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May 12, 2015

The rapid rise of Patient Home Monitoring, Nobilis Health and Concordia Healthcare

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Patient Home Monitoring (PHM.V) has been a recent stock darling for Market Callguests, appearing as a top pick eight times over the last year.

The Venture-listed stock has run up more than 550 per cent in the last 12 months alone, based on its growth by acquisition model, as the in-home health care provider acquired nine companies over an 18-month span.

“The wave is finally here. Ten thousand people a day turn 65-years-old and the market is ripe and there’s a lot of demand,” Michael Dalsin, chairman of Patient Home Monitoring told BNN’s Andrew McCreath.

Despite being listed in Canada, the company focuses on the U.S. market, most recently snapping up Kentucky-based Legacy Oxygen.

Companies that buy growth currently represent 10 per cent of the market capitalization of the S&P/TSX composite index, according to Ian de Verteuil, Head of Portfolio Strategy, Quantitative and Technical Research, at CIBC World Markets.

“Clearly, these companies have become more of a factor than they used to be, even from a few years ago,” de Verteuil said.

Many investors, however, approach this ‘roll-up’ strategy with skepticism.

BNN’s Frances Horodelski says one risk associated with this strategy can be found in accounting.

“Acquisition accounting can mask true underlying, organic growth,” she said. “Things can get messy with leverage, non-cash items, balance sheet adjustments, tax policy changes, a host of things that require a deep analysis to uncover.”

But Dalsin maintains that these deals are, at the core, a form of customer acquisition.

“We’re not buying that business because it’s nice to own the business, we’re buying it for the patient database so we can offer other services to those patients that they need,” Dalsin said.

NOBILIS: TRIPLE-DIGIT WINNER

Nobilis Health Corp. (NHC.TO) is another acquisition-hungry firm that has seen its share price rise more than 650 per cent in the last year.

The company offers minimally invasive surgeries through their outpatient facilities. Most recently, it acquired a Dallas-based surgical hospital for the assumption of $5.5 million equipment leases and $7 million in debt.

Another criticism that Horodelski points out is the need for larger and larger acquisitions as a path to more revenue growth.

“However, even with the best management, the risk almost by definition rises the more it is done,” she said. “And bigger can often prove more complicated.”

But Nobilis CEO Christopher Lloyd said they are careful to buy assets that won’t burn a big hole in their pockets. The company also partners with the physicians who perform the surgeries on many of their deals.

“We’re buying really cheaply,” he said. “We’re buying distressed assets and we’re usually buying them for working capital and the assumption of some debt.”

CONCORDIA: THE NEXT VALEANT?

Concordia Healthcare’s (CXR.TO) latest acquisition of Covis Pharmaceuticals for US$1.2 billion not only gave the firm 18 more drugs in its pipeline, it also helped Concordia become one of the best performers on the S&P/TSX composite this year.

“Our objectives for 2015 is to double the size of the company and diversify,” Mark Thompson, CEO of Concordia said. “When you look at the Covis’ assets, it achieves both those objectives in one fell swoop.”

Concordia’s stock has surged more than 300 per cent in the last 12 months. Analysts at Beacon Securities say the deal will boost earnings 80 to 85 per cent in the next year.

“We’re an M&A driven company, very similar to Valeant,” Thompson said.

Valeant Pharmaceuticals International Ltd. (VRX.TO), the Canadian poster child for the growth-by-acquisition strategy, has seen its stock skyrocket over the last five years. Since merging with Biovail in 2010, Valeant has embarked on an acquisition spree that’s allowed it to purchase everything from Bausch and Lomb to Cold FX. Valeant now makes up about 5 per cent of the S&P/TSX composite’s market capitalization.

While Thompson wants to keep the ball rolling, he says Concordia still weighs the risks of their acquisition strategy.

“What you don’t want to do is get into auctions, overpaying, and falling in love with a deal. And we don’t do that,” Thompson said.