Repro-Med Systems: Growth and More Growth - REPR

Repro-Med Systems sells the FREEDOM60® Syringe Infusion System as well as other medical devices. The company is profitable and has grown revenues at 29.6% annually since 2006. Repro-Med was co-founded in 1980 by CEO Andrew I. Sealfon, who owns 21% of shares outstanding.

Repro-Med's flagship product is the FREEDOM60® Syringe Infusion System. This device allows patients to receive constant drug infusion therapy without being tied to an IV stand, allowing them to go about their lives. It looks like this.

The device can be used to administer several different drugs, and the company continues to search for new applications. FREEDOM60® is approved for use in the US as well as many European and Asian nations. Very importantly, Repro-Med's product is the only Medicare-approved product for subcutaneous administration of immune globulin. I am not extremely familiar with medical terminology, but a little googling informs me that immune globulin treatment is given to patients with compromised immune systems and autoimmune disorders. Elements of FREEDOM60®'s design are patent-protected.

The company also sells the RES-Q-VAC® Suction Unit. In 2012, sales of the FREEDOM60® accounted for 86.4% of Repro-Med's total revenue, while RES-Q-VAC® accounted for 12.3%. Other legacy products made up the other 1.3% of sales.

The success of the FREEDOM60® has resulted in record revenues and operating income for the company over the last twelve months. In the quarter ended August 31,2012, revenues rose 43.3% over the same quarter a year earlier and operating profit leaped 203%.

Net income was artificially inflated in 2008 and 2009 as the company wrote up the value of net operating loss carryforwards that had previously been written off. A better gauge of true profitability is operating income, which reached a new high last quarter.

The company's gross margins are a thing of beauty, coming in around 65% for the last few years. These margins have remained steady as revenues increase, indicating the company has not had to reduce prices to stoke demand. Operating cash flow has lagged net income, but Repro-Med's rapid growth makes this only a minor concern. Growing companies must invest in working capital assets like inventories and accounts receivables, which depresses operating cash flow. (By contrast, poor operating cash flow in a company that is not growing is very worrisome.)

Repro-Med's balance sheet is extremely healthy, showing $1.94 million in cash and equivalents against total liabilities of just $1.22 million. The company also makes extremely good use of its assets, recording a return on equity of 32.9% in 2011 with minimal leverage.

Despite its track record of nearly 30% annual growth, positive free cash flow and robust profit margins, Repro-Med's valuation is modest.

On a twelve trailing months basis, Repro-Med has a P/E ratio of 9.00 and an Enterprise Value/EBITDA ratio of 4.35. Since, Repro-Med is growing so quickly, twelve trailing months data understates the company's earnings power. Annualizing results from the quarter ended August 31, 2012 gives a P/E and EV/EBITDA of only 6.03 and 2.98, respectively. Regardless of how it is calculated, numbers like these are more typically seen in low-growth or highly cyclical companies, and Repro-Med is neither.

Of course, the fact remains that Repro-Med is a tiny company competing in an industry dominated by gigantic international companies with deep pockets and huge R&D budgets. It's possible that new drug therapy regimes could render Repro-Med's products obsolete or changes to Medicare could reduce reimbursements for the FREEDOM60®.

Despite these risks, the company has been extremely successful in increasing revenues and profits. As Western societies (and eventually the rest of the world) grow older and require more frequent and more intensive medical care, medical device manufacturers like Repro-Med stand to benefit from ever-increasing demand.

Disclosure: No position.