RE:RE:Normalized Earnings Analysis of CRH MedicalI think this is a fair critique and one that I spent a lot of time thinking about before deciding to make the investment, but I came to take the opposite view. I do not think that CRH is buying assets that will decay in value over a reasonable investment timeframe.
What they are primarily buying is a legal entity that employs MD anesthesiologists and CRNAs and the associated professional services agreement between the anesthesia practice and the GI ambulatory surgery center. The PSA is between the practice and the ASC, and as the nurses and doctors get older, they can hire replacements to the anesthesia legal entity and continue in the PSA. You could argue that the amortization represents the decline in the number of years left on the PSAs that are acquired, but my diligence suggests that CRHM puts in place meaningful covenants as part of the PSAs (e.g., financial penalties, rights of first refusal, etc.) to ensure a very high likelihood (although not 100% guaranteed) that the PSAs are renewed. Plus, there is a meaningful switching cost...imagine that you're a GI who has an anesthesiologist/CRNA team that you really trust. Why would you throw out that team for someone else that you might not know as well and take the risk of a mistake that leads to a medical malpractice lawsuit? And if/when the anesthesiologist/CRNA gets replaced after the incumbent retires, don't you think that the GI is more likely to go with the replacement that has been endorsed by someone he/she trusted vs. a completely brand new team?
As for training, the training of new personnel comes on the job and is part of the labor expense. I think also including it as part of the amortization would be double counting the expense theoretically.
Perhaps there will come a day when competing technologies do replace the colonoscopy, but in my due diligence with the anesthesiologists and the GIs, the view I've come to is that even with a positive stool test/Cologuard test, the GI still wants to see the colon and biopsy the polyp/tumor before beginning treatment. Exact Sciences even makes this point in their presentation: the Mayo Clinic found that positive Cologuard improves colonoscopy performance, with 46% more time spent on the colonoscopy, 2x polyps discovered, 32% increase in pre-cancer detection, and 4x higher flat right-sided lesion detection. (See Slide 9 of 34 in Exact Sciences July 2017 presentation: https://investor.exactsciences.com/investor-relations/events-and-presentations/default.aspx). Their focus is on Cologuard as a supplement to, not a replacement for, colonoscopies, and this matches my anecdotal evidence.
In conclusion, the amortization question might be the most important one for determining whether you're long or short this stock. Like I've said in prior posts, amortization expenses were real in companies like Valeant, where the Company used acquisitions to replace maintenance CapEx for developing new drugs. I don't think that's the case here...the amortization expense primarily reflects the length of the PSAs, which I think will be renewed for the reasons I've described above. Happy to hear additional thoughts that you have on this.