Description

Long CRHM: CRHM is the largest provider of GI (Gastroenterology) anesthesia to patients undergoing colonoscopies in ambulatory surgical centers (ASC).  At its current valuation of 8x EBITDA and 10% FCF yield, we believe this is an attractive valuation for a business that’s well-positioned to capture uncorrelated growth and compound free cash flow.  

Background: Over the last 20 years, there has been a strong trend for patients undergoing colonoscopies to be subject to deep sedation (or GI anesthesia) rather than the traditional conscious sedation.  With deep sedation, the patient sleeps through the procedure with no memory of it, the doctor is able to maneuver more freely, and patient experience and throughput for the practice improves.  Deep sedation for colonoscopy has gone from 15% of procedures in 2003 to 50%+ in 2015. Practices differ by geography, as the practice of routine deep sedation started in the South East, spread North, and is now finally spreading West.

GI anesthesia requires the services of anesthesiologists or nurse anesthetists and is a separate billable procedure. CRHM’s GI anesthesia business revolves around employing and managing primarily nurse anesthetists (CRNA) to perform deep sedation at their associated ASCs, as well as performing billing, collecting and other administrative functions related to GI anesthesia.

Colonoscopies are increasingly being performed in ASCs, which are often owned by the practicing GI physicians.  There are about ~1,000 GI-centric ASCs in the US. The number of those that use deep sedation and therefore require anesthesia practices is about 50% and growing with every year.  CRHM is the only company that we know of to be executing a roll-up strategy for GI anesthesia.

CRHM’s legacy business is distributing a non-surgical, hemorrhoids treating device (O’Regan System) to GI doctors.  While it has been highly profitable and have grown steadily, TAM is limited and top-line hasn’t moved the needle. However, the byproduct of approaching GI doctors over ~8yrs is a deep network of GI relationships.  CRHM has trained 2,800+ out of ~8,000 GI doctors in the US so far and that number continues to grow.

Thesis: As a first mover in an attractive niche, CRHM is positioned to create significant value through rolling GI anesthesia practices into a platform with several attractive attributes:

• Large Market.  We believe CRHM to have less than 5% market share, operating at 45+ of the ~1,000 GI-centric ASCs.  

• Differentiated Sourcing.  Most deals are sourced through existing relationships formed by its sales force, which has for years marketed the O’Regan hemorrhoid system to leading GI practices.

• Low Multiples.  CRHM acquires/develops GI anesthesia practices at 4.5-5x steady-state pre-tax cash flow, including benefit from its revenue cycle management expertise.

• Value Add Through Revenue Management. CRHM’s scale allows it to optimally bill and contract for GI anesthesia services, which typically produces a 20-30% steady state revenue lift to an acquired practice.

• Steady Target Businesses. The practices acquired by CRHM have long-term exclusive agreements to provide anesthesia to market leading GI practices, allowing CRHM to grow slowly as the practices grow cases. CRHM targets 1-3% organic patient case growth.

• Attractive Deal Structure. Most deals are structured as de novo JVs with the associated GI practice (typically CRHM owns 51% and the GI 49%), such that long-term incentives are aligned and CRHM starts with a clean slate with respect to liabilities and payor contracting. The deal structure allows GI doctors to partially monetize its anesthesia practices while participating on the upside from revenue cycle management

• Asset-lite business model.  There’s virtually no capex needs since the core business is around providing and managing nurse anesthesiologists to aid in associated GI practices.

• Improving track record of executing on a niche strategy. CRHM now has a strong and growing reference base from 19 anesthesia practices operating 45+ (ASCs), handling nearly 300k cases per year.  CRHM has recruited its President of CRH Anesthesia Management, Jay Kreger, who came from HCA and is credited with growing its ASCs to 130 centers through acquisitions and partnerships.

Difference with consensus: CRHM is an underfollowed company and has been burdened by an immature and somewhat complex business model, which has led to modeling problems for the management and sell-side and the perception that the business is unpredictable.  A large negative revision to CMS reimbursement in 2017 has created the perception of high regulatory and reimbursement risk.

We believe that the underlying business fundamentals for CRHM are stable and relatively predictable, which should become clearer with time.  We believe that the reimbursement problems experienced in 2017 were largely one-time in nature and are a response to the broader trend toward deep sedation colonoscopies that is benefiting the company in other ways.  We believe that larger health care roll-ups view GI anesthesia as attractive, but struggle with how to efficiently reach scale given the total fragmentation of the industry and, as CRHM grows, it will become an increasingly attractive acquisition target for such players.

Valuation framework:

Base case:  10x 2020 shareholder EBITDA (or Consolidated EBITDA less NCI), discounted back at 10%, assuming $30-35m/year of capital deployed → $5 per share, ~50% upside.

Upside case: 12x 2020 shareholder EBITDA, discounted back at 10%, assuming $50m/year of capital deployed → $6.50+ per share, 100%+ upside.

Downside scenario:  Surprise 15% revenue cut due to negative CMS reimbursement change in 2020 → 2020 shareholder EBITDA goes from ~$50m to ~$33m, while multiple re-rates to a conservative 7x → ~$1.8 per share, 50% downside.

Key risks to monitor: (1) Practice trends among GI specialists, (2) debate surrounding deep sedation vs conscious sedation, and (3) reimbursement outlook.

Catalyst

Convergence:  Believe the long runway of attractive deals creates the potential for multi-year alpha.  We believe the stock will additionally benefit from multiple expansion, as the company demonstrates the improved predictability of the larger business and gains sophistication with regards to shareholder communication.