Summary

• REPR’s flagship product has a firm grip on the growing infusion homecare market and REPR’s stock is trading at a significant discount to what it’s worth.
• The product is held in high regard by those in the industry, who confirm that there is also some initial activity in using the product outside of its primary indication.
• CareFusion (CFN), a maker of more complex infusion pumps, announced a massive $12 billion buyout over the weekend for 23.8x ttm earnings and 3x sales.
• CareFusion’s buyout proves that Repro-Med is ripe to be acquired, and that there is substantial growth opportunity in the home infusion sub-sect of the healthcare industry.
• We believe REPR has a chance to more than double in the short-term due to multiple expansion, and then provide potential lucrative long-term returns as the company continues to grow.

Repro-Med Systems (REPR) – Slated for Immediate Upside

The majority of Repro-Med Systems, Inc.’s (REPR) revenues and growth comes from its FDA regulated “FREEDOM60” mechanical infusion pump system, as well as related needle sets used to deliver medication to primary immune deficiency patients. We believe Repro-Med is currently slated for immediate upside of as much as 135%, with additional upside to follow as the company’s growth continues.

REPR is primarily targeted to the outpatient/homecare market. Primary immune deficiency diseases (“PID”), an umbrella term referring to more than 130 genetic defects involving the immune system, affect as many as 500,000 Americans and 10 million people worldwide. PID disorders weaken the immune system, allowing repeated infections and other health problems to occur easily, and more frequently. There is no known cure for the condition, and it’s widely under diagnosed with only 5% of patients identified in the US and 3% internationally.

We like the prospects of both the business and the flagship product, the FREEDOM60 pump – but don’t take our word or management’s word for it, do what we did: talk to healthcare professionals who actually use the product

In order to determine how healthcare professionals view the FREEDOM60 pump, we contacted an Accredo Health branch in Ft. Lauderdale, Florida. Accredo is a subsidiary of Medco Health Solutions, which was acquired by the $52 billion Express Scripts Holding Company (NASDAQ: ESRX) in 2012.

We spoke to the manager at the Ft. Lauderdale office, Larry Belusko, who was kind enough to give us ten minutes of his time. We didn’t tell Mr. Belusko we would be calling in advance, and we identified ourselves as a research firm simply trying to get unbiased feedback about how people in the industry felt about the FREEDOM60 pump. Mr. Belusko was happy to oblige us. His commentary about the FREEDOM60 and the company that owns it was consistent with our views.

Mr. Belusko first told us that he had a “great deal of experience with the FREEDOM60.” He then offered praise for the product several times, stating:

• It’s a “very easy pump to operate,” a “simple mechanical device with no programming involved.”
  • He stated they’ve “had very, very few complaints or replacements”
  • He noted that the pumps “seem to be very trustworthy and last us a good amount of time”
  • Then, when asked about his overall thoughts about the pump, he concluded simply with “I think it’s awesome.”

When we asked if he knew about the pump being considered for use in other indications aside from PID, he stated that he did, but not through his branch. He said that he knew of people using the pump for alternate uses such as hemophilia infusions.

To conclude our interview, Mr. Belusko acknowledged that there are other pumps, like the ones he has used in the ER, but he said these pumps are “far more complex” and are not conducive to the home care market that Repro-Med is focused on. He stated that the pump’s main benefit is in its simplicity, since it can be self-administered.

Repro-Med’s Products

The genesis of REPR’s current products is the result of management’s decision to transition the company from being a low margin, original equipment manufacturing (“OEM”) business to developing homegrown, proprietary products.

REPR’s primary products are:

• FREEDOM60® Syringe Infusion Pump System (91% of fiscal 2013 sales)
  • The FREEDOM60® Syringe Infusion Pump – designed for ambulatory medication infusions and home health care patients. The infusion pump delivers medications to Primary Immune Deficiency patients by injecting immune globulin (IgG) under the skin as a subcutaneous administration.
  • The RMS High-Floâ„¢ Subcutaneous Safety Needle Set – developed as an improvement in performance and safety over similar devices. Design permits drug flows which are the same or faster than those achieved with larger gauge needles currently on the market. Offered in needle lengths of 4mm, 6mm, 9mm, 12mm and 14mm, the sets are available in combinations for single, double, triple, quadruple, penta and hexa infusions. Using a Low Residual “Y” Connector, needle sets can deliver to as many as eight infusion sites.

• The RES-Q-VAC® Emergency Airway Suction System (9% of fiscal 2013 revenues)

• A lightweight, portable, hand-operated suction device that removes fluids from a patient’s airway by attaching the RES-Q-VAC® pump to various proprietary sterile and non-sterile single-use catheters sized for adult and pediatric suctioning. “

(Source: 10-K ended Feb. 28, 2013)

External infusion pump defined:

“An external infusion pump is a medical device used to deliver fluids into a patient’s body in a controlled manner. There are many different types of infusion pumps, which are used for a variety of purposes and in a variety of environments.”

“Infusion pumps may be capable of delivering fluids in large or small amounts, and may be used to deliver nutrients or medications – such as insulin or other hormones, antibiotics, chemotherapy drugs, and pain relievers.”

“Infusion pumps may be powered electrically or mechanically.”

REPR compares its FREEDOM60 mechanical pump to the electrical pumps offered by competition as follows:

“For the home care patient, FREEDOM60® is an easy-to-use lightweight mechanical pump using a 60ml syringe, completely portable, cost effective and maintenance free, with no batteries to replace and no cumbersome IV pole. For the infusion professional, FREEDOM60® delivers accurate infusion rates and uniform flow profiles providing consistent transfer of medication. The FDA approved a Form 510(k) Pre-market Notification for initial design of the FREEDOM60® as a Class II device in August 1994.

Competition for the FREEDOM60® for IgG includes electrically powered infusion devices, which are more costly and can create high pressures during delivery, which can cause complications for the administration of IgG.”

Management believes that its flagship product, Freedom60, is superior to its competition due to ease of use, a superior safety profile and elaborate quality control in the manufacturing process. REPR’s success supports this opinion. The company has created a highly successful franchise that has facilitated steady growth augmented by a recurring revenue stream.

Potential investors should consider that REPR has produced year-over-year quarterly revenue growth in 30 of its last 31 quarters alongside compounded annual revenue growth rates (CAGR) of 26.3% and 19% since 2007 and 2004, respectively. It also appears that growth is kicking into a higher gear as the company seeks to increase penetration of its current target market, enter new markets and fine tune its sales model. We think the only thing missing for REPR is exposure, and we believe that when investors come to realize REPR’s fundamentals, we will see a significantly higher share price.

Ultimately, longer term, we think REPR could potentially turn into the elusive “multi-bagger” scenario.

Imitation is the Sincerest form of Flattery

Piquing our interest and fueling our bullish sentiment on the REPR story is that some of its competitors are selling products claiming to replicate the FREEDOM60. In addition, these competitors confirm to us through their product sales, that there is a business offering accessories that can allegedly be used with REPR’s product. In fact, REPR is suing one of its competitors for selling what is essentially a knockoff of the FREEDOM60, while claiming to have lower cost accessories that can be used with the FREEDOM60.

REPR’s public filing described the litigation as follows:

“There is a mechanical pump, manufactured by a competitor, which we do not believe to have FDA clearance. The new pump uses a prior design of a simple coil spring which does not create a constant pressure and which had been removed from the market several years ago. The competitor offering this product is also representing that it is capable of manufacturing lower cost accessories which can be used with the FREEDOM60®. We have issued Safety Bulletins to all customers advising them that any non-RMS product used on our FREEDOM60® Systems may be unsafe, can create a health risk to the patient, including death and would void the warranty of the pump. We are currently involved in legal proceedings with such competitor involving various claims and counter-claims (see Item 3 – Legal Proceedings).

We commenced a declaratory judgment action in 2013 to establish the invalidity and non-infringement of claims of a patent of a competitor that alleged that our needle sets would infringe. The defendant answered the complaint and asserted various counterclaims that we believe are without merit. We subsequently added claims against the defendant to show that the defendant had engaged in various unfair business practices. The litigation is in early stage discovery.”

We discussed this issue with REPR management, who told us that they believe that the prevalence of “copycats” is not an isolated event. Investors who are concerned about knock off products stealing significant market share should note that patients that use needle sets other than REPR’s will void the warranty of the Freedom60 pump.

Five Rock Solid Reasons for Optimism

1. Competitive Advantages

• First to the Home Care Market

REPR is focused on the home care market, while its larger competitors are servicing hospitals and medical facilities. As the great hockey player Wayne Gretsky famously said, “I skate to where the puck is going to be, not where it has been.”

REPR was a first-mover into the home care market with its mechanical pump and it did so with a product that is cheaper, safer and more reliable compared to traditional electronic pumps. With the trend toward more home care solutions and insurance reimbursement rates in severe decline, there is a compelling need for low-cost, effective devices for home care. According to management, these factors have enabled REPR to attain what is estimated to be a 90% plus share of the homecare market it targets: primary immunodeficiency.

• Meeting the Needs of Patients

REPR is focused on the home care market. Management firmly believes the macro trends in the home health care field favor the market and, in FREEDOM60, they have the best product available to monetize it. REPR’s infusion pump is perfectly suited to the home care market because the pump delivers drugs or medications subcutaneously (under the skin) and can be self-administered. In contrast, intravenous (into the vein) drugs generally have to be delivered by a professional. The unique function of self-administered infusions is a key niche that helps REPR grow and retain its customer base.

We agree with REPR’s management and believe that the future of self-administered care will be far more of a necessity than a choice. We believe this for the simple fact that patients prefer a subcutaneously vs. intravenous delivery method, when possible. The sheer number of patients requiring infusions will eventually outstrip the capacity of hospitals and medical facilities to deal with routine infusion of drugs and medications. Also, most patients simply don’t want (nor can they afford) to be in hospitals or to have a nurse constantly in the home. For these reasons, the FREEDOM60 gives REPR a strong competitive edge in the home care market. This product could also eventually result in scenarios where hospitals can send patients home earlier, and without nursing assistance. It’s an obvious cost saving proposition, especially for intensely cost conscious insurers and hospitals. If the trend toward more home care continues and begins to accelerate, REPR and its shareholders will be the beneficiaries.

• Price Advantage

FREEDOM60 benefits from a lower price point (around $400) than electronic pumps used in hospitals and medical offices ($1,100 to $2,000). Inclusive of the disposables necessary for operation, REPR’s solution costs less than electronic pumps. The lower initial cost of the pump more than offsets the somewhat higher use (i.e. disposable needles) cost.

• Product Advantage- Safety and Reliability

The FREEDOM60 requires no electrical outlet or battery to operate. The key to the pump’s success is that it creates a constant flow rate or dynamic equilibrium that ensures patient comfort and safety. If the medication is not flowing properly, or the pump senses increased resistance, it automatically adjusts the flow rate accordingly. In simple terms, the pump reacts to the actions of the body. Specific needles and tubing are required for the pump to achieve dynamic equilibrium, which is why the pump’s warranty requires patients use REPR’s needle sets.

We also believe that REPR is well positioned to build off FDA initiatives. Since 2009, the FDA has increased its efforts to ensure that Infusion pumps meet stricter safety guidelines:

“Infusion pumps have been a source of multiple patient safety concerns, and problems with such pumps have been linked to more than 56,000 adverse event reports from 2005 to 2009, including at least 500 deaths.^[1] As a result, the U.S. Food and Drug Administration (FDA) has launched a comprehensive initiative to improve their safety, called the Infusion Pump Improvement Initiative.^[2] The initiative proposed stricter regulation of infusion pumps. It cited software defects, user interface issues, and mechanical or electrical failures as the main causes of adverse events.”

REPR’s 10-K does a good job detailing why its mechanical pumps are safer and more reliable than traditional electronic pumps:

Our proprietary technology employed in the FREEDOM60® uses constant pressure to administer drugs. FREEDOM60® avoids an important problem faced by electronic pumps currently on the market, which employ constant flow mechanisms that result in potentially dangerous, high pressure placed on indwelling catheters or under the skin. In order to protect the patients, these pumps must contain an overpressure sensor to shut the pump off when a potentially threatening pressure is detected. Some of these electronic pumps generate extremely high pressures exceeding 60psi before the overpressure system will activate. Also with these systems, the alarm can falsely trigger halting administration until a health professional can verify that the infusion is, in fact, safe and the pump may be reactivated. In either case, the patient is at risk from damaging pressures or not receiving the medication required.

• Insurance Reimbursement Advantage

With insurance reimbursement on a severe decline, there is a need for a low-cost, effective alternative to electronic and expensive disposable IV administration devices for home care. The FREEDOM60® provides a high-quality delivery to the patient at costs comparable to gravity-driven infusions. In addition, it is targeted for the home health care industry, patient emergency transportation, and for times when low-cost infusions are required. In 2007, REPR’s competitive advantage was enhanced when the Freedom60 was:

“reclassified by the Centers for Medicare and Medicaid on May 21, 2007 for use under code E0779 which increases the reimbursement for the Freedom60 for all billable syringe pump applications approved by Medicare.” Page 5 FY 2007 10K

2. FREEDOM60 and Safety Needle Set – the Razor and Razor Blade Strategy That’s Working

The precision flow rate tubing and specialized infusion needles required for each injection are sold separately and have to be replaced after each use. The disposable components make up a recurring revenue stream for the company. Since PID is not curable, REPR most likely has a long-term customer once he or she becomes comfortable with the infusion pump and needle sets. The success of the model is evidenced by the impressive growth that the company’s infusion therapy revenues have enjoyed since 2007. The following charts and tables illustrate our point that REPR has been logging consistent revenue and infusion pump sales growth since 2007:

• Total revenues in the last seven years have a CAGR of 26.3%:

• Year-over-year quarterly revenue growth in 30 of its last 31 quarters:

• Total units sold have increased every year since 2004 with a CAGR of 25.3% since 2007:

3. Favorable Industry Trends

An article published in the “Health Affairs Blog” in February 2014 detailed the changing trends in health care, including the growing health care at home market. The following is an excerpt from that article:

“While today’s news is bombarding us with headlines about Healthcare.gov, the Affordable Care Act isn’t just about insurance coverage. The legislation is also about transforming the way health care is provided.

We may have thought the days of the house call were over, but increasingly, they are coming back into fashion. Marketing firm BCC Research predicts that the market for remote monitoring and telemedicine applications will double from $11.6 billion in 2011 to about $27.3 billion in 2016. Much of the interest is being fueled by the people expected to become insured through the Affordable Care Act, a surge of new consumers that our system simply can’t treat in person.

Also driving the growth is the need to make care more convenient, particularly for those with chronic conditions, so patients can be monitored and coached to health anytime, anywhere. And there’s a cost component to the trend as well. “Hospital at Home,” a program designed by Johns Hopkins that provides acute care services in the homes of patients who might otherwise be hospitalized, has been demonstrated to increase the quality of care patients receive, improve their satisfaction, and reduce costs by at least 30 percent.

Last, technology-enabled at-home health care is increasingly solving an access issue for patients. According to a recent survey, almost half of rural hospitals use virtual care or telemedicine to connect with patients who may be too far away for an in-person visit, allowing them to close the gaps in care that arise due to geography.”

The above excerpt supports management’s belief that specialty drugs and antibiotics will eventually have to move to the in-home care market. The sheer volume of patients and cost of administering the medications will put pressure on a number of them to be done in the home.

Antibiotics need to be infused slowly, over time, and the FREEDOM60 is the perfect product for performing that task. We believe that REPR is in a sweet spot and is positioned to capitalize on the inevitable market shift in how certain medical procedures are administered and maintained.

4. Tweaking the Marketing Strategy

REPR had, in the past, largely relied on an internal sales team to promote its products. This approach can result in a protracted selling process and delay customer acquisitions. Thus, over the past few years the company began to take steps to broaden the reach to potential customers by placing more emphasis on selling through distributors. The primary catalyst for this move was the clear message from customers that they would prefer to acquire REPR’s products through its distributors. The advantages of using a distributor network include more comprehensive tracking and better supply chain efficiency.

REPR sacrifices margin by selling through distributors, but that is offset by cost savings derived from less picking and packing, fewer and larger shipments, less need for costly overnight shipments, and reduced overhead since the company is not processing as many orders or managing as many direct transactions with customers.

5. New Products/Demographics/Penetration

Focusing on home care is nothing new to REPR and the company’s infusion therapy products have already carved out a strong presence in the market. If anything, REPR has been somewhat of a pioneer in home care. They are already prominent in the US market, have established customers and distributors, and are reaping the benefit of the ever-growing number of home care patients that are driving demand.

We think it is impressive that the company claims to dominate the segment of the Primary Immune Deficiency market it targets. Despite the dominant position FREEDOM60 has in addressing the needs of PID patients, there is much more room to grow. Estimates of the number of US patients with some form of PID vary widely, which is not surprising given only 5% of patients in the US and 3% internationally are diagnosed. Simply put, this means that the vast majority of those suffering from the condition are undiagnosed. Diagnostic techniques for PID will inevitably improve, creating an ever increasing demand for REPR’s infusion pumps. It’s worth reiterating that once REPR has a customer, we believe they will stick with the company for the long-term.

We prepared market share estimates for the FREEDOM60 by estimating the number of individuals in the US with PID. The more conservative estimates of those with the likely prevalence of PID in the US are 1 person in every 1,200, though most remain undiagnosed.

Assuming that:

• REPR has around 90% of its market, according to management
• REPR will report near $11 million in revenue for FY 2015 (based on Q1)
• The U.S. population is 320 million
• 1 person in every 1,200 is living with primary immunodeficiency (about 267,000 people)
• Unit Cost of the FREEDOM60 is $400

…we can estimate the total potential size of the primary immunodeficiency market for the FREEDOM60 to be $106 million, nearly 10x REPR’s current market share. These estimates also do not include the recurring revenue that would come from the disposable component sales or an assumption for the analysis of PID internationally. The steady increase in REPR sales indicates that the diagnosis of primary immunodeficiency is increasing, and REPR shareholders would also benefit from the supplemental ongoing revenue that comes from the disposable component sales.

One thing to keep in mind is that REPR could enjoy its dominance for some time, since the currently diagnosed primary immunodeficiency market size is probably not large enough to attract bigger competitors. We believe that REPR is sitting in a comfortable “under the radar” pocket to both potential shareholders and potential competitors.

Still, management is not resting on its laurels. The company believes opportunities for the FREEDOM60 lie in the product being used with indications other than primary immunodeficiency. These opportunities could arise once the FDA increases the amount of drug indications that can be used with the FREEDOM60. REPR is also expanding in Europe and South America. The company already has a solid structure in place in the UK, Scandinavia, Italy, France and Germany.

Recent Buyout of CareFusion Indicates that the Potential for a Repro-Med Buyout is Ripe

Repro-Med opened trading this week with a strong move to the upside. We believe the move was partially in response to CareFusion, a leading provider of infusion pumps and drug dispensing systems, announcing on October 6, 2014 the sale of the company to Becton, Dickinson, & Co. for $12.2 billion – a 23.07% mark up from the previous trading session’s closing price.

About one third of CareFusion’s business is derived from infusion pumps, and its CareFusion’s line of “Alaris” infusion devices that draw comparisons to Repro-Med. The article that reported the buyout stated:

“Its Alaris infusion devices, sold under the IVAC and IMED brands, administer medications intravenously. IVAC and IMED began as independent companies, then were repeatedly sold until they wound up as part of CareFusion. IVAC was formed in 1968 by medical entrepreneur Richard Cramer, who designed its products to incorporate electronic microprocessors. A few years later, Cramer was forced out of IVAC in a proxy fight. He responded by forming IMED in 1972 to compete with his former company.”

However, Repro-Med’s pumps have command over a different segment altogether. As CareFusion’s pumps are used mainly in hospitals and emergency rooms (they are far more complex and expensive than Repro-Med’s), the FREEDOM60 continues dominate the homecare market. As we noted in our interview with Mr. Belusko, the advantage of the FREEDOM60 is in its simplicity.

We discovered in CareFusion’s filings that it has made an acquisition in what appears to be an attempt to get into the home care market:

In addition to the acquisitions listed above, we have acquired non-controlling equity interests in privately held companies, including our March 2014 investment in Caesarea Medical Electronics Ltd. (“CME”). CME is a global infusion pump manufacturer headquartered in Israel that designs, manufactures and markets a range of infusion and syringe pumps, as well as related accessories and disposable administration sets for both homecare and hospital settings.

This is beneficial to Repro-Med for two major reasons:

• It validates that there is growth in the home care self-administration market
• It makes the company an obvious buyout candidate

The fact that there is an increase amount of M&A in the healthcare industry will likely bode well for Repro-Med. For those looking to try their hand in the homecare infusion market, Repro-Med is an obvious buyout candidate. The CareFusion transaction in and of itself seems to confirm that there is growth in the infusion segment of healthcare.

CareFusion’s buyout was completed at a price of 23.8x ttm earnings and 3x sales (fiscal year ends in July). If Repro-Med were to be acquired based on these multiples, it would be a buyout of $0.55 and $0.87, respectively.

Limited Caveats, All of Which Have Been Considered

We feel there is limited downside to a position in Repro-Med at these trading levels. The caveats that we addressed while looking at the business were:

• The company is currently tied to one market segment
• Product safety risk and risk of user error
• Regulatory changes that limit the use of REPR’s product and/or impact insurance reimbursement
• Companies that attempt to copy the FREEDOM60 products and accessories to steal market share

Companies selling accessories and “copycat” products could eventually be the biggest threat to Repro-Med. Repro-Med addresses this by making sure that customers know their warranty is voided if 3rd party accessories are used with the pump. Further, the easy way for any company to compete with Repro-Med would be to simply acquire them.

The company’s one market, from what we understand, could also be expanding to other indications in the future. Regulatory changes emanating from safety concerns do not concern us due to the company’s high quality, cost efficient product.

While we feel these potential downsides are worth noting, we don’t believe any of these will have a long-term effect on the success of Repro-Med, which continues to grow despite these potential challenges. We feel that any wave ridden by other companies to success in this sector will de facto carry Repro-Med with it.

Repro-Med’s Valuation: Predictable Model Should Lead to Premium Valuation

There are costs associated with maintaining REPR’s high business standards. These costs mean that the company will have to invest in the business and increase capex in the short-term (at the temporary cost of limiting the bottom line). We believe this will ultimately prove to be an investment that pays off for REPR and its shareholders.

The trend toward increased in-home care and self-administered medical care solutions is only just beginning and should pay substantial dividends for REPR as it continues to dominate market share. We could not identify publicly traded direct comparables to REPR, but given the company’s:

• pristine balance sheet, with no debt and a 5.4 current ratio
• history of consistent growth/recurring revenue model
• underserved target market with huge upside
• new markets yet to be tapped
• ability to capture over 90% of its target market, despite being a small company

… we think shares deserve premium valuation multiples

Following is a summary of some key REPR data points:

	REPR
CAGR – Pumps Sold 2004-2015	25.30%
CAGR – Revenue 2004-2014	26.30%
YOY Quarterly Growth	31 of 32 quarters
Enterprise Value/Revenue (TTM)	1.19
Enterprise Value/EBITDA	7.57
Trailing P/E	16.09
Return on Equity	15.90%
Current Ratio (mrq)	5.40
GM %	61%

(Metrics in the above table are calculated based on the recent closing price of $0.37)

And here are our near-term price target scenarios:

Scenario 1			Buyout Scenario 2 (1)
		ftm(2)			ftm
P/E		25	P/E		21.6
Implied value per share		$0.48	Implied value per share		$0.42
EV/EBITDA		15	EV/EBITDA		15.0
Implied value per share		$0.59	Implied value per share		$0.59
EV/S		2.0	EV/S		2.9
Implied value per share		$0.62	Implied value per share		$0.87

note 1: CFN’s acquisition multiples are applied in Scenario 2

note 2: Annualized estimate for next 12 months

Keep in mind that the valuation multiples we used are not outrageous “premiums” given that REPR employs a predictable, debt free sales model. Also, we are more inclined to value REPR on an EV/S basis. We think that EPS and EBITDA growth could be lumpy as the company increases its marketing efforts, but this not an issue when companies generate consistent and predictable revenues streams. The EPS and EBTIDA “light switch” can be turned on once the company has achieved a desired level of revenue.

Finally, we consider our valuation scenarios to be conservative, as they do not take into account International expansion, new product opportunities, and future indications for REPR’s flagship product.

Disclosure: Long REPR

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