Patient Home Monitoring Corp (TSX.V:PHM) Targets $250 Billion US Healthcare Sector – Interview

James West
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Patient Home Monitoring Corp. (TSX.V:PHM) Chairman Michael Dalsin discusses his company’s rapid growth strategy and unique business model in the United States Health Care market that is worth US$250 billion a year, and how they plan to grow their revenue from the current $50 million top line to $60 -70 million within the next twelve months. Ultimately, Dalsin sees his company growing to $300 million EBITDA before it becomes a takeover target for a bigger company.

Listen to the interview with Chairman Michael Dalsin:

The company’s recently released financial statements demonstrate a ~50% increase in revenue and ~300% improvement in profit. The company is essentially a consolidation rollup of small market patient monitoring services that serves out-patients who require ongoing monitoring and treatment at home.

Here is the full transcript of the interview:

James West:           Michael why don’t’ we start with an overview of what is the value proposition for investors in Patient Home Monitoring?

Michael Dalsin:       Sure well it’s important to understand the market to understand the investment proposition. So the market is the U.S. Health Care market . It is a nearly 3 trillion dollar market. You can break that down a number of ways but the way that we break it down is into acute care and chronic care. The $2 trillion acute care market and a trillion in chronic care. The difference between acute care and chronic care is you know if something is wrong with you, you go to the doctor or the hospital or you may not live, eventually. Or its something temporary that needs to be fixed. Chronic care – diabetes is prime example of chronic care, where you can live with this disease for 40 or 50 years, but you really need to stay on top of it on a periodic basis – either weekly or monthly. So we are focused on the $1 trillion chronic care business. We like that business because it’s largely the aging population. About 10,000 people a day turn 65 in the United States, so it’s a growing market.

We also like it because it’s a stable population of folks who need recurring services so it’ a subscription based kind of model. Their insurance covers everything that we offer. And we…so that’s the market. Our service is really about care coordination. So what we do is we take the device which is an in-home device either for treatment of diagnostics. By the way, of that $trillion dollar market, about $750 billion is in devices and device development and device sales. That’s really an intellectual property driven business – that’s not us. And then when that manufacturer whether it’s a large or a small manufacturer developer develops a new device that gets FDA approved and gets reimbursed by Medicare, they usually put it in the hands of a business like ours. So we are a care coordination business – that’s roughly a $250 billion market. And we basically deal with the patient, the doctor, the insurance company and the device company, and we coordinate care between those 4 parties. Obviously for the benefit of the patient, but the insurance company is the payer. So we really have three customers. The doctor who writes the prescription, the patient who gets the end service and then the insurance company pays.

Our strategy in PHM is really about patient acquisition. What we’ve learned, is of this $250 billion market, its very very fragmented, largely because it’s a new a market. You know, 20 years ago that market was very small, and technology advances along with the cost pressure of this large aging population – that has really created this impulse to push treatment into the home out of the hospital. And that has been a long 10 to 15 year trend, 20 percent market growth, and this advance in technology has really created the ability to have the patients treated much more cheaply in the home. And a lot of these new devices and new technologies and new reimbursement codes are not immediately adopted by the large multi-billion dollar companies in our space. They are adopted by the entrepreneurs who are usually the sales reps of the device company, sometimes doctors themselves think they can make more money doing this care coordination than being a physician. So it’s small little companies all around the country – $10-20 million in sales, usually highly focused on one disease space. So they might only service pulmonology disease. And the reason they do that, ultimately, is because they know that market. They know the sales reps, they know the doctors, they can get prescriptions, they know pulmonology. And as they start developing their market, they become a little bit profitable – they make a couple of million dollars a year – but for us, the most important part of that acquisition is the patient database.

Because in fact, as a party gets older in the United States and probably around the world but certainly in the United States, that person has a high high likelihood of having more than one chronic illness – even two or three or four chronic illnesses. And in fact, one chronic illness may cost $1, 2 chronic illnesses cost $7. So there’s a complication when you have a couple of chronic illnesses. And in fact for the patient, it would be much more convenient if they could actually just have one service provider for all of their chronic diseases. And that’s what PHM is focused on – looking at the early adopter, the early stage technologies that are reimbursed, so there’s no reimbursement risk, there’s no technology risk for the patient to be able to have one service provider for these new technologies and services. And the simple math here is that we go in and buy these businesses at a very good multiple – 2 and a half to three times EBITDA – so we get a good multiple on the business. But we believe we can increase multiples significantly post-acquisition because the minute we buy a company, we acquire their talent, their expertise because they take stock mostly for the transaction. We acquire their knowledge and their technical expertise for being able to deploy the service that we’re about to offer to all of our patients. And then, most importantly, we take this database and then we just start cross-pollinating. We have a company with $20 million in sales now in the pulmonology services space, and we’re starting to sell cardiology services into these patients after we’ve bought the companies. And last quarter, we had about 8% of our sales was in this cross-selling, very high margin business, and that was kind of reflected in our financials. Our sales last quarter went from $2.6 million to $3.6 million, roughly, – I think it was 2.4 to 3.6 million in sales – so 50% increase in sales quarterly, but our profit went up 300%.

James West:           I wanted to talk about that for one second – so what is your gross margin?

Michael Dalsin:       Well our blended gross margin is right around 45%. But really what we’re doing is we’re buying companies with lower grow margins – their gross margins are probably in the 30’s – and our cross selling efforts – our newer more innovative cross-selling services are 70 to 80% gross margins.

So complex COPD, monitoring people on blood thinners, these are 60 to 80% gross margins. So what we’re doing is buying a business that historically trades lower multiples because they have lower margins, and after we buy the business we are pushing through higher margin business. And the resulting outcome is rising gross margins. And more importantly, the marginal cost to add that revenue is very low because we already own the patient. We already have a relationship. There’s no extra sales cost. There’s very little extra administrative cost. So what you see is what you saw last quarter – a 50% increase in sales and a 300% increase in profit.

James West:           Sure so you’re essentially the first consolidator in the space.

Michael Dalsin:       Well I wouldn’t say that. We are certainly the first consolidator in the very small market. As I said, it’s a $250 billion market, but in the US it’s interesting. You know, a lot of people ask well “Why are you a Canadian company?” And the answer is, “You can really only do this kind of an acquisition rollup strategy if you’re in a micro capital market. The US market – if you get US market money, you’re a $100 to $200 million, and you are not going out and buying $10 million deals. Because you would die of exhaustion. So you’re looking at $50 million deals to $80 million deals. And remember that’s still a small deal in a $250 billion market.

The largest company in that market is $5 billion – that’s Apria [Healthcare Group –private]. So it’s really fragmented – you have $100 million, $200 million, you have $ Billion – we’re in the very small market range. And so we really have no competition, and we are absolutely the first in the small market range. We’re buying $10 to $20 million revenue businesses. There’s really no one else in there, and the reason simply is, we have access to capital in a micro capital market that is the TSX, that really no one else can get. And that’s our competitive differentiator.

James West:           So will you ultimately become a target for Apria?

Michael Dalsin:       Yeah I think that’s probably right. You know, in my previous job, I was with a private equity fund called Stanmore Capital, and a lot of the transactions we did were in that $100 to $300 million range. So I’m most comfortable in that range and that’s my goal for this business is to – through acquisition and cross-selling and increasing gross margins, get this business to $250 – $300 million, and I do think at that point we are a very ripe takeover target for 9 to 7 times EBITDA from what I’ve seen. So our goal right now is to keep on finding companies to buy and you know, there are a lot of them out there that we get lots and lots of leads, and we can do a deal a quarter, we have plenty of cash, we have plenty of cash flow, and we have a warrant that is sitting at $0.36. Our stock, when we get to that point, we get another $7 million worth of cash, so we’re cashed up, we’re cash flow, we’re profitable, we’ve got plenty of acquisition targets ahead of us. We’ve got a great operating team – a guy named Andy Fulmer who is the president of the company really is a top notch operator, and he knows how to integrate these companies, operate these companies, he’s very efficient, very numbers focused. He’s a CPA, so originally an a accountant, but he’s got a lot of creativity and operational expertise, and he can operate these things, I can buy these things and can increase gross margin and it’s really the next 6,7,8 9 quarters, it’s just plodding ahead, buying, increasing margin, buying, increasing margin, and I think the ultimate outcome of that is really increasing EPS. Every quarter, my goal is to have significant increase in earnings per share.

James West:           Wow. Okay. Interesting. What are the barriers, what are the challenges ahead that could derail your ambitious plans?

Michael Dalsin:       Well you’re right –it is an ambitious plan so that’s a very good point. The biggest issue, I believe is, you know, when you buy a company, you find the truth the day after you own it. So there’s a lot of BS that goes on in advance, and then the day you buy, it’s kind like, okay, show me the ugliness. It helps that we’re doing mostly stock deals cause a lot of that ugliness comes out in advance. We’re locking up their stock for a period of time, we’re using that stock as collateral against anything that might happen that’s ugly, they’re also our partner the day after so they have to kind of work with us and so they’re not really kind of getting away with anything. But sometimes they don’t even know. These are small businesses. It’s not like they’re General Electric and they might have some surprises that they didn’t know about. So the momentum we have on a quarter-by-quarter basis in buying these things, you know if we can buy them and integrate them and we don’t find surprises that are too expensive or lengthy to fix. There are always surprises – its just a question of how much and how long – but if we can keep doing that, we’ll hit our plan. If we get derailed – and I think derailed is a strong word, but where we’re going to get slowed down is through the quicksand of an ugly deal. We’re $5.5 million in EBITDA right now, maybe we buy another company, and maybe it – you know these are annuity based companies, so they’re not really going to reduce revenue, but maybe there’s some operational issues. Maybe we’re not going to make as much money the day after we buy them and our operational team has to dedicate resources to fixing it. Then we’re backing up – we’re not buying a deal every quarter, we’re buying a deal every 8 months or 9 months. Our growth and EPS is triple digits it’s maybe single digits or double digits. So my view is really – it’s not a question of if this is all going to happen, it’s a question of when, and how quickly, and that’s really a question of a little bit of luck – I mean, I hate to say that, but it’s true. We do a lot of due diligence and we try to do everything can to uncover the rashes, but there are some times in the M&A world where you buy something and it kind of turns to sand and it takes time to organize it and deal with it. Again, we’re abated a little bit because we’re a subscription-based company, so the long term care with patients. So if there’s issues, they’re usually on the cost side, and you can deal with those relatively quickly. It’s not like a multi-year issue or a multi-month issue. But that’s certainly one big major risk and I do imagine a quarter, I mean, one quarter where we have a problem, and I have to go to shareholders and say ‘Listen. We’re not going to an acquisition for another six months because we have to solver our issues. I imagine that might happen at some point. The biggest market risk we have is Medicare reimbursements always go down.

So for the same service we’re offering this year, we’re going to get paid less next year. Those aren’t usually severe – they’re 2 or 3 or 4 percent a year – but that just means we have to get more efficient and our operations have to be better and the scale – we tend to do that. We’re a $30 million revenue company now. I think we can get to $60 or $70 million run rate within the next twelve months. Twenty percent to 25 percent EBITDA margins. I used to target 20%, but we’re doing well enough now that I think I’m comfortable saying it and I think we can get to 25% EBITDA margins. So we’re just kind of a ship sailing along very nicely, and there are certainly waves around, and we need to figure out how to de-risk those waves, but I don’t think there’s anything that’s going to sink the ship, from the business model perspective.

James West:           Ok Mike well that’s a great first interview…I’m going to try you again in three months and see how your progress is and thanks for taking the time.

Michael Dalsin:       Thank you James.

 

 

 

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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