Morning and welcome to the Sidoti & Company December Virtual Investor Conference. The next company to present is InfuSystem. We have with us Rich DiIorio, the CEO, Carrie Lachance, the COO, and Barry Steele, the CFO. This presentation will be a fireside chat. There might be some time at the end for questions from the audience, so if you do have a question, you can type that into the chat, the Q&A box at the bottom of your screen. So, Rich, can we get started? Just give us a brief description of your business and really let us know what your core competencies are.
Sure. So InfuSystem is a healthcare services company. We've been around for just over 38 years. We have 100,000 devices that we own, actually a little more than that. We have seven service centers, six in the U.S., one in Canada. We service 18 of the top 20 hospitals in the U.S. And maybe the key to everything we do is we have over 800 payer contracts. So basically every insurance company you can think of, we have an agreement with them in place to bill them for our services. But the way to think about what we do is we really, as a services company, we're device agnostic.
So it doesn't matter what type of infusion pump or if it's a negative wound care vac or another type of device, we can wrap our core competencies around that device, which is logistics, our biomed capabilities, and what I think is our world-class clinical and revenue cycle capabilities. So just to kind of give you some examples, GE came to us as a partner. They needed some help with their infusion pumps and their acute care hospital agreements and locations. We're able to get to those devices and repair them. And then both Smith & Nephew and Sanara over the last couple of years have come to us, and they needed real help with logistics and ultimately our revenue cycle and payer contracts.
Being able to leverage the logistics capabilities, the biomed, the clinical, and ultimately our payer contracts and our revenue cycle capabilities and team, if you take those four competencies, we can wrap those around really any partner's device or product and help them in the market.
All right. So we start out with the chemotherapy business because that is your oldest business. Can you talk about the market for that business? Is it a stable market? Is it a growing market? And what are your expectations going forward?
Yeah, it's very stable. We have about 2/3 of the market. And again, most of the 18 of those 20 top hospitals use us for oncology. We've been in that business for the entire 38 years we've been in existence. It does continue to grow. So from a volume and market share gain standpoint, it's low single digits every year. It's very profitable, but the growth is obviously slow because we have so much of the market. The last couple of years we've been fortunate that we've layered on top of that volume and market share gain from our revenue cycle capabilities and improvements. So systems, people, processes, those things have allowed us to effectively get more out of every billing, more revenue, more profitability. So that's brought us more into the mid. Even, I think last year we were up around 8% in total growth.
Again, volume and market, low single digits. The rest of that was revenue cycle gain. So we should see more of that in the future. I don't know if the revenue cycle gain will continue at that rate at some point. You start to slow down there. But low to mid single digits is a good expectation for our oncology business in the future.
Capital requirements for that business, is it significant?
Yeah. The way that we look at it is for every new patient, we have to buy a device. So economically, when you look at it, it's for every $1 you spend on a device the first year, you'll see $1 in revenue. We depreciate them over seven years. So after that first year, the device is effectively paid off. We still have to maintain it and make sure that it's in good working condition for the patient. But we depreciate them over seven, and a lot of them will last 10 or 12 years. So the economics of the device is really nice, but we do have to buy devices for that business when it grows.
Okay, but the devices are reusable.
I mean, like I said, a lot of them last 10 or 12 years, and that's where our biomed capabilities help us. For years, we've been working on our own equipment. So being able to keep these going, it's like having your own mechanic at the house kind of thing. We can keep the device going for years and years.
Right. And then you mentioned the agreement with GE. Can you update us on how that's going? Is it fully implemented? About how much revenue does that generate?
Yeah. So all the devices have been onboarded at this point. It's somewhere still around $10-$12 million in revenue. We definitely still have some efficiencies to gain operationally, travel time, how long we're away, how we travel, those sorts of things. That'll be a continual process that we'll work on hopefully forever. The good news is we still have opportunities within GE for other types of deals, other types of services we could offer them. We have done things like their RFID tagging over the last couple of years. They brought us other opportunities that the economics didn't make sense for us or it was outside of our core competencies. But there's still more in that pipeline with them. And then also outside of GE with other partners. We signed the agreement with Dignitana a month or two ago. We should see more of those.
There's more in the pipeline there as well. It's nice because we can leverage the team we already have in place, or at least the majority of that team. So the deals become more profitable. They're not going to be the size of GE, or at least we don't see something that's another $10-$12 million. But these just over, just under a $1 million deals are nice because they're profitable, easy for us to go execute on.
Are you able to service the Dignitana equipment with the same folks you brought on for GE?
Yeah, it's mostly the same team. I don't think we've had to supplement that team at all. Not a ton of devices in the U.S., but they are spread out, so we'll use multiple people, but existing team members for that specific deal.
I believe on the second quarter call, you announced a third partner. Is that correct?
On the biomed side?
Right.
We have been doing some pump remediation for one of our biggest pump manufacturers. They needed some software upgrades and some things done to their pump. So we're doing that. Some of it's on our own fleet. Some of it's in the market. But I think that's probably the other one that we've been working on with some additional GE stuff we've worked on.
All right. And then the other big opportunity over the past couple of years is the joint venture you entered into with Sanara for wound care. Can you let us know how that's going?
It's been going great. They're an awesome partner. Really good group of people. Our philosophies align really well, and they have some phenomenal products, so right now with the JV, we have their two products. Their antimicrobial gel and their collagen treatment, so HYCOL and BIAKŌS . We also have other wound care products, so the dressings and all the other supplies you need to go with that offering, as well as negative pressure. All that runs through the JV. It's going really well. Last year, we had a lot of leases that showed up from a revenue standpoint, about a few million dollars. This year, that number is much lower, which is actually good. That's not the future of the business. They're nice to have, but where we're really growing this year in wound care is all the advanced wound care products, including the Sanara products.
That's where the growth has come from in 2024 and should certainly continue to grow in 2025 and beyond.
From an accounting point of view, where does that revenue go, the revenue that comes in from the JV? Is that revenue on the top line for you?
Yeah. Everything that we're working with in the JV is products that we're buying through the joint venture entity, but selling to our customers. So all the revenue gets booked on the top line. We do have a markup that the joint venture captures, which will, as when the volume gets up, increases, you'll see that come out as an additional line in our P&L as equity type income.
So the leases from last year, were they booked through the joint venture or were they booked directly to InfuSystem?
They were InfuSystem's revenue.
Okay. All right. And then you announced a new partnership with Smith & Nephew for negative pressure devices. Is that through the joint venture or is that direct to Smith & Nephew?
So the partnership started directly with Smith & Nephew, but that'll run through the JV as well. So everything wound care related, the negative pressure vacs, all the advanced wound care products will all run through the JV.
Why does a company like Smith & Nephew come to you?
Yeah, that's a great question. So they called us, I guess it was late spring, early summer. They have a lot of patients that were going to go on their vacs, and they had a current partner and they still use them. But they just didn't have the breadth of contracts on the revenue cycle side. So they would call them with 10 patients and their current partner could only take a handful of those. And they had no solution for the rest of their patients. So they called us, they reached out to us, and with our 800 contracts, being a national organization, we can take almost all of the patients. It's not 100% of them because we don't have all the contracts. But with the breadth of contracts we have, we could service a lot more of their patients. So it was a nice fit for them.
They've been an awesome partner, as big as they are. They've been really nimble and easy to work with, and that partnership, within a couple of weeks of signing that agreement, we had patients coming in and we were able to service them.
One of the other announcements you've made recently is the Chemo Mouthpiece. Can you talk about that, what it is and what the potential is for InfuSystem's?
Yeah. So Chemo Mouthpiece has phenomenal potential. So to kind of simplify it, it's used to treat oral mucositis, which is really just mouth sores. So think of canker sores. They're chemo related. So most chemos cause them, not all of them, but most do. And think of a canker sore, but multiple of them in your mouth and kind of 10 times worse than you would normally get. It's really an unmet need. The standard of care today is to chew on ice chips, which is really not a good solution. So if you see a patient in a chair getting chemo, they'll have ice in their mouth. It's not for hydration typically. It's really just to cool their mouth down. And the concept is if you cool down the mouth, it causes vasoconstriction. So it causes the blood vessels to constrict.
So the chemo doesn't hit the mouth and doesn't cause these issues and kill the cells in your mouth. Chemo Mouthpiece, it was approved by the FDA in February of this year to treat that. It's effectively, think of it, it looks like a baby bottle with a mouthpiece on the end. You put it in your freezer, it gets really, really cold. You put it in your mouth and it does the exact same thing as ice chips, just more comprehensively in your mouth. Does a much better job of cooling down the entire oral cavity. So it got approved in February. A trial code came out for the clinics and doctors to get reimbursed to dispense the product. So it could actually potentially be a revenue generator for the clinic. So it's an unmet need, FDA approved. There's really nothing else in the market like it.
And the doctor could get reimbursed. It's a nice combination to kick off with a new product. And we have exclusive rights to it for the next five-plus years. So all the pieces are in place. Those pieces just have to fall in over the next six months or so. And if they do, this could be something really special for InfuSystem. What's nice for us is it's in the market that we own, right? It's in oncology. So we can leverage our existing sales team. We don't need to hire anyone to do this. We can leverage our existing relationships and we can get into the market pretty quick. So our sales team now is trained up. They're ready to go. Now we just have to get to customers and work through the sales cycle and how long that takes and what that process looks like.
But it'll start in 2025. We don't know to what order of magnitude yet. It's a little bit early, but when we look out a few years from now with Chemo Mouthpiece, it could be something special.
CMS has a code in place so doctors can get paid?
Yeah, there's a code in place. It's a trial code, but they can bill it. Their revenue cycle team can bill the payer. Trial codes sometimes get paid. Sometimes they don't. Sometimes the payers want to see more activity before they start to reimburse it. That will all play itself out just like every new code that comes out over the next year or so. What we've heard from some of the bigger clinics is that they're less concerned about reimbursement. The cost of oral mucositis to the clinic and to the patient is astronomical. Patients sometimes have to stop or pause treatment because the mouth sores get so bad. It can cause issues as far as hydration and being able to eat. So then they end up on pumps for hydration, those sorts of things.
So the cost of the device is almost insignificant to the cost of some of the other issues that the chemo can cause. So they're less reimbursement sensitive, but obviously when the reimbursement hits and all the payers really start paying, that'll be a huge lift. That's a little bit outside of our control. But initially, with the code there, at least the access to the code for the clinic, plus an unmet need being filled with this product, I think we're in a really good spot.
The sales team you have now, they're primarily dealing with patients with colon cancer, I believe. Will colon cancer patients use this device? Is this applicable to other types of cancer treatment?
Yeah. So you can apply this to pretty much every cancer that gets chemo to treat it. So colon cancer patients are certainly on that list. The good news is our sales team, although most of what we see is GI-related cancers, so everything from esophageal to colon and those sorts of things. When we win customers, we win the clinic, right? So when we call on the big hospitals, we're not asking for just their colon cancer patients. We're just asking to treat all of their patients that need pumps with us. So the call points haven't changed at all. It's the same physician, same nurses, same pharmacists, same operational people in the hospital. So the sales team has a nice entrée into the market with obviously phenomenal relationships with customers that trust us.
So access should not be a problem here with this product, which is a lot of times a stumbling block of a new product, but for us, that won't be an issue.
How did this deal come about? Did they find you? Did you find them?
So this came through Sanara. So Sanara, kind of in their search for the latest and greatest products for wound care and building out their portfolio, met the Chemo Mouthpiece folks. We all got introduced, and the three of us worked really well together to get this contract signed. So it was brought to us by the Sanara team. And obviously, this will run through the JV as well. And I think Sanara actually has purchased a minority stake in Chemo Mouthpiece as well when the contract was signed.
So you would assume Sanara is out there now looking for other similar type deals?
They're always looking at new products. It's amazing the job that they do, kind of looking and seeing and finding every product out there, and then obviously, like this, we help them vet the product from an efficacy standpoint, from an access to the market standpoint, but they do a really good job kind of seeing everything that's out there, and that's not our strength, right? We're not a product development company at all. We're really the services and the backend support, so it's been a nice marriage between the two companies where they can go find these great products and we can go implement them into the market and provide the contracts and the backend and those sorts of things, so it's been a really good partnership.
On the wound therapy business, I know last year it got delayed a little bit because of some of the supply chain issues with the vacuum pumps. What's the status now? How many different pumps are you partnered with?
Yeah, so we have three now. We have Cork Medical, who was the replacement for Cardinal a couple of years ago. We have Genadyne that we started to carry last year. And now we have Smith & Nephew. So we have three devices. As far as I know, there's no supply chain issues and haven't been any with any of the manufacturers for quite some time. So we're kind of past that. And just like in oncology, having multiple manufacturers is a nice way to mitigate that risk so that if one of them does go down or have an issue, we have a backup plan in place. It's also nice to have multiple manufacturers from a customer standpoint because they get a choice, right? If they don't like the user interface on one, we have other options for them. Very similar to oncology.
So to be able to be agnostic like that is a really nice spot to be.
Is that similar to the chemotherapy pumps? You can reuse those pumps once the patient's done?
Yeah, the vacs, we don't have as much experience because we've only been working with them for three or four years. I guess almost five now. But yeah, we depreciate those over seven years, just the same as oncology. And they should last a significant amount of time. And we can repair them so we can keep them going.
So it's the same service team on those as on the chemo pumps?
Yep, same team.
Now, the last quarter was a particularly strong quarter for cash flow. Is that the trend we should expect going forward? Or what are your expectations for cash flow?
There really was two drivers for that nice result for Q3. One is just as we grow EBITDA, we'll have better operating cash flow. The third quarter EBITDA was significant for a couple of reasons. One, we're just growing the revenue. And two, that's one of the more stronger quarters as opposed to, say, the first quarter where we'd usually have a little bit lower adjusted EBITDA. Operating cash flow is also influenced by working capital. And we do see a pattern in our business where the back half of the year, we're either neutral working capital investment or we get a little bit of cash flow benefit from a reduction in working capital. Whereas in the first part of the year, we're usually building working capital.
It's kind of a confluence of just the stronger EBITDA and the timing of when we see our EBITDA as well as the working capital. As far as going forward, what I would say is the pattern we've seen the last seven years, every single quarter we have positive operating cash flow will continue into the future and only get stronger and stronger as we grow the EBITDA line.
So you've been able to grow in the past seven years or so to expand beyond the chemo business using operating cash. Do you think you'll continue to be able to do that?
Yeah, I think we will. We've seen in recent history where we grew at 20%, particularly in oncology, that we did have to borrow money to fund the capital acquisitions that we have. But for the most part, the growth that we're seeing right now, particularly the fact that a lot of it's not capital intensive, like the Biomed, like a lot of the wound care products, don't require us to buy devices. So I think that we have plenty of ability to fund our growth through operating cash flow. And if we don't, any quarter that we don't need to borrow, we have a massive amount of liquidity with our revolving line of credit to help fund that.
As the Chemo Mouthpiece grows, is that something that'll improve cash flow right away?
I think it will because we don't, as I mentioned, most of the wound care business. It doesn't require us to buy devices. So we'll have a little bit of investment working capital just to carry inventory, and we'll have receivables, of course. But that revenue should drop to the bottom line fairly quickly, drop to the cash line very quickly.
What other disposable type products will you be selling to the Sanara JV?
So there's other advanced wound care products. So not just their BIAKŌS and HYCOL, but there's other dressings. Everything you need to treat a wound would be all kind of consumable supply type of products that we can bill insurance for. But same types of things where there's no capital investment to get those.
Right. And that leads into a question on margins. Margins have expanded pretty significantly in the past few quarters. Is this trend continuing? And as you start selling those consumables to the JV, what impact will that have on the margins?
So just generally, margins have been improving as we're overcoming a lot of the investments we made in driving some of these new growth businesses, like the Biomed in particular. If you look at a little shorter term, just for in 2024, we've seen improvements sequentially like we did last year because we typically have more expenses that we just time in the first quarter. The first quarter is usually lower. But if you look at on a trailing 12 basis, we've been slowly improving our EBITDA margin. I would say that trailing 12, 18% margin, if you kind of wiped away some of the investments that we have in the P&L right now, that we'd probably be closer to 20%.
Our expectations for the future as we bring on these new revenue streams would be that we'd be able to be solidly in the 20% on a trailing 12 basis at any point in time.
So in terms of revenue cycle management with the JV, are you able to use the same team you have in place for the chemo business, or are you going to have to staff up for that?
Yeah, we'll have to staff up. The team that works on oncology, and it is a little bit different. Wound care and oncology, the billing process is a little bit different. But the team that's working on oncology, we run pretty tight and pretty efficient. So they're maxed out anyways. So we'll bring in some wound care experts and have over the past year or so to help with the wound care piece.
In terms of capital needs, it sounds like you're pretty much set that you don't expect to have to go out to borrow a lot of money or raise money over the next 12 months.
That's absolutely certain. We have over $40 million in liquidity just on our bank revolver to do anything we would like to. Even if we had non-organic type investments, we probably could utilize that.
All right. And I guess when we think about 2025, can you talk about some of the things that possible opportunities, possible risks, the things that you think about when you start in your budgeting process for 2025?
I think on the exciting news standpoint, executing on wound care will be fun to see it grow in 2025. I think we have some really cool opportunities and partnerships in the works there and some deals that are going to get closed. Then obviously, Chemo Mouthpiece, it could be as big as any product we've ever brought in. We'll see how that takes off in 2025. Launching a product with this type of potential, with exclusivity, with an unmet need in the marketplace, with good partners like Sanara and the Chemo Mouthpiece team, it doesn't happen very often. It's kind of rare to get that combination. That's going to be fun in 2025. I think from a risk and concern standpoint, at the end of the day, it just comes down to execution, right?
Can we go close the deals and execute on the backend? And if we can do that, which I have all the faith in the world we can, we've been doing it for 38 years. If we can do that, we'll have a really good year in 2025.
Can you just get a little more detail who Sanara is and what they do and how you found them or they found you?
Yeah, I was introduced to Ron Nixon, who's now their CEO. I think he was the chairman at the time, right in the heart of COVID when COVID first kicked off. We had just signed our agreement with Cardinal. We had entered the wound care space. They were already in wound care on the surgical side with their core business. We were introduced, some great conversations about kind of the philosophies of the company and helping patients in both companies and how we help patients that we were entering into wound care and what else did we want, what else did they need, and that's kind of where it was born, and it's kind of morphed into us carrying their products and adding additional products. And they added Radiaderm to our bag back in July or August. Now, Chemo Mouthpiece, they brought to us.
So they're a really good group, very innovative. They do a really good job. Their core business, at least today, most of their revenue, if not all of it, comes on the surgical side. It's the same two products we carry. They're just sterilized for surgery. The BIAKŌS and HYCOL, they call them something different on the surgical side, but that's their core business. And now they're getting into Tissue Health Plus, which is a value-based care model for wound care. That's their other piece that they've been talking about. But their core business is surgical wound care.
All right. And in terms of the new administration coming in, I know your revenue is all in the U.S., but you buy a lot of components. Are any of those components going to be impacted by the tariffs, possible tariffs?
I don't think so. A lot of what we do, Chemo Mouthpiece, for example, they get one component from Canada. The rest is made in the U.S. and built in the U.S. So there's no concerns there. Most of the devices are made in the U.S. or Mexico. We don't foresee a big impact with the tariffs at all. We haven't heard anything. We don't see. We've been through a lot of administrations over 38 years, and very little of it impacts us at all. We're a little bit shielded in that way, which is nice.
On the revenue side, do you see any potential changes in reimbursement coming?
No, we don't see anything new, good or bad. It's kind of the status quo going into 2025.
All right. All right. Well, that was the list of questions we got to a couple of minutes early, but I think we'll just give you a chance, Rich, to put out some closing comments and we'll end the session.
Yeah, I think it goes to your question, Jim, about 2025. I think 2024 is going to be a very solid year. We've certainly seen margins improve in Q2 and Q3. We should see continued improvement into 2025, both on the margin and the revenue line. With chemo mouthpiece and wound care and Biomed as our three opportunities, the investments have been made over the last couple of years. So now it continues to be just like we do with GE. You make the investment, you go get the revenue, and then the profitability will follow. I think we'll start to see that even more in 2025 and see more of what we've seen in the back half this year and the next year. And it's going to be exciting. Having new products and best-in-class products is always fun to launch, especially with chemo mouthpiece.
But what wound care and Biomed are going to do in the future as well, we're really well positioned to both grow and be profitable, hopefully for years to come.
All right. All right. Well, thank you, Rich, Carrie, and Barry. Appreciate the time today. Appreciate the time you took out to do the meetings with us today. And I'll talk to you on the next earnings call.
Thanks, Jim. Appreciate it.
Thank you.
Take care.
Bye, Jim.