[VIDEO] MidasLetter Interviews Patient Home Monitoring Corp. Michael Dalsin and Roger Greene
What do Roche Holding Ltd. (VTX:ROG), Abbott Laboratories (NYSE:ABT), Baxter International Inc. (NYSE:BAX) and Bayer AG (ETR:BAYN ) have in common with Patient Home Monitoring Corp. (CVE:PHM) (OTCMKTS:PHMZF)? PHM sells all their products to a growing database of customers in the United States.
In this exclusive interview, Roger Greene and Michael Dalsin – the driving force behind Patient Home Monitoring and a growing list of additional high flying TSX Venture healthcare deals – describe how the PHM came into being, what makes them such a solid team, and why the dilution that is part and parcel of the company’s rollup strategy is actually a good thing.
James West: Michael Dalsin and Roger Greene are the driving force behind a new breed of healthcare companies listed on the TSX Venture Exchange. Today they join me in the studio to discuss the value proposition, the business model, and the future prospects for investors in Patient Home Monitoring Corp., trading on the TSX Venture under the symbol ‘PHM’
Gentlemen, thanks for joining us today.
James West: Lets start with a discussion about how you guys came together to work on these companies and how Patient Home Monitoring came into existence.
Michael Dalsin: Well Patient Home Monitoring was a company that our fund made an investment in about five years ago, and about 18 months ago, Roger and I became principally involved – we actually bought the fund out of their shares and we became principally involved and basically took over the company.
We saw the opportunity in Patient Home Monitoring through a couple of different views. One is the fact that 10,000 people a day turn 65 in the United States. The other is that, as people get older, they tend to have chronic illness, multiple chronic illness. And the third thing we’ve seen in this market is its massively segmented, or fragmented I should say.
It has probably 10,000 little companies, and the key with each of these companies is that generally the entrepreneur knows a particular disease state, or a particular type of doctor. So often what will happen is someone who is a pulmonary sales rep for a large – like Roche Holding Ltd. (VTX:ROG) or Abbott Laboratories (NYSE:ABT) or Baxter International Inc. (NYSE:BAX) or Bayer AG (ETR:BAYN ) – he’ll know a lot of pulmonologists. He’ll go to the pulmonologist, and he’ll basically sign up the pulmonology patients for COPD treatment of sleep treatment. They run these companies, they’re good little $10 million or $12 million little companies, and they have maybe 20 or 30,000 patients, but they’re ever really focused on the pulmonology aspect of the patient.
These patients are older. They have multiple chronic illness. So you can in the right way you can offer these patients multiple services. It makes life easier for the patient and its actually cheaper for the insurance company to be able to have a single provider. And for us, we’re basically M&A guys – we basically go in and buy these businesses.
It’s a very simple business model – go buy a business on a trailing 12 basis. The trailing 12 profits are based on one indication of the database. Once we buy the database, and the patient is our patient, we can offer up other services to that patient, and on a going forward basis, we simply increase revenues or profits through providing multiple services to the patient.
James West: Ok. So what’s your position in all this Roger?
Roger Greene: I think Michael and I have worked together a long time. I think we have different viewpoints and personalities. Frankly, I’m probably the person who looks at eh company strategically and looks for some of the downside risks. We look at these companies – why are they selling? Are they trying to pull something over on us? But that doesn’t give you the upside. Michael I think has often had the vision of what we can do, how we can make these companies better. So for this company to succeed we need to do two things: We need to buy companies that are good companies – we can’t have any losers – but once we buy them, we’ve got to make them fly. And I think our partnership has worked well together because we have complimentary strengths.
James West: Ok so now to acquire these companies o acquire these companies you issue cash in shares and so as part of the strategy you’ve got to issue continuouslyshares from patient home wondering which is dilutive to the shareholder base so how do you reconcile that diminished value with the growing value in the company?
Michael Dalsin: Well for us, its all about mathematics. Its quite straightforward. As long as you’re buying much much more profit than you are being diluted – that’s the key. So for example, we looked at a Louisiana company – a company that has $40 million in revenues, $15 million EBITDA. This is a company we’ve signed an LOI with recently in early May of 2015. That’s a company where we’re going to have to give up 15 percent of our share capital, and about a third of our cash. But we’re going to double profits. So, that’s good math.
If I can pick up a $100 bill every time for $15, I should be picking up $100 bills all the time. I think the big challenge is – I hear this a lot all the time – I hear from investors. They’re frustrated by how many shares we have outstanding, and they’re frustrated by dilution. My view is, if you’re in a rollup, you’ve got to expect some dilution. Really what you should be focused on is earnings per share. EPS is everything. So as long as our E is going up our S, we’re happy, we’re happy guys. We’re big investors – we put a lot of our own money into it. But you know, this is not Google. We don’t just take our cash, and just churn it without actually issuing shares for capital or issuing shares to acquire companies. So I often tell people, ‘if you don’t like dilution, don’t invest in a rollup’.
James West: What can derail that theory: What can send you’re E higher than your S?
Michael Dalsin: Well the E is supposed to be higher than the S…
James West: Oh yeah right…
Michael Dalsin: Well I think if we make a bad acquisition…
James West: And have you yet?
Michael Dalsin: We haven’t yet…we’ve made six. I will say this (with the negative lawyer sitting next to me) – I think its tough to make a bad acquisition…mainly because Roger Greene is helping me. But I will say the other reason is, these are service businesses, so we’re not banking on technology, there’s no technology risk. We’re buying up businesses that have been around for a long time – some as long as 20 years – we’re buying a business that has profitability, very little debt. They provide a service to a patient that is a needed service that’s covered by Medicare, so there’s very little risk there.
The risk is really in the price cut of our pricing. We have no pricing power generally speaking. Medicare sets pricing – usually that pricing is decreased over time, not increased over time. So when we buy a company, the biggest issue we have is just in price reductions. But generally these price reductions are not major – they can be a couple of percentage points per year – maybe a ten percent reduction. But the key for us is the database.
Once we buy a company, even if the revenue stream that we’re buying the company for reduces, the database is there to be able to offer patients other high margin revenue streams. So really this is a patient acquisition play for us. This is not an M&A rollup. It’s a nice by-product to have M&A arbitrage, meaning we buy something for less of a multiple than what we’re trading. That’s a nice by-product. But really we’re looking at patient databases. And if we buy a bad acquisition, as long as there’s a good patient database, over time, that will recover.
So I think for us – the reason I think we can get this to $1 billion is because the model now works really well. Its very straightforward. We just stamp out a deal of a good multiple – a low multiple on trailing 12 – usually means an even lower multiple on forward looking 12.
James West: Ok so in terms of how that translates into share price …so in the last year, you’ve basically performed at 400 to 600 percent, depending on where somebody got involved. Now does that start to level out over time, or does that rate of appreciation continue at the same pace, because your rate of acquisition and earnings per share continues to increase, or rather at least travel at that same pace?
Michael Dalsin: Well I think it keeps going up. And that’s really because the market’s huge. I mean really we’re just at the very beginning.
James West: So what’s the target size for PHM?
Michael Dalsin: A billion.
James West: A billion dollars in sales?
Michael Dalsin: Yeah.
James West: And is that realistic Roger?
Roger Greene: Well I think its realistic. I’m very focused on the quality of the companies and making sure we’re acquiring the right kinds of companies so that we can build the database in the proper way. So I don’t think it’s a race to get to $1 billion, but we can definitely do it. Look at what we’ve done so far. What we have to do is stay disciplined on everything we do. So we continue to make sure we’re careful on the legal side, on the financial side, we’re looking at all the risks involved with the company. And then, once we acquire the company, its also crucial that the management team that has already proven itself, continue to drive sales once we’ve done the acquisition. So I don’t see an obstacle to us continuing to repeat this. You look at companies like Apria or Lincare in our business that years ago did rollups, and I know it looked like…you know people come to us and say ‘you had a few million in sales, now are you near the end’? We look at and we say, Apria’s a $5 billion company for example, that has a small percentage of the market share in our market. At one time, they were a $100 million company, then a $400 million company, then a $1 billion company – you know they kept growing, they kept repeating it, and we can too.
James West: Sure. Okay so is the growth going to come from the continued pace of acquisition – you’ve done six acquisitions so far – and you’re going to continue at the rate of six per year roughly?
Michael Dalsin: Well its difficult to know when we can close acquisitions. We have an M&A team – a pretty big M&A team. So our view is we have two types of acquisitions. We have database acquisitions, and those can be both big or small. And then we have technology acquisitions. So we have companies that have a very low margin boring businesses that have a lot of patients. We like those because those are super cheap. But we also have companies that we pay a higher multiple that maybe have a new reimbursed technology that they’re servicing their patients with, and those might not be big companies, but they have this knowledge base around deploying technology. So once we buy those businesses, we can then go back in and offer that back up to our entire patient database. So, you know, a lot of people ask us, ‘you’ve gone to $4 million, to basically $170 million is really where we think we can be in the short run here. How do you get to $1 billion? You just keep punching these things out: Small deals, big deals, database deals, technology deals – they’re all out there. There’s 10,000 of them, and then its just a matter of having the discipline to keep punching them out.
James West: Sure. Okay then at what point does a larger fish come and swallow PHM as a smaller fish? At what point do you attract that company that makes a takeout offer at a premium to the current share price?
Roger Greene: I don’t look at this company as an opportunity to sell to someone else. I think if we continue executing we are going to be rewarded in our financial performance and in our share price. If some comes along, great. But I’m not counting on it. We’re already public and I think we have talked about perhaps moving to the NASDAQ market. I think if we do that, as we get bigger, I think we’ll be rewarded with a premium. You can see lots of U.S. healthcare companies that are trading at very good premiums.
James West: Okay gentlemen – let’s leave it there. Thanks for joining us today.
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