I am excited to share this guest post and great write-up on Repro-Med Systems (REPR). A bit of background info about the author, in his own words: “My name is Frank Lind. I am an individual investor living in Taiwan. My investment approach is to take concentrated positions in high-quality nano-cap and micro-cap stocks. I look for good growth prospects and some kind of competitive advantage at a cheap price.”

Repro-Med Systems (REPR) is a great little company which is basically undiscovered by the market. The best part about this company is its high-margin recurring revenue stream. This is explained later in this report.

Investment highlights:

l  The sale of one of their subcutaneous infusion pumps guarantees at least a six year recurring revenue stream to the company.

l  The FREEDOM60(R) Syringe Infusion Pump is the only Medicare-funded pump for Subcutaneous Immune Globulin (SCIG).

l  Its product is the most technologically superior and the cheapest.

l  Revenue has grown from 1.7 million to 4.7 million over the last 4 years.

l  Net Income has steadily grown from ($254,000) to +$704,085 over the last 4 years.

l  Earnings are accelerating due to the rapid growth of the use of subcutaneously administered immune-deficiency drugs.

l  The company is expanding its manufacturing capacity to keep up with demand.

l  Growing medical companies are recession-proof.

What does this company do?

REPR has two main products. The main product, and the main driver of growth, is the Freedom-60. The Freedom-60 is a specialized infusion pump that administers various types of drugs to patients subcutaneously rather than intravenously. This means the drug is injected into the fat of the body just under the skin, rather than the vein.

Their second product is called the RES-Q-VAC. This is a portable suction pump. Sales of this product are trending up, but are lumpy and not really important to the valuation of this business. Thus, this entire report will concentrate on the Freedom-60.

The advantages of subcutaneous administration

Currently, the most widespread use of subcutaneous administration is for primary immunodeficiency disease using drugs called immunoglobulins. These help individuals with immune deficiencies to live a more normal life. The two main drugs in this area are Vivaglobin and Hizentra – both made by CSL Behring.

People are switching to subcutaneous immunoglobulin (SCIG) because:
– It is more convenient because treatment can be done at home rather than at a hospital.
– It costs less.
– There are less adverse reactions.
– Since treatment is generally done weekly instead of monthly,

the immunity level remains more constant, which should help keep the patient more healthy.

Further research on the superior efficacy of (SCIG) can be found here and here.

Therefore, the market for this kind of therapy is rapidly growing with an estimated 10 million people with this disorder.

Enter Repro-Med Systems and the Freedom-60 infusion pump.

Competitive advantages of the Freedom-60

  1. 1. The company’s 10-K states – “In June 2007, Medicare issued a letter of clarification stating in part:

“The FREEDOM60(R) Syringe Infusion Pump is the only allowable pump to be billed with the Subcutaneous Immune Globulin (SCIG). …All other pumps or modifiers will result in a denial.”

This is important for several reasons.

First, the lack of funding for other devices creates a huge competitive advantage against other companies.

Second, application for funding takes a considerable amount of time, as bureaucracies tend to move at snail’s pace. Thus, if any company has noticed this niche market, it is going to take considerable time before they can possibly get a device approved. In that time, so many more Freedom-60s will have been sold and the recurring revenue stream can be secured.

Third, there is NO guarantee that potential competitors can actually receive Medicare funding approval. In my communications with the CEO, he described the approval process as something of a “black art”. He surmised the reason the Freedom-60 received funding was because of its superior performance and its extremely competitive price point. He also said, should a multi-national decide to compete in this niche market, it would make more sense to acquire his company than go through the process of

a) actually developing a product at such a low price-point

b) developing the years of know-how that have gone into the Freedom-60.

2. The Freedom-60 is technologically superior to more expensive (non-Medicare funded electronic infusion pumps). This is best summarized by the 10-K –

    “Our proprietary technology employed in the FREEDOM60(R) uses constant pressure to administer drugs. FREEDOM60(R) 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 over pressure 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.

    Other unsafe conditions of conventional equipment include runaway administrations; overdose due to programming errors or pump failure, and over-pressure resulting in burst blood vessels or failed internal access devices. We believe that the increasing sales of pumps and tubing sets for the FREEDOM60(R) demonstrate that the FREEDOM60(R) eliminates these potential outcomes and ensures a safe, constant, controlled infusion. Electronic devices will increase infusion pressure while attempting to continue an infusion at the programmed rate, while the FREEDOM60(R) design maintains a safe constant pressure and thereby automatically reduces the flow rate as required, a process we refer to as “dynamic equilibrium,” if any problems of administration occur.”

    3. Cost-constrained Medicare funding heavily favors cost-efficient devices.

      As can be seen on page 41 here, the Freedom-60 is the cheapest device available on the market. Debates over health-care spending continue, but there is no doubt over the long term cost-containment rules. This plays into Repro-Med’s hands.

      Recurring Revenue

      The best part, from the point of view of investors, is once the Freedom-60 is bought, the patient with immune-deficiency disorders must continuously purchase disposable tubing sets.

      From the 10-K:

      “We estimate that each FREEDOM60(R) pump, when used for immune globulin administration, uses an average of four to six tubing sets per month per patient. Antibiotics may be administered much more frequently, occasionally up to four times per day. In some cases, a tubing set may be used for as long as 72 hours. We estimate tubing set usage for antibiotics to be as much as 10 sets per month per patient. The tubing sets currently have an average price of $5.41.”

      The list price of the Freedom-60 is $399

      The revenue information that they put in the 10-K regarding disposable sales indicates that they are thinking big.

      Pumps in the Market Annual Sales of Disposables

      5,000                                $1,530,000

      10,000                                $3,060,000

      50,000                              $15,300,000

      100,000                             $ 30,600,000

      I think the above table speaks for itself

      The tubing sets are patented and only Repro-Med’s tubing sets will work.

      From the 10-K – “Our patented luer disc connector ensures that only the Company’s FREEDOM60(R) tubing sets will function with the pump. Non-conforming tubing sets, without the patented disc connector, are ejected from the pump to prevent the danger of an overdose or runaway pump from injuring the patient. We are achieving our objective of building a product franchise with FREEDOM60(R) and the sale of patented disposable tubing sets.”

      The other key point about this type of recurring revenue is it allows for continuous improvements in operating margins because dollars are not having to be spent to incur new sales.


      Revenues are currently growing at more than 40% annually with earnings currently growing more than 100% sequentially.

      Furthermore, the automatic recurring revenue through the tubing sets will certainly allow significant operating [not gross] margin improvements.

      25% compounded revenue growth over 4 years is easily achievable

      Operating Margins should rise from 25% to at least 30%.

      Assume the shares outstanding are about 40 million in 4 years.

      So, TTM Revenue compounded at 25% for 4 years = $12,800.997

      30% operating margin = Operating Income of $3,840,299

      Tax of 35% = Net Income of $2,496,194

      Divided by share count of 40,000,000

      = EPS in 4 years of 0.0624

      Now choose various PE ratios to give a 4-year price target.

      I chose a PE of 14. I believe this to be conservative given the quality of the company’s business model

      Multiplying these two gives a price target of $0.87 vs the current price of $0.37

      Over 4 years, growth in price from $0.87 from $0.37 is a return of 23.83% per year.

      Further points of interest:

      1. According to the immune deficiency organization (primaryimmune.org) there are more SGIG drugs that are going through trials right now. This should further increase demand for SCIG treatment and Freedom60 sales.

      2. On May 20, 2011 REPR received their long anticipated FDA approval for the marketing of their new needle set. It is expected this approval will lead to a significant increase in sales and REPR is undergoing significant manufacturing expansion in anticipation of this.

      Disclosure: The author of this guest post is long REPR.

      A few weeks ago, I wrote about my first international stock – Fuji Oozx – a net net stock trading in Japan.

      Japan has the highest quality net-nets of anywhere in the world, and despite the historic challenges of investing in the country, I’ve taken the plunge and allocated a small but not insignificant portion of my portfolio into a few of the most promising net-net stocks.

      Company Overview

      Dainichi Co. LTD (5951:TYO) manufactures and sells oil heating and environmental equipment such as kerosene heaters, air purifiers, fuel stoves, humidifiers, and coffee makers. Just like Fuji Oozx, Dainichi has been in business for decades, going back to the company’s start in 1964.

      These are the businesses I like investing in, boring businesses that are often ignored by investors looking to capture the newest technology trend.

      Financial Results

      Dainichi Financial Overview

      As with many Japanese companies, Dainichi reported its 2011 annual results last month, reporting sales of ¥18,738 million, up 2.18% over the prior year.

      The company saw a steep drop-off in sales during 2008 (when sales fell to ¥14,712 million), but business has rebounded nicely since then.

      Operating income came in at ¥1,904 million, with operating margins returning to double digits, a significant improvement over the ~4% margins during the depths of the recession.

      Net income was ¥1,041 million, the best result since 2007.

      Importantly, the company has remained profitable for the past 10 years, a rarity in the world of net-net investing.

      In all likelihood, Dainichi will continue to report decent profits for the foreseeable future.

      Balance Sheet

      However, my investment in the company is due to the balance sheet rather than earnings power.

      At recent prices, the stock trades with a market cap of roughly ¥11,500 million, yet carries ¥11,038 million in cash and cash equivalents on the balance sheet.

      Combining this cash balance with the ¥792 million in “Securities” translates into a negative enterprise value, meaning the market is assigning a negative value to an operating business that is cash flow positive and profitable.

      In addition, the company also holds ¥3,745 million in “Investment Securities”, which includes equity shares, company bonds, and municipal & government bonds.

      Although these types of securities are usually not included in the cash balance, they represent relatively liquid securities which can be easily converted to cash.

      This means that a large portion of Dainichi’s NCAV is made up of highly liquid assets, as opposed to other net-nets where the majority of assets are tied up in things like inventory (which are usually company-specific and often end up obsolete).

      Book value is ¥22,374m, for a P/B value of 0.51. Book value has grown since 2006, but only at 1.43% CAGR, typical for many of the small Japanese companies I have researched.

      While growth is low, the company has reduced shares outstanding at a decent rate, with shares falling from 19.1m in 2006 to 17.7m in 2011, for a net reduction of roughly 7%.


      For a Japanese net-net, Dainichi’s operating metrics are pretty decent: average ROE is 4.29%, ROIC is 8.42%, and CROIC is 8.2%.

      FCF yield is currently 5.4% using 2011 owner earnings – however, capex in 2011 was 2x the average from previous years, a number that had traditionally been very stable.

      FCF using the formula “operating cash flow – capex” is much lumpier, but at current prices, translates into a FCF yield of more than 23%.

      Here are several valuation scenarios after applying very conservative assumptions to the value of the operating business:

      Dainichi Valuation Scenarios

      Both the EBIT and FCF figures (FCF is calculated using both owner earnings and traditional FCF) are using the company’s 5-year averages, which obviously take into account the global recession of 2008/2009 – Dainichi’s true earnings power is likely higher.


      The recent Japanese earthquake did not affect Dainichi’s 2011 figures, but results could be impacted in the upcoming quarters.

      There is also currency risk with the Japanese yen, a risk that I’m choosing not to hedge (read this post on currency and value investing for a good explanation of my position on currencies, along with my conclusion in the Fuji Oozx post).

      While Dainichi is not ‘exciting,’ consistently profitable, cash flow producing companies should not be selling for less than net cash, and would never do so in the private market.

      Despite Japan’s record of poor corporate governance and anemic investment returns, I think there is a substantial margin of safety in investing in these net-net situations. It will likely take a few years for the market to re-price these securities, but I don’t think they will stay ignored forever.

      In the mean time, Dainichi pays a dividend, currently yielding 2.81%, cushioning the waiting game a little bit.


      Long Dainichi (5951:TYO)

      Check out another view on the company here.

      This is another update on recent news and results for some of my current stock holdings, following the theme from my post on first quarter results.

      To be efficient, I’m once again going to combine several short blurbs into a single post.

      Access Plans Inc (APNC)

      APNC continues its amazing growth trajectory, recently reporting a 155% increase in fiscal second quarter earnings (which follows a 69% increase in Q1 earnings).

      Quarterly revenue increased 5%, as solid gains in the Wholesale Plans (+12%) and Retail Plans (+4%) segments were partially offset by a decrease in the Insurance Marketing (-6%) segment.

      The company benefited from a large decrease in direct costs, fueling the large jump in earnings.

      Consider: In the first six months of the fiscal year, APNC has already earned more net profits than in all of 2010.

      APNC is throwing off a ton of excess cash, with the net cash balance growing to $8.89m this quarter. Despite this rapid growth, the stock continues to trade at less than 5x TTM EV/EBIT and less than 8x EV/FCF.

      As a continued vote of confidence, one of APNC’s largest shareholders, Russell Cleveland of Renn Capital Management, increased his stake by over 350k shares to 10.1%.

      While there has been no news, the assumption is that the company is still exploring strategic options for unlocking shareholder value, including a going private transaction – I see this has a strong potential catalyst.

      Iteris (ITI)

      On a pure numbers basis, ITI is out of place when compared to the majority of my portfolio (which is focused on companies trading at a discount to assets, such as Fuji Oozx or IBAL).

      ITI recently reported fiscal fourth quarter fiscals for 2011, with revenues up 4% as compared to the same quarter last year, primarily driven by the recent acquisition of Meridian Environmental Technology (MET).

      The company continues to see strong growth in its product businesses, but revenues were held back by weakness in the Transportation Systems segment.

      Operating income for the quarter was $0.67m, down from $1.19m last year, primarily due to increased sales and marketing expenses and costs associated with the MET acquisition.

      For the fiscal year, the numbers are not great, with the company reporting an operating loss of $4.7m due a large impairment charge taken in the third quarter – backing out the impairment charge shows operating income roughly flat when compared YoY.

      This impairment charge also has no effect on cash flow, as the company reported almost $5m in FCF. ITI’s cash balance now sits at $11.8m, offset by roughly $3m in debt.

      Despite a history of losses, Iteris reported its fifth consecutive year of profitability, and has paid down over $11m in debt since 2007.

      Iteris is probably considered more of a growth stock rather than a true value play, but it’s a name where I believe in the industry trends that back  the company’s technology.

      Consider these points from the latest conference call and recent investor presentation:

      • Expect Global Intelligent Transportation System (ITS) Device Market to reach $65b by 2015, up from $24B in 2010, growing 22% CAGR
      • Road and other infrastructure spending projects usually project $1.50 back as return for each $1.00 invested – comparatively, spending on management infrastructure (in ITI’s sweet spot) usually sees a 7x or more return for each $1 invested
      • Next Federal Highway Bill will provide a ‘shot in the arm’ for growth – expected to pass this year
      • EU mandate for LDW in commercial trucks will start boosting sales in 2013 ; by 2015, expect 10-20x increase in demand

      ITI management sounded very bullish on the latest conference call, with the CEO saying that he expects Iteris to do $100m in sales within the next 18 months!

      The stock has struggled, but it’s hard to come up with a valuation less than $2/shr based on current metrics – if the growth materializes, the stock could appreciate significantly from current levels.

      New Frontier Media (NOOF)

      As opposed to ITI, NOOF violates my rule to avoid investing in business facing industry headwinds. NOOF is not in a great industry, and is therefore ignored by many in the investing world.

      But at some point, even unloved stocks in bad industries are just too cheap to ignore.

      NOOF reported $48.7m in revenue for fiscal 2011, down 3.4% from 2010, continuing the string of slow but steady declines going back to 2007.

      After taking a string of impairment charges over the past few years, operating and net income have both been ugly, but appear to be trending in the right direction – net losses have improved from $5.2m in 2009 to $1.7m in 2010 to only $0.8m in 2011.

      The company will likely see continued pressure in the domestic Transactional TV business (the main source of profits). Growth is manifesting nicely however in international markets, where sales have increased 64% YoY to $5.9m.

      Despite the GAAP losses, the company has enjoyed positive operating and free cash flow going all the way back to 2004.

      The cash pile just keeps growing, and NOOF now sits on $18.8m in cash offset by no debt.

      Management made a number of strong moves during 2011, including consolidating facilities and investing in new storage equipment.

      These measures caused capex to jump to over $5m during the year.

      In 2012, the capex figure should drop significantly, as the business only requires a normal ongoing capex of $0.3m per year.

      While the business may be in decline, it’s hard to see a future where NOOF disappears overnight – the business should continue to throw off cash for the medium-term.

      At these prices, the stock is selling at a 45% discount to book value and only 2x FCF, for a FCF yield of almost 50%.

      That’s just too cheap in my book, and I expect to see management return some of the excess cash to shareholders once the business stabilizes.


      Long APNC, ITI, & NOOF