITDA multiple of ~15-17x. At the time, Acelity was growing about 5% with ~30% EBITDA margins. It is worth highlighting that in 2018 when INFU was still largely a commodity DME business, activist shareholder Meson Capital and Argonne Capital offered to buy INFU for $3.75 / share or ~8x EBITDA.

I believe 2023 numbers will come in better than Company guidance. Management has missed guidance all to often over the last several years for various reasons including: slower ramp in Pain due to COVID and supply shortages; slower ramp in Wound Care due to Cardinal pulling device; and slower ramp in GE contract due to some early onboarding challenges. I believe management has learned this lesson and will get back to a beat and raise paradigm going forward. Therefore, I believe they will beat 2023 full year guidance due to: (1) stronger growth in Pain (we heard from UNH several weeks ago that elective procedure volume is significantly higher); (2) Wound Care revenue from several large leases and some contribution form the Sanara partnership (neither of which is baked into the guide); and (3) faster ramp to $12MM revenue on the GE contract.

Going forward, driven by the 3 attractive growth opportunities (Pain, Wound Care and Biomedical Services), I believe INFU is going to grow topline 15-20% leading to a doubling of total revenue in roughly 5 years. I also see EBITDA margins expanding to at least 25% as some of the investments and costs associated with the growth opportunities are leveraged and absorbed.

I model 2023 sales and EBITDA of $123MM and $24.6MM (20.0% margin) and 2024 sales and EBITDA of $142MM and $29.7MM (21.0% margin). INFU has a stronger growth and margin profile so I see no reason why it should not trade in line with its peers. Applying a 16x EBITDA multiple to my 2024 estimate lends a $21 stock price or 102% upside from the current share price.

FWIW according to FactSet, analyst consensus calls for $120MM sales and $21.5MM EBITDA (17.9% margin) in 2023 and 2024 sales of $129MM (8.1% growth) and EBITDA of $23.8MM (18.4% margin).

Management

I believe Rich has put together a strong team. Our diligence and industry checks have been very positive on management. Despite missing guidance in 2022, I think they are reasonable and grounded people and have found them to be very capable and rationale allocators of capital. Both Rich and Carrie have a sales background, which is very important given the growth strategy. My biggest concern is that they have too many lines in the water. However, we have discussed this, and I believe they will be strategic and thoughtful in terms of how they allocate their time and resources. Not that past performance is indicative of the future, but since Rich became CEO in November 2017 the stock has compounded at a 34% CAGR despite being down roughly -55% from the all-time high in April 2021.

Catalyst

Improved financial results from growth in Pain Management, Wound Care and Biomedical Services