CRH Medical - CRHM

[gjangal]

This is a company that's probably familiar to people who track Jason Donville of Donville Kent.There are 2 parts to the business the O'Regan device (12% of revenues) and (Anasthesia service provider)88% of revenues. The O'Regan product has settled down into a organic growth rate of 4%. They have relationships with ~750 practices in the US.

 

The growth part of the business is from are from rolling up Gastro Enterology Anasthesia providers. From the ROE Reporter (Mr Donville's news letter ) the acquisition strategy is driven by regulation where gastroenterologists utilizing associated anasthesia practices are in violation of self-referral laws. They are funding growth with a mix of debt and equity.They started with buying GAA in Georgia in December 2014. These are the acquisitions after that.

 

John's Creek Anesthesia LLC ("John's Creek")                                                                       December 2015         $1,200,000

Macon Gastroenterology Anesthesia Associates LLC ("MGAA")                                       December 2015         $4,670,000

Knoxville Gastroenterology Anesthesia Associates LLC ("KGAA")                                       September 2015 $6,818,352

Associates in Digestive Health LLC ("ADH")                                                                       August 2015         $6,600,000

Anesthesia Healthcare Providers of Florida and AHP of North Carolina (collectively "AHP")    March 2015             $600,000

Austin Gastroenterology Anesthesia Associates, PLLC ("AGAA")                                       May 2016               $16,821,896

Community Anesthesia, PLLC ("Community")                                                                       June 2016               $13,636,639

Arapahoe Gastroenterology Anesthesia Associates, LLC ("Arapahoe")                               June 2016                   $3,700,000

 

Latest SEC filing with detailed numbers are here if anyone wants to take a look at cash flow, amortization, revenue numbers

 

https://www.sec.gov/Archives/edgar/data/1461119/000110262416003171/exh99_1.htm#Exhibit99.1

 

Total revenue for the six months ending 2016 is ~30mn (Annualized 60mn), Cash EPS: 6 month (11mn / 74 mn shares outstanding), Annualized cash EPS is 0.3 USD / share

 

Mr Donville's letter:

http://www.donvillekent.com/pdf/DKAM-Newsletter-July-2016-FINAL.pdf

 

Risks/Questions:

 

1. Highly levered rollup: Self explanatory

 

2. Organic growth in patient services:

What are the drivers of organic growth? . I see ageing population as a tailwind. However i do not know how to look regarding growth in % of patients using anesthesia services in GI endoscopy , currently around 50% (it grew from 30%)of patients use anesthesia services for colonoscopies. How will this grow?

 

3. Payer related risks:

 

How to think about the changing payer mix affects pricing and how they can push back the anesthesia practices regarding this, for example demand pricing cuts for services performed? In my research i think they have once unsuccessfully tried to remove anesthesia coverage for colonoscopies but failed

 

4. Expiry of PSA's (Professional Services Agreement)with the acquired practices:

 

While looking through the SEC filings , i looked at the amortization schedules of the PSA agreements. They can be anywhere between 1 year and 10 years. How to look at these practices after the termination of the PSA's with the practitioners? I don't think the practices are going to stop receiving patients after the Prpfessional Services agreement, having some minority interest in the practices mitigates this. I don't see revenue going down dramatically after the expiry of the PSA's (which is the risk with most roll ups)

 

5. Competition in rollups :

This roll up strategy looks very prevalent in the anesthesia space. Because of competition, they could end up paying alot (currently they are paying between 1.25x and 2x of revenue)

 

This is by no means a thorough investigation but more of a brain dump. I just wanted to open this up for discussion as i might be missing a lot of obvious things

[NoCalledStrikes]

Has anyone on this board seen the AYAL Capital short report?  In today's conference call, management answered questions raised by the report, but I'm curious as to whether there were other questions raised by the report that management didn't answer.

 

My take from the call is that the short report apparently listed some obvious but unlikely risks to the business model, such as expenses would go up if nurse anesthesiologists were replaced by doctors. True costs would, but I think this is against the trend everywhere to hold insurance costs down.

 

My biggest negative takeaway is that the report apparently projects margins to shrink over time, but then who wasn't.  My biggest positive was that management didn't spend the call accusing the short seller of evil intent like fraudulent company CEO's do.

 

[gjangal]

Haven't seen the short report . I passed on it as i had low confidence in the idea

 

Low margins and no pricing power, plus all that leverage made me stay away.