InfuSystem (INFU)

-Connor Haley, Nat Casey, Peter Chase, Seiji Liu, Chaodan Zheng, Chris Whittlesley, Rob Boling

Financial Overview
Price: $1.68 Market Cap: $36.9M Enterprise Value: $67M EV/EBITDA: 6.46X Average 3m Volume: 43K

Business Overview
Founded in 2005 and headquartered in Michigan. Provides infusion pumps and related services to oncology clinics--to be used in the treatment of a variety of cancers--in the U.S. and Canada These pumps are also used in the treatment of colorectal cancer Obtain payment through patient's insurance company/patient depending on the individual's insurance benefits Economies of scale and network effects keeps out new entrants

Some History
In recent years, INFU has experienced a relatively strong growth in revenue: 54% from 2008 until 2011. However, those gains have been erased by incompetent management Global Undervalued Securities, Meson Capital, Boston Avenue Capital, worked as activists in outsing McDevitt.

History of Shareholder Activism

Activist investor bought 2 percent of InfuSystems shares and persuaded Kleinheinz Capital Partners, the companys largest shareholder, and veteran small-cap activist Chuck Gillman to join him in an official group of concerned shareholders. On Dec. 6, 2011, Morris filed 13D, declaring the group controlled 11.4 percent of InfuSystems shares and intended to influence the board.

Overview of Activist Investor

Ryan Morris of Meson Capital Partners Been compared to Carl Icahn and Bill Ackman by Bloomberg His fund made 753% in 2009 http://www.businessweek.com/articles/201212-20/ryan-morris-28-year-old-activistinvestor

Overview of Activist Investor

Cost Cutting- Eliminating Irregular Board Compensation

In 2010 the board awarded $7.2 million in salary, stock, and other compensation to the CEO and gave $1.3 million to Vice Chairman and awarded at least $400,000 to almost every other member of the board. InfuSystem had to pay the personal income taxes they triggered. 6x median comp of comparable micro caps Since then, a new board has been appointed by a council headed by the activist Ryan Morris. After the takeover, Morris and the board laid off the New York staff and sublet the midtown office space, saving InfuSystem about $1 million a year These cost-cutting moves helped InfuSystem post its first quarterly profit since 2010 in November. Efficiency has increased by $1.6 million, non-employment costs

Better Vertical Integration of Subsidiary, First Biomed

First Biomed evaluates, certifies and repairs medical equipment, primarily ambulatory, infusion, syringe and enteral pumps. Due to poor management in the past, Infu, which manages a rental fleet of 36,000 pumps that will need repair in the future, did not properly utilize First Biomed's services. Because refurbished and new pumps are indistinguishable, there is a high resale value. New management looks promising in taking advantage of cost centric synergies in repair. Strong management of cross-advertising and administrative redundancies will further drive down costs.

Valuation Methodology
INFU has averaged between 6-8X EBITDA multiple over last three years Used 6X for low-end and 8X for high case Estimated 2013 EBITDA using low and high estimates for annualized EBITDA
low case: uses avg. of last 2 qtrs ACTUAL EBITDA high case: uses annualized Q4 adjusted EBITDA #

Assumed reasonable cash generation/debt paydown

Valuation Summary
Market is currently implying ~$10 mm EBITDA run-rate
This is in-line with historical results '08: $10.5, '09: $11.3, '10: $7.7, '11: $10.3, '12: 11.4

Q3 Actual EBITDA: $3.19 Q4 Actual EBITDA: $3.34

Annualized $13.06 mm (average)

However, this ignores the recent improvements, potential for more costcutting, and the effects of one-time charges

Valuation Scenarios

EBITDA to Adjusted EBITDA Reconciliation

Risks
Medicare Reimbursement Cuts The net impact is that, based on cuts other industries experienced, INFU has a potential revenue headwind up to 1.2% (~40% cuts on 3% of revenue) in 2013-2014 and then ~ 12% (40% cuts on 30% of revenue) in 2017. While the margins of this business segment will likely compress somewhat, this will create an enormous market share opportunity as INFUs fragmented industry becomes increasingly consolidated as a result of competitive bidding INFU is inlikely to experience these cuts given it is in a very unique niche and is the low cost provider so anyone bidding on these segments against INFU is unlikely to bid prices shockingly lower than INFU.

Risks
Xeloda Drug
There is a Roche drug called Xeloda (capecitabine) that is an oral alternative to 5FU cancer treatment and it is set to become generic in 2013. Many investors believe it may cause a shift in market share at the expense of infusion. Based on historical impact of Xeloda and talking to people in the industry we do not believe this is likely. The most bearish analyst out there from (a pharma specialist) thought that Xeloda would be a couple hundred bps per year revenue headwind annually to INFU.

Summary
An exciting special situation opportunity to follow on the coattails of a smart, successful activist investor Great business with high margins and network effects that have historically been masked by abysmal management Given the current price, market is using historical performance and thus placing zero value to improved output in 2013 Reflecting cost reductions from two most recent quarters gets us a price between 53%-174% undervalued