Source: George S. Mack of The Life Sciences Report (8/19/15)
http://www.thelifesciencesreport.com/pub/na/acquisitions-power-growth-of-companies-and-portfolios-stonecastles-bruce-campbell
Small-cap life scholarship investors in a U.S. are focused on binary-event catalysts and vital milestones that possibly propel bonds into a stratosphere or pile-up them to a ground. In Canada a concentration is a bit different. Bruce Campbell of StoneCastle Investment Management has finished a murdering over a past year on rather unadventurous medical companies that have been appropriation smaller businesses and flourishing external by regulating spokes to a hub. In this pronounce with The Life Sciences Report, Campbell describes 5 small-cap expansion stories staid to ring adult some-more acquisitions, some-more income upsurge and some-more share cost appreciation to portfolios.
The Life Sciences Report: You’ve been on a buyside during both U.S. and Canadian firms, and therefore have a good basement for comparison of a dual systems. You are a expansion investor, and your new portfolio opening bears that out. Can we explain a biggest differences between investing in U.S. contra Canadian medical securities?
Bruce Campbell: The biggest disproportion is apparently a abyss of a marketplace in a U.S. There are some unequivocally poignant vast life sciences and medical companies down in a States. You don’t tend to have that in Canada. We have Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX), that is a largest Canadian medical association and would positively arrange adult there with many of a U.S. peers, with a nearby $90 billion ($90B) marketplace valuation. But subsequent that there’s a outrageous slot of atmosphere before a subsequent spin of Canadian companies, that hurl in during a low billion-dollar range, or maybe are valued during a confederate of billion dollars. Then, there are a lot of companies subsequent a billion. In a U.S., that slot between Valeant and a subsequent tier is totally filled in. You have all from a tiny startup to a enormous life sciences company. You usually don’t see that in Canada.
TLSR: You have fewer companies to differentiate through. Could that be construed as an advantage for you, as a Canadian life sciences investor?
BC: Going behind a year or dual ago that would have been a case, usually since a altogether Canadian marketplace was unequivocally dominated by energy, materials and financials, and a medical zone wasn’t something a lot of investors had in their portfolios—or even looked during for that matter. There were lots of undiscovered gems in a medical zone that, if we wanted to spin over adequate rocks, we could find.
However, once investors began to demeanour during Canadian life sciences companies, a batch prices went up. In a final 18 months—probably some-more specifically, even a final 9 months—you’ve started to see some-more investors concentration on a zone as an choice because, obviously, a materials and appetite sectors have been so formidable for a infancy of investors. As a result, we cruise there are now fewer opportunities in a life sciences.
TLSR: Do we cruise that many of these life sciences companies have achieved, or are nearing, full valuation?
BC: From a gratefulness standpoint, there is positively some-more reasonable valuation, or gratefulness that would be in line with what we would see with U.S. peers. In a past, we saw Canadian companies trade during some-more of a bonus from a gratefulness standpoint than they do now. As we say, it’s a duty of so many some-more investors looking during a sector.
TLSR: My clarity is that Canadian investors, or those who deposit in Canadian stocks, seem to find companies that don’t have big, pivotal, binary-event milestones. These investors also tend to find companies with income flow. Is that what Canadian investors are looking for, or is that usually what happens to be available?
BC: we cruise that’s some-more a duty of what Canadian investors are looking for. There are positively companies in a Canadian marketplace with binary-event opportunities in their futures. If a association can get a drug approved, a batch is going to jump. If it can’t, a batch won’t.
I would contend that, for a many part, since Canadian investors tend to be some-more conservative, we tend to see many aloft valuations in a U.S. for binary-event companies before a binary outcome is announced than we do in Canada. Canadian investors are some-more focused on income upsurge and are reduction peaceful to deposit in a association with a poignant binary outcome in a future. The batch prices of these forms of companies do not get bid adult as many until after an eventuality occurs.
TLSR: Bruce, we have a unequivocally clever merger theme. If there were one thing we could collect out from your investment theory, it would be that we demeanour for companies that grow horizontally. Do we worry that desirous companies will have difficulty integrating a acquisitions they make?
BC: Yes. That’s always a regard when we see a association creation mixed acquisitions: How is it going to be means to integrate?
The second thing we always worry about when a association creates mixed acquisitions is that, during some point, there will be a misstep. It’s usually kind of inevitable. Is that misstep going to be a vast bargain or a tiny deal? If a association is creation several smaller deals, a misstep competence not finish adult being as impactful to a bottom line. If a association is leveraging adult and removing bigger deals as it goes along, a intensity impact of a misstep becomes greater.
TLSR: Is it satisfactory to contend that partial of your investment speculation is to demeanour for prominence within a subsequent 3 to 4 quarters?
BC: Yes. For a many part, we’re not looking for something that’s going to have a binary outcome several years down a road. We’re looking for something that, as we say, has a matter occurring in a business over a subsequent several quarters, so that we see some arrange of coherence in a stock.
TLSR: I’m looking during 12-month sum gain on some of a names in your portfolio, and several of these names have achieved unusual share cost growth. Do we trust your merger and cash-flow thesis can grasp consistently aloft gain over a longer duration of time?
BC: We’d like to trust that, though a law of numbers says that’s substantially not a case. We’ll take advantage of a thesis now, while it works. But as we mentioned, there is some-more concentration on investments in a life sciences than there was 18 months ago. Some of a numbers we’ve generated were outsized since a zone wasn’t good followed. Some companies finished acquisitions that were transformational, and during a same time we saw some-more particular investors looking during these opportunities. we don’t cruise that’s a box now.
There are usually some-more people out there branch over rocks.
TLSR: Could we pronounce about some names in your portfolio?
BC: Nobilis Health Corp. (HLTH:NYSE; NHC:TSX) has been around for a while. It is in a ambulatory sanatorium business in a U.S. It recently finished acquisitions that not usually remade a association in terms of size, though also in terms of what those acquisitions meant from an gain standpoint. Nobilis also recently acquired a selling association to assistance fill a hospitals. Management has finished a good job.
We found out about Nobilis as it was in a routine of shutting a Texas merger final fall. We looked during all a numbers, and they finished lot of clarity to us. It seemed like a association had a unequivocally reasonable valuation, generally given what supervision was projecting. About that same time, a rest of a marketplace started to take notice, and a batch has left from inexpensive to, during times, unequivocally expensive, and is now attractively labelled again.
TLSR: This batch is unequivocally standard of your investment style. Nobilis seeks to grow by appropriation ambulatory surgical centers, and currently this thesis is utterly strong. Much incomparable companies are now in this game, like HCA Holdings Inc. (HCA:NYSE), Tenet Healthcare Corp. (THC:NYSE), AmSurg Corp. (AMSG:NASDAQ) and Surgical Care Affiliates Inc. (SCAI:NASDAQ). Is it removing harder to find value in a eccentric ambulatory surgical centers that Nobilis would like to acquire?
BC: we don’t cruise they come as inexpensive as they did since of competition. Nobilis has a confederate of advantages, one of them being a size. Its marketplace gratefulness is entrance $400 million ($400M), and it is not unequivocally competing with those companies you’ve mentioned, that are many larger. Acquisitions that will pierce a needle for Nobilis wouldn’t indispensably pierce a needle for a lot of a competition. Nobilis can demeanour during medicine centers that are smaller.
Its second advantage is a new selling division. One of a recently announced acquisitions was operative by bankruptcy. Because of that, Nobilis got a many improved bargain than what it had primarily suspicion it would. Now Nobilis has to go out and build adult that center. It substantially was in failure since it wasn’t doing adequate surgeries. That’s where Nobilis’ selling multiplication will come into play.
TLSR: One of a Nobilis’ strategies is to rise economies of scale by executive purchasing and other mechanisms. But there is usually so many potency we can fist out of a system. How prolonged does it take before you’re not means to grasp that form of scale anymore?
BC: That’s apparently something we will leave adult to Nobilis’ supervision organisation to figure out. The association is perplexing to revoke costs, though it’s also perplexing to raise a business from a selling side by stuffing a centers with as many surgeries as it can run by a facilities.
TLSR: Could we go to a subsequent name, please?
BC: Inspira Financial Inc. (LND:TSX.V) is assisting physicians and tiny medical practices financial their cumulative receivables—money that’s entrance directly from a government. For example, a alloy does a $20,000 ($20K) surgery. Let’s contend a studious pays $4K, and Medicare pays $16K. What these clinicians have detected is that a time it takes to get remuneration from a supervision has been extended. Where they once were paid in 30 days, now it can be 60 or 90 days before they indeed accept a money. There is not a lot of doubt that they will be paid, though it still is a delay. To assistance these doctors grow their practices, Inspira stairs in. It has a singular structure whereby a remuneration can be finished to a alloy forward of income entrance from a Medicare system. It’s roughly like a factoring loan for doctors for their receivables. It allows them to modify accounts receivable into income today, while Inspira waits for a income to come from a government.
TLSR: How many does Inspira assign a sanatorium or clinician for this?
BC: It can vary. The tangible seductiveness rate is one thing, and Inspira tacks on of fees over and above for several opposite things. From what we understand, those are in a 10–12% range. Doctors would differently have to go to a bank for a personal line of credit, or yield personal guarantees, or debt their homes. But that is not a case, given a approach Inspira has structured a business. It has been means to come adult with a authorised structure that allows a association to entrance income from Medicare and have a confidence of receiving those payments.
TLSR: Are these chance loans? If Medicare doesn’t pay, or rejects a claim, does Inspira come behind on a sanatorium or a medicine to redeem that?
BC: we trust it can, though typically, these procedures are authorized by Medicare, and it’s usually a duty of waiting. Inspira has pronounced these are effectively AAA-rated bonds since it’s a supervision payment. It’s some-more about cash-flow timing contra anything else.
TLSR: Could we go to a subsequent name, please?
BC: Convalo Health International Corp. (CXV:TSX.V) is sincerely new in a business. It’s another growth-by-acquisition company, though there is also an organic expansion member to this story. It operates piece abuse centers, and a initial place it has targeted is a Los Angeles area, where it has dual locations.
“If a association is leveraging adult and removing bigger deals, a intensity impact of a misstep becomes greater.”
There are opposite levels of piece abuse. The initial spin is true detoxification. Convalo has not gotten into that business yet, though is observant there’s intensity for that. The association is now providing a bargain horizon for patients after they have been expelled from detox. It helps a patients stay on lane with their programs. Of course, this is a approach outcome of a Patient Protection and Affordable Care Act, that fundamentally allows kids to stay on their parents’ health word until age 26. Here again, these comforts are being paid by a medical system, and a margins are sincerely strong.
What Convalo has found is that a obsession liberation attention is unequivocally fragmented. Typically, we find clinicians with some form of side practice; they run organisation sessions to yield income flow. Convalo has come in and bought a confederate of those businesses, and afterwards has looked to enhance them. It has finished a comforts some-more appealing and appealing. So far, a numbers have been unusual as distant as organic growth. Convalo hasn’t finished a lot from an merger standpoint as yet; organic expansion is a vast thing right now.
TLSR: How is Convalo removing patients?
BC: The association has built out a sales network of “influential” individuals. To be “influential,” we have to be someone who has recovered from a piece abuse problem. Typically, those people are concerned with possibly an Alcoholics Anonymous module or something like it, and they are going out and sourcing patients for Convalo’s programs.
The second instance of an “influential” particular is a clinician, who might have dealt with someone on an particular basement and refers that chairman to Convalo’s organisation therapy program. Part of a company’s plan will be, during some indicate in time, to acquire a initial theatre of rehab as well. Then it will have a approach mention source for patients to a programs.
TLSR: Do we cruise these dual clinics in Los Angeles to be a commander program?
BC: It’s over a pilot-program theatre now. Convalo has things flattering tangible and streamlined. Now, it’s a duty of flourishing that out into other markets and other cities. The association says it is targeting a vast cities in a U.S.—New York, Miami, San Francisco, Chicago, Dallas, Houston.
TLSR: Does Convalo have an exit strategy? Does it intend to grow to a indicate that it gets acquired by a incomparable sanatorium with a liberation program?
BC: Yes. Convalo says it would like to build a nice, cash-flow-generating business and then, during that point, possibly a incomparable user or private equity organisation could come in and take out a company.
TLSR: Could we go to a subsequent company, please?
BC: CRH Medical Corp. (CRH:TSX) has a possess specific diagnosis for hemorrhoids, and has had good success with that business. It sells a banding product and trains doctors to use it. At one indicate in a company’s history, it was handling a possess clinics, though CRH satisfied that wasn’t a best approach to go, so it shifted instruction and started to sight independents and sell a product on a repeated basis. The association has consistently grown—it had 9 or 10 buliding where it saw expansion in both a series of doctors lerned on a complement and a series of procedures performed.
Last December, CRH finished a transformational acquisition. It acquired Gastroenterology Anesthesia Associates (GAA), a association that provides anesthesiology for opposite procedures, many ordinarily for colonoscopy. That unequivocally altered a business. CRH saw a outrageous ramp-up in a revenue, and apparently in a EBITDA (earnings before interest, taxes, debasement and amortization) as well. While a O’Regan hemorrhoid diagnosis has continued to grow, now CRH is starting to see a vast strike in a year-over-year and quarter-over-quarter numbers. This swell began with a merger of GAA.
CRH feels there are some-more acquisitions to be finished in that sector. It’s a sincerely high-margin business and one that a association thinks can continue to grow. The association also skeleton to do some cross-selling between a doctors already lerned for a hemorrhoid treatment.
TLSR: Do we have one some-more name to share?
BC: Yes. This final one is interesting, generally of late. Patient Home Monitoring Corp. (PHM:TSX.V) has been appropriation tiny home medical monitoring businesses. It has now left into bigger monitoring businesses as well, for opposite indications. Its final vast merger was of a association called Sleep Management out of a U.S. It has been means to hurl adult and do some cross-selling between a opposite customer bases. The association has been flourishing sincerely aggressively by acquisition, though is also producing poignant organic cross-selling expansion among patients with opposite illness indications.
TLSR: PHM down about 60% over a final 16 weeks, though if we demeanour during it contra one year ago, it is adult about 115%. Why have a shares been beaten down recently?
BC: Roger Greene and Michael Dalsin, who were some-more or reduction founders of a business, came in about 24 months ago and remade PHM. It was usually a tiny bombard before they took over. Over a final 18 months, they finished a lion’s share of PHM’s acquisitions, and were both sincerely poignant shareholders. The open filings announced they had sole all their positions, when in fact they had not. So a Street has been unequivocally dissapoint with management. While a business seems total and is flourishing great, a share cost has been beaten adult of late. It’s unequivocally singular that we see this form of share cost dump though a poignant dump in a underlying business of a company. This is not a box with PHM: In fact, a business is stronger than ever.
TLSR: In a U.S., we seem to be relocating to an outcome-based medical system, where providers are rewarded for things that work. The Centers for Medicare Medicaid Services (CMS) and private payers wish to see that services are indeed operative for patients. On a website, PHM talks about outcomes. Does it have to continue to uncover CMS and private payers that these services are saving income for a system?
BC: we cruise a association will have to continue to infer that. Otherwise, Medicare won’t support it, and it will remove funding.
TLSR: Thank you, Bruce.
Founder and portfolio manager of StoneCastle Investment Management Inc., and a former portfolio manager for some of a largest investment dealers in Canada and a U.S., Bruce Campbell brings some-more than 22 years of knowledge to account management. A connoisseur of a University of Alberta with a bachelor of commerce grade specializing in finance, Campbell has warranted mixed designations in investment management, including a Chartered Alternative Investment Analyst (CAIA) and a Chartered Financial Analyst (CFA) designation, one of a many prestigious designations in a financial industry. Campbell is a past boss of a Okanagan CFA society.
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1) Dr. George S. Mack conducted this pronounce for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an eccentric contractor. He owns, or his family owns, shares of a following companies mentioned in this interview: None.
2) The following companies mentioned in a pronounce are sponsors of Streetwise Reports: Nobilis Health Corp. The companies mentioned in this pronounce were not concerned in any aspect of a pronounce credentials or post-interview modifying so a consultant could pronounce exclusively about a sector. Streetwise Reports does not accept batch in sell for a services.
3) Bruce Campbell: we own, or my family owns, shares of a following companies mentioned in this interview: None directly. we privately am, or my family is, paid by a following companies mentioned in this interview: None. My association has a financial attribute with a following companies mentioned in this interview: None. we was not paid by Streetwise Reports for participating in this interview. Comments and opinions voiced are my possess comments and opinions. we dynamic and had final contend over that companies would be enclosed in a pronounce formed on my research, bargain of a zone and pronounce theme. we had a event to examination a pronounce for correctness as of a date of a pronounce and am obliged for a calm of a interview.
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