home but not alone phm will - beacon securities€¦ · phm has numerous consolidation...

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

Patient Home Monitoring

(PHM – V)

Home But Not Alone – PHM Will

Take Care of You

February 13, 2014

Doug Cooper, MBA

(416) 643-3863

[email protected]

Margaux Berry, Associate

(416) 364-5148

[email protected]

As the 80 million American baby boomers have started to

reach age 65, they are more likely to develop one or

more chronic illness.

In an effort to reduce the financial strain on the US health

care system, home monitoring of chronic illness is being

encouraged through self-testing technologies and new

Medicare re-imbursement codes. Weekly home

monitoring of various indications has been proven to

prevent chronic conditions from becoming acute and

needing expensive hospital care.

Patient Home Monitoring (PHM or the Company) has

embarked on an acquisition program (2 thus far) to

consolidate companies catering to numerous indications

across all geographic regions.

Through mining the aggregate patient database, PHM will

cross-sell its various services thus driving revenue per

patient growth. The ultimate prize is to uncover a portion

of the ~3.9 million Coumadin patients who are still being

monitored monthly at hospitals. Transitioning them to

weekly home monitoring represents a potential annual

market opportunity of $7 billion.

With $7 million in cash and a public market currency, we

believe PHM could buy an incremental $20 million in

revenue. Coupled with its current 3 operating companies,

we believe PHM could exit FY14 at a revenue and EBITDA

run-rate of ~$40 million and $8-9 million respectively.

We initiate coverage with a BUY rating and a 12-month

target price of $0.65 based on 12x FY14 exit run-rate

EBITDA noted above.

$0.65$0.28

$0.65

132%

YE: Sept. 30 FY14E FY15E FY16E

Revenue ($MM) $16.1 $21.4 $28.9

EBITDA ($MM) $2.8 $4.2 $6.2

FD EPS $0.02 $0.02 $0.04

FY14E FY15E FY16E

EV/Sales 2.1x 1.5x 1.1x

EV/EBITDA 11.8x 7.8x 5.3x

P/E 17.5x 11.3x 7.7x

Basic 136.1

FD 143.4

Basic $38.1

FD $40.1

Net Cash $7

EV (C$) $33

Stock Data (MM)

About the Company

PHM is focused on a highly fragmented and developing market of

small privately- held US companies servic ing chronically ill patients

with multiple disease states. PHM is actively working to identify and

evaluate profitable, annuity- based companies to acquire their

patient databases and technical expertise at favorable prices.

PHM's post acquisition organic growth strategy is to increase annual

revenue per patient by offering multiple services to the same patient,

consolidating the patient's services and making life easier for the

patient. The company was founded on March 5, 1993 and is

headquartered in California, US.

Shares Outstanding

Initiating Coverage

BUY Prev ious Close

12-month Target Price

Potential Return

$0.06-$0.3852 Week Price Range

Estimates

Valuation

Market Cap (C$)

Stock Performance

A ll prices in C $ unless o therwise stated

Mar May Jul Sep Nov Jan

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mailto:[email protected]


February 13, 2014 | Doug Cooper | 416-643-3863 | [email protected]

Patient Home Monitoring Corp

Table of Contents

Investment Thesis .................................................................................................................... 3

Home Sweet Home – Demographics Driving Global Growth in Home Care............................... 5

Characteristics of Emerging Industries – PHM Has Numerous Consolidation Opportunities ......... 7

Current Portfolio Has Significant Cross-Selling Opportunities .................................................... 9

Financial Forecast ................................................................................................................. 13

Valuation – What’s It Worth? ................................................................................................. 17

Key Risks .............................................................................................................................. 18

Initiating Coverage with Buy Rating and $0.65 Target Price .................................................... 19

Appendix A: Comparable Companies ................................................................................... 20

Appendix B: Financial Statements .......................................................................................... 21




Investment Thesis If there is one inevitability in life, it is that we get older every day. With

advancing age comes the breakdown of our bodies. The simple fact is

that a 60-year old is more susceptible to suffer from diseases than a 20-

year old. With increased age comes increased health expenditure. On

average, the 60-year-old and above group spends 200%+ more than the

30-year old category. As the first baby boomers began to turn 65 in 2011,

that population hoard, which has set trends its entire life, is starting to have

a significantly negative impact on the health care budgets of the

industrialized world. Simple math clearly demonstrates that as the median

age of all industrialized countries increases (up 4-8 years in just the last 5

years) and health care costs increase substantially on a per person basis

as one ages, governments need to do something to bring those costs

down. One of the ways to do this is to minimize expensive hospital care

by monitoring patients’ chronic conditions at their home such that the

condition does not become acute (and need hospital care). Maybe

governments are taking heed of the old proverb, “An ounce of

prevention is worth a pound of cure.”

To enable a viable and dynamic home monitoring industry, three things

are necessary:

a) A growing demographic profile that is susceptible to chronic diseases:

We have already cited an aging population in the US but it is also the

2nd most obese nation (recently passed by Mexico) with 36% of adults

classified as such. Aging and obesity are two conditions that are

leading to significant prevalence of chronic conditions.

b) Technology to enable effective home monitoring: Recently FDA-

approved capabilities from device manufacturers such as Roche

have made patient self-monitoring at home easy and effective.

c) Medicare re-imbursement: This is a critical step to making home

monitoring a viable industry. While a diabetes (blood sugar) home

monitoring device has had a re-imbursement code since 1980s, a

home testing device for Coumadin (blood thinner) just received a re-

imbursement code in 2008.

With all of the macro pieces in place, the home monitoring industry is

seeing good growth. However, the industry is still in its early stages

characterized by thousands of small, private, regional and single-

indication-based companies. As such, the industry is ripe for consolidation.

Enter Patient Home Monitoring (PHM or the Company).

PHM has started the consolidation of the industry. Over the past 4 months,

the company has added to its existing business by making its first 2

acquisitions, giving it pro-forma TTM revenue and EBITDA of $15 million and




$3 million respectively. It now supports in-home medical devices in 3

indications: cardiology, diabetes, and pulmonology. As indicated earlier,

many patients have multiple chronic conditions, i.e. patients with diabetes

have a strong likelihood of being on Coumadin or having sleep apnea.

The ultimate goal of PHM, therefore, is to cross-sell the services of its

operating companies to the aggregate database of patients. In our view,

the “golden ticket” is to mine the database for patients on Coumadin

and converting them to home monitoring. Starting with ~2,000 patients,

the market opportunity in the US is 4 million patients (of which only

~100,000 are currently being monitored at home or 2.5%) or an annual

revenue opportunity of ~$7+ billion.

Through an acquisition strategy that should create value in-and-of itself,

the cross-selling opportunity between the acquired companies has the

potential to drive revenue and earnings well beyond expectations. Based

on an assumption that PHM will exit FY14 at an EBITDA run-rate of $8.5-$9

million by spending its cash position in an accretive manner, we believe a

current EV/EBITDA of 6x represents exceptional value.

We are therefore initiating coverage of PHM with a Buy and target price of

$0.65.




Home Sweet Home – Demographics

Driving Global Growth in Home Care

The industrialized world is aging rapidly. It is common knowledge that as

we age, we are more susceptible to disease as our bodies break down.

To understand the PHM opportunity, one needs to understand the

demographic picture. From the chart below, one can see that as people

age, the average health care spend per person increases:

Average annual health care expenditures by age, 2005

Source: Urban Institute calculations from the US Department of Health and Human Services,

Medical Expenditures Panel Survey (2008)

Intuitively, we know this but the above statistics from the US Department of

Health show that in 2008, expenditures for 60+ years was US$6.600+ per

persons versus US$3,400 per person for the age category 45-49 (let alone

US$1,959 for 25-29, and why younger Americans are upset about being

forced to buy higher priced insurance). Just the dollar difference between

45-50 group to 60+ is +93%.

From the data, it is clear that age 40 is the demarcation line at which

health care costs start noticeably appreciating. Note that from ages 25-29

to 30-34 and then to 35-39, costs accelerated by 14% and 12%

respectively. However, starting at ages 40-44, costs grew by 29%,

eventually further doubling between 40-44 and the 60-64 age group.

Coincidently, the median age of most of the industrialized countries is now

over 40 and in a lot of cases, materially so. Logically, therefore, health

care costs are about to skyrocket in industrialized nations.




The table below shows the median age in all industrialized countries is

moving higher.

Median Ages of Selected Countries

Country Median Age 5-years Ago

Japan 45.0 37.0

Italy 44.3 37.0

Germany 43.7 38.0

Austria 42.6 36.0

Canada 40.7 33.0

UK 40.5 36.0

France 39.7 35.0

USA 37.1 33.0 Source: CIA, The World Fact Book

Led by Japan at 45 years old, the US is younger at 37.1 years but this

average is up 4 years in just the last 5 years. It is set to go higher still as the

baby boomer cohort reaches retirement age. As they have their entire

lives, the 80 million American baby boomers are now set to make a

significant impact on the health care system as ~10,000 of them turn 60

every day.

Three conclusions we reach from this demographic review:

a) As we age, we are more likely to need care as our bodies are

more susceptible to illness. That results in increased care dollars as

we age.

b) As the baby boomers, who have set trends since the 1950s, hits

this “Age of Illness”, it will put tremendous pressure on health care

systems.

c) Governments must look for ways to reduce health care costs.

This opportunity has spawned a new industry in the United States; one that

caters the home needs of patients with chronic illnesses. Patient Home

Monitoring is amongst the thousands of participants, but one who now

has both the aspiration and balance sheet to start the consolidation

trend.




Characteristics of Emerging Industries –

PHM Has Numerous Consolidation

Opportunities

An academic study by Graeme et al entitled “Winning the Merger

Endgame” identified the four major stages an industry goes through over

its lifecycle; a cycle that typically lasts 25-30 years.

Consolidation Curve

Source: Graeme Deans, Fitz Kroger, Stefan Zeisel – Harvard Business Review

Source: Harvard Business Review

Stage 1 – Opening: The first step generally begins with a single start-up just

emerging to form a new industry. Very quickly, multiple companies

emerge to capture the opportunity.

Stage 2 – Scale: Major players begin to emerge, buying up competitors as

the industry quickly consolidates.

State 3 – Focus: After a ferocious consolidation in Stage 2, stage 3

companies focus on expanding their core businesses and continuing to

outgrow the competition. The top three industry players will now control

35%+ of the market.

Stage 4 – Balance and Alliances: The final step of the endgame journey.

The industry consolidation rate levels off at this stage as the top 3 players

claim as much as 70%-90% of the market. Growth becomes very

challenging, pushing firms to form peer-to-peer alliances.




We believe the home monitoring industry is late in Stage 1. It is

characterized by thousands of small, private businesses that are regionally

based and typically focused on a single indication. It is rapidly emerging

as an industry driven by, as discussed above, a rapidly aging population

susceptible to multiple chronic illnesses, technology advances that make

self-monitoring easy and efficient and a government that is being forced

to look for ways to save money. PHM is taking the lead and moving the

industry into Stage 2, that as noted in the aforementioned study, is

characterized by rapid consolidation.

After digesting its second acquisition on January 17, 2014, PHM has

indicated that it has an immediate funnel of 12 companies and hopes to

close one acquisition per quarter over the balance of 2014.




Current Portfolio Has Significant Cross-

Selling Opportunities

The first stage of PHM’s strategy is to grow through acquisition, gaining

both regional and product diversification. Starting with its cardiology

home monitoring business, the Company has quickly added two other

companies over the past four months. Its portfolio now consists of:

a) PHM

Indication: Cardiology. Monitoring patients on blood thinning drugs

such as Coumadin (typically associated with atrial fibrillation).

Market Size: 4 million patients

Revenue Model: Monitor patients (who self-test at home) weekly

through a call centre. If dosage is not appropriate, arrange for

medical appointment. Take care of billing to Medicare or private

insurance. Re-imbursement is $1,800/patient/year.

Distribution: Call centre in California

Current Patient Base: 2,100

TTM Revenue: $3.6 million

Patient acquisition: Cross-selling

b) Hollywood Healthcare (HHC)

Acquisition: September 20, 2013

Indication: Diabetes and specialized drugs for respiratory and

oncology.

Market Size: 26 million Americans have diabetes including 11 million

age 65+ (27% of all seniors).

Revenue Model: i) Sell blood sugar monitoring supplies for diabetes

patients. Re-imbursement $150/patient/year

ii) Fulfillment of specialty drugs. Re-imbursement

$1,200/patient/year

Distribution: 1,600 partnership pharmacies nationwide

Current Patient Base: 15,000 diabetes patients, 2,000 prescription drug

patients


Patient Acquisition: i) Double digit growth in diabetes patients

ii) Significant internal growth in specialty drugs

iii) Cross-selling

c) Resource Medical (RM)

Acquisition: January 17, 2014

Indication: Pulmonary (sleep apnea, COPD)

Market Size: 18 million Americans have sleep apnea while 15 million

have a COPD diagnosis

Revenue Model: Sell oxygen concentrators as well as CPAP

equipment. Re-imbursement $1,200/patient/year

Distribution: 5 sales representatives

Current Patient Base: 4,500 patients (55% oxygen, 45% CPAP and

other)


Patient Acquisition: Internal growth and cross selling




Patient acquisition is the key metric for growth (aside from additional

acquisitions). While each operating company will attempt to add patients

in their own indication, the cross-selling opportunities between the

operating companies may hold the best potential for significant patient

acquisition. The simple fact is that elderly patients who have one chronic

disease have a high likelihood of having at least one additional ailment.

The chart below highlights the prevalence, by age category, of patients

who have two or more chronic conditions. It also compares the situation

today (or at least the most recent data) versus 10 years ago. Note that

the increased potential versus 10-years ago may be related to increased

obesity levels in the United States across all age groups.

Prevalence of Patients Having Multiple Chronic Conditions (US)

Source: CDC/NCHS, National Health Interview Survey

For example, research indicates that roughly half of those who have atrial

fibrillation also have obstructive sleep apnea. In addition, at least 15%-

20% of people with diabetes of Medicare age also take Coumadin.

Management has a strategic initiative to drive cross-selling opportunities

between them. In an effort to reduce costs, the US is trying to reduce the

amount of acute (i.e. needing hospital care) care to patients. To do so,

patients who have chronic ailments need to be monitored more regularly

so that they can avoid those chronic conditions becoming acute.

The following statistics speak to the potential for PHM to mine the

aggregate database of all of its current (and future) operating

companies. Some examples include:

HHC-RM: RM provides specific drugs and nebulizers (inhalers) to patients

with COPD. It currently sources the drugs from pharmacies other than

ones in partnership with HHC. Consequently, RM could re-route some drug

purchases to HHC. The company believes it could add 30 patients/month

(@ $1,200/patient/year) to HHC’s revenue.

HHC-PHM: HHC can mine the database of its 1,600 partnership

pharmacies for patients on Coumadin and train the staff to convert to

home monitoring. While it will take some time to train all of the

pharmacies, this could prove to be very fertile ground. If even 20 patients




per store can ultimately be converted, that represents a potential 32,000

incremental Coumadin patients to be monitored (@ $1,800/patient/year).

RM-PHM: RM has 5 sales representatives who call on medical specialists as

part of their everyday function. Through their relationships with

cardiologists, they will now attempt to convert Coumadin patients to

home monitoring.

Case Study – Coumadin

While all of these cross-selling opportunities are being pursued, we believe

the “golden ticket” is mining the aggregate corporate database for the

conversion of Coumadin patients to home monitoring.

As noted above, there are currently 4 million patients in the United States

on the blood thinning drug (and potentially many more as the baby

boomers reach 65+ years) with only 120,000 currently being monitored at

home. That leaves a potential market of ~3.88 million patients to be

converted.

Testing Method % of Total Patients # of Patients

Private Physicians 55% 2,200,000

Clinic/hospitals 35% 1,400,000

Home Testing 2.5% 120,000

Source: College of American Pathologists

As the table above illustrates, the vast majority of patients continue to be

tested on a monthly basis at either a hospital or private clinic. The primary

and secondary issues with this are:

a) Monthly monitoring is not sufficient to catch changes in necessary

medication dosages. If a patient continues for an extended period on

the wrong prescription, he is more susceptible to a heart attack or

stroke. Such a chronic condition becoming acute (and requiring

hospital care) puts tremendous financial pressure on the health care

system. Testing and monitoring on a weekly basis at home ensures that

the patient receives the optimal care and the timely information if the

prescription needs to be changed and saves a chronic condition from

becoming acute.

b) The testing of patients at a hospital/clinic ties-up valuable time of

nurses and lab technicians, which could be spent on other things.

Therefore, the hard and soft/opportunity costs of treating patients who

could be monitored at home is significant. Testing at home is

significantly cheaper.

c) Patients may be inconvenienced to get to the hospital/clinic to be

tested. This could lead to missed appointments and thus missed

opportunities to correct dosages. Testing at home alleviates any travel

concerns and helps ensure the patients undertake the testing on a

timely basis.

ex




Once an FDA technology was developed for the testing, Medicare

initiated the re-imbursement for home testing. What started out as a mere

subset of Coumadin indications in 2002 (for mechanical heart valves) was

expanded in 2008 to cover an expanded array of Coumadin-related

conditions. Medicare re-imburses 4 tests per month or $1,800/patient/year.

We believe this high level of re-imbursement is sustainable for an

extended period of time or until a significant percent of the patients are

tested at home (as with the diabetes market, where re-imbursements are

significantly lower. That downward re-imbursement movement, however,

took several decades). With only ~2.5% of patients currently on home

monitoring, it is very early in the game.

As one can see, re-imbursement of Coumadin monitoring represents the

highest revenue/patient opportunity. In one sense, therefore, PHM’s

acquisition strategy is the Trojan Horse to uncover and acquire those

Coumadin patients (in addition to buying profitable operating companies

in their own right). At a starting point of 2,100 Coumadin monitoring

patients, we believe it could be possible through cross-selling between

HHC, RM and future acquisitions to reach 20,000-30,000 patients within 2-3

years. Given the high Medicare re-imbursement level (which acts as a

stimulus to get patients to home monitoring), that would imply potential

incremental revenue from only cross-selling this service of $36-$55 million.




Financial Forecast

PHM’s revenue is based on re-imbursement per patient. As indicated

earlier, each indication has different re-imbursement levels, from a low of

$150/patient/year to $1,800/patient/year for Coumadin monitoring. From

a modeling perspective, there are two main points to consider:

a) Medicare has set the standard re-imbursement levels. As such,

there is a high visibility as pertains to revenue per patient;

b) There is a high degree of patient “stickiness” as they typically will

have their chronic condition(s) for life.

The unknown variable, therefore, is how successful PHM will be in cross-

selling its services amongst its operating companies. As we showed earlier,

statistics bear out the fact that:

a) There is a very high probability (almost 50%) that a 65+ year old

who has one chronic condition will have at least one more;

b) Only ~3% of US patients on Coumadin are actively monitored at

their homes. This is a huge latent market that also carries the

highest revenue per patient.

Consequently, we have no doubt that cross-selling is a viable strategy.

Furthermore, it is important to remember that over a projection period,

adding “sticky” patients can quickly grow revenues, especially if PHM can

grow revenue/patient at the same time (which it can do most notably by

adding high margin Coumadin patients). Pictorially, our FY14 forecast of

patient acquisition/cross-selling looks as follows:

In other words, at the end of FY14, PHM would have 2,750 patients, and

Resource Medical would have 5,000 patients in addition to any patients

garnered through the internal growth of each operating company. One

can quickly envision how such internal growth, coupled with cross-selling,

and any future acquisitions that bring both new patients and augments

the ability to cross-sell, can lead to logarithmic revenue growth. Note that

our forecasts below do not consider any additional acquisitions, despite

the company’s stated intention to do more.




The following table highlights our forecast:

Revenue, EBITDA and EPS Forecast (FY13-FY16e)

($000s) FY13 FY14e FY15e FY16e

Revenue 3,976 16,109 21,420 28,854

EBITDA 746 2,820 4,243 6,200

EPS -0.037 0.016 0.025 0.037 Source: Company Reports and Beacon Securities Ltd

In addition to our annual forecasts noted above, we believe investors

should consider the exit run-rate in terms of patients and thus revenue.

Fiscal Year-End Run Rates

Exit Run-Rate 2014e 2015e 2016e

Coumadin Patients 3,275 4,681 6,252

Rev/Patient 1800 1800 1800

Sub-Total Revenue $5,895,000 $8,426,250 $11,252,813

Diabetes Patients 18,000 21,600 23,760

Rev/Patient 150 150 150

Revenue $2,700,000 $3,240,000 $3,564,000

Prescription Drug Patients 3,350 5,525 7,344

Rev/Patient 1,200 1,200 1,200

Revenue $4,020,000 $6,630,000 $8,812,500

Flu Injections 21,000 22,050 23,153

Rev/Injection 40 40 40

Revenue $840,000 $882,000 $926,100


Pulmonology Patients 4,725 4,961 5,209

Rev/Patient 1,200 1,200 1,200


Run-Rate Revenue $19,125,000 $25,131,750 $30,806,588 Source: Beacon Securities Ltd




Strong Balance Sheet Can Fund Additional Acquisitions

As of December 31, 2013, PHM reported a cash position of $8.5 million with

working capital of $9.5 million. Subsequent to the quarter end, the

company closed its acquisition of Resource Medical, a transaction that

included a cash payment of $1.5 million. Hence, on a proforma basis, we

believe PHM has cash of $7.0 million. We believe this cash will be

earmarked for future acquisitions. The goal is to make an average of at

least 1 acquisition per quarter. As discussed above, future acquisitions not

only bring potential new indications and geographic reach, but also the

ability to mine the acquired database for cross-selling opportunities.

Acquisitions to Drive Growth – 2 Done Thus Far with Many More to Come

While the macro-environment (i.e. aging population, high probability of

multiple chronic diseases) seems very conducive to growth, the

opportunity to accelerate such growth though accretive acquisitions is

pervasive. As an indication of how such future acquisitions could look, we

have outlined PHM’s two previous acquisitions in terms of valuations:

Acquisition Multiples

Date CompanyPurchase

Price

Cash

Paid

Shares

Issued

Issue

Price

TTMe

Rev

TTMe

EBITDAP/Rev P/EBITDA

3-Sep-13 Hollywood Health Care $1,300 $400 2,772 $0.33 $4,200 $750 0.3 1.7

8-Jan-14 Resource Medical $4,992 $1,542 12,779 $0.27 $5,700 $1,350 0.9 3.7

Source: Company Reports

As one can see, PHM paid 0.3x TTM revenue and 1.7x EBITDA for HHC while

it paid 0.9x TTM revenue and 3.7x EBITDA for Resource Medical. Those

multiples are actually somewhat overstated given:

a) The acquired companies bring positive working capital, either

through accounts receivables and/or inventories. This would lower

the stated net purchase price as those A/Rs and inventories are

converted to cash.

b) More importantly, the cross-selling of services should lead to

increased revenue and EBITDA.

From a total of ~10,000 industry companies, management has indicated it

has a near-term funnel of 12. We assume that future acquisitions are

executed at:

a) 0.7x revenue

b) 3.0x EBITDA

c) 20-25% EBITDA margin

d) 50% cash, 50% stock




Under such a scenario, PHM would leverage its $7 million cash position to

$14 million by issuing 50% of the purchase price with shares. Assuming the

valuation multiples above, it could buy $20 million revenue and $4.7

million of EBITDA. Using our FY14 exit-rate noted above as a guide, such an

acquisition(s) could yield a proforma exit rate of $39 million in revenue

and $8.5-$9 million of EBITDA.

Capital Structure

As of December 31, 2013 (Q1/FY14), PHM had 136 million basic shares

outstanding, having issued ~38 million shares in the quarter including:

a) 25 million from an equity financing (@ $0.23 with a 2-year full

warrant, exercise price of $0.36) and

b) 12.8 million (@ $0.27) as the share portion of the acquisition of

Resource Medical.

On a fully diluted basis, there are 202 million shares outstanding including:

a) 45 million warrants with an average strike price of $0.30;

b) 15 million options with an average strike price of $0.195;

c) 5.2 million shares from $0.9 million convertible debenture.

The conversion of those warrants and options would generate ~$16.5

million to the company. On a Treasury Method at a current stock price of

$0.28, the fully diluted share count is 143 million.

Management and the Board of Directors own 20.5 million shares or

approximately 15% of the basic share count. As such, we believe that

management’s objectives are very much aligned with investors.




Valuation – What’s It Worth?

From a valuation perspective, we believe the shares of Patient Home

Monitoring are undervalued and the current price neither reflects the

positive macro dynamics of the industry nor the potential to strategically

grow its footprint through acquisitions.

We can envision several scenarios under which investors could

experience a significant increase in the share price of PHM.

a) EBITDA Growth and Multiple Expansion: We have outlined above how

we believe PHM will experience significant EBITDA growth over our

projection period. We would note that we believe our cross-selling

assumptions are conservative. Furthermore, as noted above, we

believe its current $7 million cash position, coupled with the issuance

of stock, could add $20 million of revenue to our $19.1 million FY14 exit

revenue run-rate. That $39 million exit rate could generate EBITDA in

the range of $8.5-$9 million.

As noted in the peer group table in Appendix A, the group trades at

an average of 10-12x EBITDA. Based on 50%-50% utilization of the $7

million cash and $7 million of stock (@ $0.30 or issuance of 23 million

additional shares), the total fully diluted share count would be 170

million (Treasury Method). A 12x multiple on a $9 million exit rate,

therefore, would yield a stock price of $0.65.

Such an EBITDA multiple has also been confirmed by some recent

M&A activity. CML HealthCare, an operator of over 200 labs and

diagnostic imaging sites in Ontario and British Columbia, was

purchased by LifeLabs for $10.75/share or $1.2 billion in June 2013.

LifeLabs is a private firm owned by the Ontario Municipal Employees

Retirement System (OMERS) through its Borealis Infrastructure arm. The

purchase price equated to 14.7x 1H13 annualized EBITDA. In another

example, OPMEDIC GROUP (OMG – T) announced a “go private”

transaction in September 2013 at a price of $2.90 per share. The

valuation equates to 13x EBITDA. OPMEDIC provides a wide range of

professional fertility and genetic services as well as surgical and

endoscopic services and facilities for patients and surgeons.

b) DCF Valuation of $0.68: From an intrinsic value perspective, our

discounted cash flow valuation yields a target price of ~$0.70 based

on a discount rate of 10%. The delta of a 100 basis point change in the

discount rate equates to ~$0.10.




Key Risks

Integration of Acquisitions: PHM has made 2 acquisitions in the past 4

months. There is a risk that the integration of them, as well as any future

acquisitions, may not go as smoothly as planned.

Medicare Re-imbursement: PHM’s revenue is based on re-imbursement

rates set by Medicare. If those re-imbursement rates are reduced, this

would negatively impact revenue and margins.

Timing/Success Rate of Cross-selling: Part of our forecast is based on the

successful cross-selling of medical services. Growth rate could be weaker

than anticipated if cross-selling initiatives are not as successful as envision.




Initiating Coverage with Buy Rating and

$0.65 Target Price

We are initiating coverage of Patient Home Monitoring with a Buy rating

and a target price of $0.65. In summary, our recommendation is based on

the following:

a) Average health care spend per person increases dramatically as one

reaches 65 years old. This is because we are more susceptible to

chronic diseases as we age. In fact, there is a very high likelihood

(~50%) that a 65 year old having one chronic disease will have a

second;

b) Bearing that in mind, as the 80 million American baby boomers reach

retirement age (oldest boomers are now 68, youngest are 50), they

are putting tremendous financial strain on the health care system;

c) One way to minimize expensive hospital care is to monitor patients’

chronic illnesses at home so that the condition does not become

acute;

d) With the macro conditions now in place (demographics, enabling

technologies, re-imbursement codes), the home monitoring industry

has spawned thousands of companies operating in specific indication

verticals in specific geographic regions;

e) PHM, starting in the cardiology home monitoring vertical, has started

an acquisition strategy from both a geographic and indication

perspective. Given the sheer number of industry participants, we

believe the opportunities are plentiful and the prices very reasonable;

f) In addition, given the profitable nature of the acquisition targets, each

transaction should be very accretive to EBITDA per share as well as

EPS;

g) EBITDA and EPS accretion should also be enhanced through mining

the aggregate database of all of the operating companies and cross-

selling services (remember approximately 50% of patients with one

chronic condition have at least one other) and drive revenue per

patient higher;

h) PHM has ~$7 million in cash and a public market currency to execute

its strategy. With that balance sheet, we believe PHM could acquire

$20 million of incremental revenue. If so, we believe the company

could exit FY14 at a revenue and EBITDA run-rate of $40 million and $8-

$9 million respectively;

i) With a peer group and industry transactions at an average of 12x

EBITDA, such an EBITDA forecast would yield a value of $0.65 per

share.




Appendix A: Comparable Companies

Company TickerLast

Price

Market

Cap.

(MM)

EV

(MM)2012A 2013 2014E 2015E 2016E 2012A 2013 2014E 2015E 2016E 2012A 2013 2014E 2015E 2016E

Fresenius Medical Care AG & Co. KGaA FME-ETR $53.62 $17,185 $22,967 20.0% 19.8% 19.9% 20.2% 20.2% 10.7x 10.9x 10.3x 9.6x 8.9x 17.7x 20.4x 18.7x 17.0x 15.2x

QIAGEN NV QIA-ETR $16.54 $3,876 $4,214 32.9% 8.0% 33.5% 34.2% 34.8% 13.1x 53.9x 12.5x 11.6x 10.7x 38.6x 73.2x 19.7x 18.0x 16.7x

Alere Inc. ALR-USA $34.74 $2,845 $6,319 20.9% 13.2% 21.4% 22.0% 22.2% 10.7x 15.8x 9.6x 8.9x 8.4x neg neg 13.3x 11.7x 10.9x

BioScrip, Inc. BIOS-USA $8.27 $563 $979 5.3% 6.0% 6.8% 7.8% - 28.0x 19.5x 14.9x 12.2x - 7.2x neg 44.2x 26.1x -

Amedisys, Inc. AMED-USA $15.41 $500 $527 5.8% 4.2% 3.6% 3.3% - 6.1x 10.2x 12.3x 13.0x - neg 61.2x nmf nmf -

Addus HomeCare Corporation ADUS-USA $24.36 $266 $236 7.2% 7.2% 7.5% 7.7% - 13.3x 12.4x 10.5x 8.4x - 34.3x 25.1x 21.8x 17.9x -

QHR Corporation QHR-TSX $1.32 $64 $65 7.8% 13.5% 16.0% 19.1% - 28.3x 14.1x 13.6x 10.7x - nmf 33.0x 23.0x 18.0x -

-

15.8x 19.6x 11.9x 10.6x 9.3x 24.5x 42.6x 23.5x 18.1x 14.3x

Source: FactSet, Beacon Research

Healthcare Services Comparable

EBITDA Margin EV/EBITDA Price/Earnings

Peers Average




Appendix B: Financial Statements

Income Statement

Year End: September 30 FY11 FY12 FY13 FY14e FY15e FY16e

($000s)

Total Revenue 1,444 3,901 3,976 16,109 21,420 28,854

Cost of Goods Sold 585 982 987 8,134 10,751 14,286

Gross Profit 859 2,919 2,988 7,975 10,669 14,568

Operating Expenses:

Administration and marketing expenses 1,394 1,977 1,740 3,544 4,284 5,482

Patient acquisition 948 1,097 502 1,611 2,142 2,885

Other 0 0 0 0 0 0

Total operating expenses 2,341 3,074 2,242 5,155 6,426 8,368

EBITDA -1,482 -156 746 2,820 4,243 6,200

Amortization 0 293 386 417 689 958

EBIT -1,482 -449 360 2,403 3,554 5,243

Total net interest expense 0 125 207 112 0 0

EBT & other expenses -1,482 -574 154 2,291 3,554 5,243

Other expenses (FX, Charges) 141 -34 2,700 0 0 0

EBT -1,624 -540 -2,546 2,291 3,554 5,243

Tax Expense 0 0 0 0 0 0

Net income -1,624 -540 -2,546 2,291 3,554 5,243

Shares Outstanding 60,150 64,267 68,634 136,063 136,063 136,063

EPS (basic) -0.03 -0.01 -0.04 0.017 0.026 0.039

Shares Outstanding (FD) 60,150 64,267 68,634 143,381 143,381 143,381

EPS (FD) -0.027 -0.008 -0.037 0.016 0.025 0.037




Balance Sheet

Year End: September 30 FY11 FY12 FY13 FY14e FY15e FY16e

($000s)

ASSETS

Cash $603 $247 $3,361 $4,911 $5,768 $7,825

Accounts receivable 438 697 2,407 5,517 7,335 9,882

Inventories 74 17 576 2,786 3,682 4,893

Prepaid expenses 85 28 5 5 5 5

Other 0 0 0 0 0 0

Total Current Assets 1,200 989 6,349 13,218 16,790 22,604

Capital assets 1,196 1,331 1,375 2,587 3,859 5,031

Deposits 42 223 42 42 42 42

Goodwill 0 0 1,050 6,042 6,042 6,042

Total Assets 2,437 2,543 8,817 21,889 26,733 33,719

Liabilities and Shareholders' Equity

Bank debt 0 0 0 0 0 0

Trade and other payables 1,193 490 2,014 3,343 4,418 5,871

Accrued liability 250 319 448 669 884 1,174

Other 0 0 0 0 0 0

Total Current Liabilities 1,442 809 2,461 4,011 5,302 7,045

Convertible notes 0 496 596 596 596 596

Derivative financial liability 0 126 4,587 4,587 4,587 4,587

Other 0 0 0 0 0 0

Total Liabilities 1,442 1,431 7,645 9,194 10,485 12,228

Share capital 4,526 5,280 7,888 17,120 17,120 17,120

Retained earnings -3,521 -4,061 -6,607 -4,316 -763 4,480

Other (10) (107) (109) (109) (109) (109)

Total Shareholders' Equity 995 1,112 1,172 12,695 16,248 21,491

Total Liabilities and S.E. 2,437 2,543 8,817 21,889 26,733 33,719




Statement of Cash Flows

($000's) FY11 FY12 FY13 FY14e FY15e FY16e

Net Income (1,641) (540) (2,546) 2,291 3,554 5,243

Depreciation 121 293 386 417 689 958

Other 200 164 3,061 0 0 0

Cash Flow Operations (1,319) (82) 901 2,708 4,243 6,200

Changes in non-cash WC (241) (1,022) (679) (3,769) (1,424) (2,013)

CFO (inc. changes in WC) (1,560) (1,104) 221 (1,061) 2,818 4,187

Capital expenditures (687) (727) (94) (1,629) (1,961) (2,130)

Acquisitions 0 0 (313) (4,992) 0 0

Other (Net) 0 74 0 0 0 0

Cash Flow Investing (687) (653) (408) (6,621) (1,961) (2,130)

Principal Repayments 0 0 0 0 0 0

New Equity 0 675 3,301 9,232 0 0

New Debt 0 720 0 0 0 0

Other (Net) 0 0 0 0 0 0

Cash Flow Financing 0 1,395 3,301 9,232 0 0

Other (Net) (27) 6 (1) 0 0 0

Cash Flow (2,274) (357) 3,114 1,550 857 2,057

Cash, begin period 2,877 603 247 3,361 4,911 5,768

Cash, end period 603 247 3,361 4,911 5,768 7,825


Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

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As at

January 31, 2014

BUY 18 54.5%

Speculative Buy 5 15.2% SPECULATIVE BUY

HOLD 3 9.1%

SELL 1 3.0%

Restricted 3 9.1%

Under Review 3 9.1%

Total 33 100%

# Stocks Distribution

SELL

HOLD

BUY

Total 12-month return expected to be negative

Total 12-month return expected to be between 0% and 15%

Total 12-month return expected to be >15%

Potential total 12-month return is high (>15%) but given elevated risk, investment could result in a material loss

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