Most markets, like DME, emerge from startup to fragmentation to marketing, where the focus of disruption and innovation drives products and services to increased affordability and accessibility. In some cases, the disruption can be fueled by government intervention, as in the case with Medicare and competitive bidding. Entrepreneurs who are circumspect during these trends always find opportunity.
The DME health care vertical is no different. It has always had significant fragmentation (small, local DME operations) with the contrasting consolidation of a few companies such as Lincare, Apria, Rotech and American Home Patient. While considerable fragmentation exists in the aftermath of Medicare competitive bidding, adaptation and acquisitions continue.
One of the new leaders in the DME arena is Patient Home Monitoring (PHM). Currently listed on the Toronto Stock Exchange (TSX) Venture Exchange, and headquartered in Los Angeles, PHM focuses on providing respiratory equipment, disposables and Coumadin Home Testing of Anticoagulation Therapy (INR).
The PHM Story
PHM has been in existence for several years, and operations are based on assumptions about the health care marketplace:
- Medicare expenditures, like other U.S. health care costs, are almost 20 percent of the Gross Domestic Product (GDP) with growth that is not sustainable. As a result, Medicare will be increasingly focused on products that encourage health care diagnosis and treatment in the home.
- The home care market, including DME, home health infusion services and others, remains highly fragmented.
- Within the health care market there are numerous providers (i.e. hospitals, physicians, pharmacies, etc.) that can become partners in the process of improving outcomes, reducing hospital readmission and controlling costs.
- There exists considerable cross-selling opportunities with our aging population, with nearly 50 percent of this population segment having one or more chronic diseases/conditions such as heart disease, stroke, cancer, diabetes, obesity and arthritis.
- PHM is focused on increasing annual per patient revenue by offering multiple services to the same patient, which provides a desirable mix of patient satisfaction and favorable revenue.
PHM's founders identified the DME market as one that was opportune for acquisition and growth. They created a public vehicle via a reverse IPO and made their first acquisition of a company supplying Coumadin. That first year, they grossed roughly $4 million in revenues. Since then, they have experienced explosive growth, acquiring an additional nine companies with expected 2015 revenues of more than $175 million. Until recently they have had an acquisition-only growth model, similar to Rotech's growth model in the '90s. As of July 2015, they have implemented an organic growth model capitalizing on the synergies from their acquisitions.
They have been taking advantage of two key elements in today's market. The first is inexpensive capital. With today's low interest rates, investors are seeking any and all options to earn a return. This capital has given them the funds they needed to acquire the best companies they could find. During the second quarter of 2015, PHM raised $67 million, and they currently have close to $100 million in liquidity on their balance sheet.
Second is the downturn of the DME marketplace. It is no secret that valuations are at an all-time low, especially for companies in the low end of the middle market (below $5 million revenue and/or $1 million Earnings Before Interest, Taxes, Depreciation or Amortization or EBITDA). Medicare competitive bidding and onerous industry audits have created a significant risk, and the uncertainty is driving down valuations and causing massive provider closures in the lower end of the market. Meanwhile, large providers have been silently growing through attractive acquisitions and/or an unusually high rate of organic growth due to decreased competition. This trend will continue in the foreseeable future and, as a result, PHM will have the ability to acquire cost-effectively as long as Medicare remains inconsistent in its reimbursement practices.
What Sets PHM Apart
In the current stage of their development, PHM has shown several differentiators for their success. These include the following:
- A millennial perspective—Their leadership has always operated in the era of Medicare competitive bidding, 36-month 02 caps and aggressive audits. For better or worse, they have developed a unique resourcefulness and are able to do more with less as compared to their competitors. As an agile company, they are able to consciously develop options quickly and then capitalize on the opportunities, especially in terms of acquisition.
- Strategic clarity—DME companies have a general sense of their strategic aims and that was sufficient to be successful in the pre-competitive bidding marketplace. Today, that is certainly less so. PHM has a razor-sharp view of available opportunities.
- Effective execution—Many organizations have great plans, but few are able (or willing) to execute their plans with conviction. Not so with PHM. As they note in "Our Investor Proposition," they are "an acquisition-oriented, fast growing" company and that's how they have implemented their strategy. The nature of their acquisitions is clearly aligned with their plans.
- Knowledge and marketplace understanding—As noted above they have thoroughly researched the service and product dynamics of the DME vertical along with the DME intersection with other health care services and products.
- Targeted product offerings—While other DMEs are complacent in offering a full line of products/segments, PHM has drilled down to core offerings with considerable precision by identifying the strongest, and eliminating underperformers.
- Incorporating acquired talent—Management acquired in a transaction can be a blessing and an obstacle, but as I note below, PHM has taken the best and positioned them in leadership roles that will hopefully sustain PHM's success.
Each company has its culture and character, but these differentiators are worth considering.
Learning Quickly From Mistakes
In late July 2015, PHM principals Michael Dalsin and Roger Greene announced that they were moving about 13.4 million shares into a Health Care Special Opportunities Fund, while retaining individual investments of 4 million shares each. Unfortunately, this announcement was poorly communicated publicly and, if an investor was not present at a specific webinar in June, they were likely caught off-guard. In addition, PHM had been extremely dynamic in its acquisition activity in the second quarter of 2015 (especially the acquisition of Sleep Management, LLC of Lafayette, Louisiana) and the transition of PHM founders Dalsin and Greene out of their executive roles added to the uncertainty along with shaky global exchanges.
Mistakes are not uncommon in any company, but the response is the indicator of your character. Immediately following the debacle and a sharp drop in PHM's stock price, management apologized for the poor communication and sought out media to honestly discuss their mishandling of their investor reporting. Possibly most importantly, they focused on supporting their new management team led by Casey Hoyt, formerly of Sleep Management, LLC, who was able to give a very complete and positive picture of the company's third-quarter 2015 performance in late August. Success overcomes most concerns, but the way it is managed is just as important for long-term results.
A Deep Bench of True Entrepreneurs
As I noted above, management talent is critical to any organization, especially as an entity such as PHM enters the next life cycle of its existence. PHM is a publicly traded company that has grown dramatically (244 percent annualized quarter-over-quarter increase with EBITDA growth), experienced a significant change in management, weathered a communication fiasco and navigated the turbulence of the DME marketplace. Given their strategy and execution style, they require strong entrepreneurial leadership.
Somewhat late in the recent transaction was the appointment of Casey Hoyt (as CEO) and Michael Moore (as president) to senior management roles at PHM. Hoyt and Moore were the founders and leaders of Sleep Management, LLC, which was the largest of the PHM acquisitions in the third quarter of 2015. What most DME owners and investors were unaware of was that Sleep Management, LLC (via "Sleep Management" and "Home Sleep Delivered") had become one of the fastest growing DME companies in the U.S. Their unique combination of been-in-the-trenches experience, operational prowess and ability to rapidly scale was critical to PHM for two reasons: 1. PHM leadership knew it was time to find new leadership. 2. They knew the type of leadership they needed and chose the right match.
Not All Sunshine and Roses
The future challenges for PHM to continue in a pre-eminent role in the DME marketplace will be many. At the top of the list is avoiding being acquired by one of the other large competitors. The same conditions that favor PHM are evident to their large competitors, especially as it pertains to access to capital.
PHM's current listing on the TSX exchange is also a potential disadvantage in at least two ways. First, the foreign exchange (FOREX) risk is having an impact on their trading value. This is due to the American dollar's dominance over the Canadian dollar, which will likely remain consistent for some time. The second disadvantage is that if PHM were listed on a U.S. exchange they would have more publicity in the U.S., which has a broader market with more investors. However, to PHM's benefit, they have been enjoying a high buying volume as one of the few U.S. health care standouts on the traditionally oil-dominated TSX exchange. This exposure has earned them recognition amongst international investors. They have announced plans to move to a U.S.-based exchange at a future date, which should mitigate some of these issues.
Why PHM is Important to the DME Marketplace
PHM, with educated hubris and naivete, examined our market and saw it was ripe with opportunity. PHM represents a new agile, nimble health care service provider that can effectively compete in our post-competitive bidding market. They are proving that the market is still a viable place for entrepreneurs to make a healthy return on their investment, while providing a needed service for a growing and aging population that is demanding what we can offer.
Note: For the purposes of full disclosure, I am a minor shareholder of PHM stock acquired prior to and following the PHM acquisition of Sleep Management, LLC, based in Louisiana and Legacy Oxygen Home Care Equipment, LLC, a Kentucky company. While my position has given me a unique insight into PHM and the larger DME marketplace, it should in no manner be considered an endorsement of PHM, its stock or its operations.
