Morsa Images/DigitalVision via Getty Images

Morsa Images/DigitalVision via Getty Images

Retractable Technologies (NYSE:RVP ) has built a reputation for providing high-quality and unique medical syringes. In addition, the constant high demand for medical supplies and the company's expansion opportunities gives it a good position for future long term growth. This provides a great buy opportunity for this high growth healthcare stock.

Retractable Technologies Inc develops and manufactures medical products most notably injection devices, such as needles and syringes. They have 3 types of syringes: the Vanish Point, the EasyPoint, and the Patient Safe. Their syringes incorporate a safety mechanism to help prevent healthcare workers from any needlestick injuries.

Recently due to the pandemic, Retractable Technologies has been getting large orders from the Department of Health and Human Services. This included a $83.8 million order for automated safety syringes in May of 2020 to supply the vaccines as well as an additional $147 million order for additional safety syringes in February of 2021. This resulted in total sales of $113.7 million and it accounted for about 60.3% of the company’s total revenues for 2021.

This is by-far the company’s most popular syringe. It comes in different sizes and it works by having the needle automatically retract from the patient into the barrel of the syringe once the lunger handle is fully depressed. This helps to eliminate almost all exposure to the contaminated needle which in turn helps to reduce risk of needlestick injuries. These needles meet the criteria of pharmaceutical manufacturers to low dead space, meaning that there is limited space between the syringe hub and the needle, resulting in lower medication waste. As of 2021, these syringes comprised 93.6% of the company’s revenues.

These syringes have considerably less demand than the Vanish Point Syringes but they still serve a great purpose. They help to reduce the risk of bloodstream infections from contamination in the catheter hub, which is used in procedures such as blood tests.

This is Retractable Technologies’ newest product. It features an automated retraction technology that allows the needle to automatically retract into a safety chamber once the needle has been used. What makes this syringe unique is that it allows for the activation of the retraction technology when the needle is still in the patient, protecting the clinician and the patient from exposure to blood or body fluids. As of 2021, the EasyPoint syringes only accounted for about 5.1% of the company’s total sales, but with its new technology, we should see the demand for these syringes rise.

The medical supply industry is a booming industry with constant demand. This demand is due to the increasing number of patients approaching medical facilities. Also, the global medical supply industry is being driven by the increase in the number of infections in regions of Latin American and the Asian Pacific. The medical supply market is expected to be around $133.5 billion by 2025 with a CAGR of 4.6%. However, one thing that may be troublesome to many of the medical supply companies, especially new emerging companies, is the government regulation. The government agencies are closely monitoring this industry and making sure that companies follow the safety guidelines and quality standards. These regulations are becoming more strict and it has become difficult for companies to keep up with the growing production costs as well as the strict government policies.

The COVID-19 pandemic also helped to accelerate the market growth. According to the World Health Organization, there were about 89 million masks, 76 million gloves, and 1.6 million googles required for COVID every month. The United States alone needed 28.5 million face masks, 7.9 million COVID-19 test kits, and 139,000 ventilators along with the 587 million doses of the COVID-19 vaccine.

The question now lies in what happens after the COVID-19 pandemic starts to die down. I believe that as time goes on, people will start to develop their own immunization for the COVID virus but vaccines are still vital to help build the body’s immune system. These vaccines will be similar to the yearly flu vaccine. In addition, injections are still very important and used in many medical procedures. This includes treatment of diseases such as AIDS, tuberculosis, and malaria, especially in third world countries, leading to a consistent high demand for injections.

The global disposable syringe market itself is valued at about $13.45 billion in 2021 and it is expected to grow at a CAGR of 6.12% between 2022 to 2030 while generating a revenue of $22.81 billion by 2030. This growth is likely due to the increasing presence of chronic diseases, a rise in the number of surgeries, and the growing use of safety syringes. Each year, over 33,800 HIV infections, 315,000 hepatitis C transmissions, and 1.7 million hepatitis B infections are caused by unsafe injection practices around the world. As a result, there is a great demand for safety syringes in order to keep the patient as well as the nurse safe. Safety syringes has led the disposable syringe market with a revenue share of 64.03% in 2021 and with their health benefits and safety precautions, safety syringes will likely maintain their position throughout the market growth.

Competition in the medical supplies industry is tough. One of Retractable Technologies’ biggest domestic competitors is Medtronic (MDT). Medtronic is much larger than Retractable Technologies and controls a larger market share, as well as greater financial resources, larger sales, and higher market influence. Despite this, the company’s competitive advantage lies in their product quality and their product performance. The company has developed a unique syringe that includes a passive safety activation system, requires less disposal space, and can be activated while still in the patient, keeping both the patient and the nurse safe. They have a consistent and reliable supply network which helps to ensure the quality of the products in addition to being much more scalable based on consumer demands. Their products are also fairly heavy on intellectual property. Retractable Technologies has many patents for the EasyPoint syringe technology and trade names/trademarks for their EasyPoint, VanishPoint, and PatientSafe products. This helps to maintain their originality and uniqueness from their competition.

Revenues and revenue growth have been very healthy for the past couple of years as the company has recently become profitable through the pandemic and net income has been growing at high rates. The company’s balance sheet looks pretty strong. Total assets have over doubled from the previous year as well as the company’s inventory, all while minimizing debt. This has helped lower Retractable Technologies’ Debt/Equity Ratio to 1.9. This lowers the risk for potential investors and it also helps the company to get loans and additional financing from creditors for its product growth opportunities. One thing to watch out for is the company’s negative free cash flow. The cause of this is the big purchases of property, plant, and equipment. However, this may not be all that bad because the investments in property and equipment could help make the production process more efficient, and therefore lowering production costs and increasing profit margins as well as profitability of the company.

We can see that when comparing Retractable Technologies to its competitors, using any valuation metric, Retractable Technologies is still considerably cheaper. Also, with the exception of Sensus Healthcare, Retractable Technologies has a significant growth advantage over its competitors. However, it is important to note that between 2019 and 2020, Sensus Healthcare had a huge dip in its revenues which explains its tremendous growth between 2020-2021.

Since the company is still incurring negative free cash flow, I decided to perform a discounted future earnings analysis instead as the company has recently become profitable in 2019. For the growth rate, I have based it off of the company’s historic growth as well as taking into account its recent outburst in growth and its future growth as COVID starts to abate. The perpetual growth rate is chosen between historic inflation rates of 2-3% to match the economy growth and as for the discount rate, I used the company’s weighted average cost of capital. When projecting future earnings, I have used the earnings for the year 2019 before the COVID vaccine was really introduced. This provides a more natural earnings growth for Retractable Technologies and a more accurate intrinsic value.

One of the main growth opportunities for Retractable Technologies is to build new revenue streams and diversify its product offerings. The company’s development team and supply distribution network has already shown its effectiveness in product quality. Since Retractable Technologies has a low D/E ratio, it encourages lenders to give the company loans to invest into R&D. New trends in the healthcare industry as well as consumer behavior give Retractable Technologies a great opportunity to innovate new products and target the changing consumer demands.

Another growth opportunity for the healthcare company is to expand to more places outside the United States. Currently, only about 11.1% of the company’s revenues were generated from international sales. Targeting third world countries especially those in Latin America would be a great market opportunity for the company to increase its global market share as well as its sales.

One potential risk for Retractable Technologies is that its sales and earnings could slow down after the COVID pandemic starts to die down. From 2019 to 2021 and continuing on till 2022, Retractable Technologies had a huge boost in sales due to the COVID vaccine shots as well as the booster shots. Once the pandemic starts to abate, its revenue growth could taper. This makes it very important for the company to continue developing new products and increasing their revenue streams.

Recently, raw material costs have been rising which would increase production costs for Retractable Technologies. Also, with government regulations in the medical supply industry becoming more strict, the rising compliance costs to adhere to the regulations would be a problem to the company’s profitability. Finally, the company will have to incur many costs to maintain their intellectual property rights. Much of the company’s competitive strength lies in their unique technology of their products and their patent and trademarks rights help to ensure that uniqueness. However, maintaining intellectual property rights isn't cheap and if one of the patents/trademarks expire, Retractable Technologies would see a significant loss of sales.

Much of the company’s operations are dependent on the timely delivery of their products from their manufacturers in China to clients and the government in the United States. The COVID pandemic has affected global supply chains with disruptions and delays in the transportation of goods. If the delays continue, it would harm the company’s ability to meet consumer demands and threaten the company's operations.

I would rate Retractable Technologies a buy with a price target of $5.09. Although the company is still fairly small, with a market cap of $148.21 million, its future looks bright with new development and new opportunities for growth and expansion of the business. Investors willing to wait 3-4 year could see the share price of Retractable Technologies rise even higher than the price target.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.