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Gemoscan (V.GES) aims to roll-up alternative healthcare market

Chris Parry Chris Parry,
0 Comments| May 27, 2014

If you’ve never heard of Gemoscan (TSX:V.GES, Stock Forum) before, you’re probably not paying much attention to the Canadian food intolerance management market. 

Hey, nobody will laugh at you for that. Few are.  

This is why Gemoscan management has been keeping an eye out for ways to turn their company into a diverse alternative healthcare roll-out play with a solid biotech core.

It appears they found one.

Gemoscan’s HEMOCODE and MenuWise food intolerance systems are long-standing commercialized products sold through partnerships with national retailers and paramedical, or as they are better known, alternative medical clinics.

But in doing business with that rapidly emerging sector, and noting how fragmented and inefficient it can be, Gemoscan management realised they could acquire existing clinics; all while realizing immediately accretive profitability by layering in their proprietary biotech programs.

​CEO, Director and President Brian Kalish notes that out of around 3500 clinics currently doing business in Canada, “Maybe 550 are controlled by about 27 operators,” which positions the market as extremely splintered with individual owner-operators squeezing out a living, sometimes with high operational costs.

That leaves a huge slice of business that can be acquired inexpensively.

 “There is lots of inefficiency in the market, and a lot of owner-operators without a realistic chance of an exit,” says Kalish. 
In developing their food intolerance systems, Kalish’s company had to write software to help deliver the system at the partner end. That opened the door to an opportunity that Gemoscan is running hard with now. 

“We have a program, a product we’ve proven out from concept, that is distributed to 600 or 700 doctors and pharmacies, which we know can add incremental profit to their business,’’ says Kalish.​

“When we bought our first clinic, it was all about selling ten of our food intolerance systems per month with a 50% margin.
Almost immediately after we bought the clinic, we were able to increase the sales of our food intolerance systems by nearly six times in five months without giving up any margin. Now we’re keeping 100% of the sale. Nobody else out there has such a platform and a strategy for consolidating paramedical clinic market can claim this.

As we acquire the clinics, we’re able to consolidate the entire margining.’’

​Gemoscan is focusing hard on acquisitions, and Kalish says they have fifty targets in the short term.

 “We expect this business to easily be maybe a $3-400m business over the next five to seven years. Those are big claims to make but they’re doable when you see an alternative healthcare marketplace that has so many paramedical clinics – that is chiropractors, physiotherapists, naturopaths, occupational therapy and chiropody services – all replicating expense and effort. When you have an $8 billion market growing as quickly as it is, I expect people take notice, and we’re in there first with real incremental synergies.”

​And as the company rolls up more clinics, it’s in better shape to grab more.

 “Last week, we announced an LOI to take on another seven clinics as part of our strategy, as an investor,” says Kalish.

“Now we’ve got the business that will create more distribution for our core product, and that vertical integration becomes more attractive for a banker looking to place their money and allow the company to grow.”

As a strategy, this is not one without comparables, the best being the funeral home market, which went from a similarly fragmented marketplace to one in which large companies went on a buying spree. With streamlined management and systems, those companies were able to quickly grow and add value to the individual units they acquired, turning an industry with slim margins into one that has turned significant profit growth. 

“When SCI (NYSE:SCI, Stock Forum) was out there consolidating the funeral home market, they were looking at the mom and pop operations and seeing vast potential to drive margin growth. We have two things going for us in that we’re already a public company that can help us in financing deals, and we have synergising programs already making money for these clinics, which is something that’s not really being done by anybody else out there.”

 “From a value standpoint, we’re at the precipice of turning our small little vertically integrated health care company into a platform where we’ll be consolidating part of an $8 billion marketplace, that’s growing 4.5% a year, and using proprietary technology as a synergizing element to create an integrated process,’’ says Kalish.​

As part of the drive to not over-leverage debt, Gemoscan is doing a lot of deals in which they acquire the business now, with a view to paying it out down the road, when they’ve had a chance to add value.
“A lot of these owner operators are in their 40s and quickly realising, ‘I’m the business, what am I going to do with my practice in five or ten years?’” says Kalish. “We provide the bird in the hand for these guys. […] We can take on a company’s P&L, operate it, grow it, and a year down the road, when we’ve created a revenue impact on the business, the value proposition is better for both them and us.”

 There are obviously challenges in integrating individual businesses sometimes run with only a handful of employees – or one owner/operator.

Says Kalish, “As with any kind of mom and pop proprietary businesses, sure, each one is a new challenge, and there’s the issue of what clinician method is involved, whether a doctor-owner operator is sufficiently incentivised, that they’re tied to progress and evolution of the business, that’s how we cut our deals. We create ratchets and opportunities for them to be part of a bigger play while at the same time giving options for an exit.

​“The low hanging fruit for us are the multi-unit players that have five or more clinics. That gives us news flow, makes investors confident that we’re growing, allows us more flexibility in access to finance and kind of finance, and limits the time and effort spent integrating operations.” 

On the topic of ongoing finance, Kalish is realistic that success won’t come overnight. 

“I think we’re well positioned to absorb the growth we’re expecting,” he says. Obviously we don’t know how much cash will be available to us down the line, but the plan is in place to allow us to be flexible enough to take advantage of opportunities and pace ourselves. We believe with what we have in the pipe and on the bench in our team, we can grow this thing to three or four hundred million in 6-7 yrs.”  

“The next six to nine months, it’s my belief that there should be enough on the balance sheet to justify a significant bump to share value,’’ says Kalish. “Right now, we’re running even, profit-wise. While the head office costs drag on profit margin’ clinic operations are profitable; but there are costs in having a centralized operation that feeds those clinics. With one more deal, or even just an incremental 50k per month, that puts you over the top and from there we ‘re net positive.”​​

As far as shareholders go, Gemoscan’s CEO says the company is completely focused on returning value. 

“Dilution is only an issue if you don’t have revenue to go along with it,” he says. “We have a keen eye on the interests of shareholders, considering I’ve got a big stake and the business owes me a fair chunk, so in addition to my general obligations, that’s a pretty good incentive to make sure shareholders are happy.’’

FULL DISCLOSURE: Gemoscan is a Stockhouse Publishing client


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