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This Medical Device Company Plans to Grow its Business Through M&A

Jocelyn Aspa Jocelyn Aspa, The Market Herald
1 Comment| June 11, 2021

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(Click image to watch video)

North America is one of the hottest spots for the medical device industry, having accounted for nearly half of all market revenue in 2019.

According to a report, medical devices continue to rise in importance for disease prevention and medical diagnosis and also the treatment and rehabilitation of medical conditions.

In the coming years, the medical device market is expected to grow at a compound annual growth rate of 6.1 per cent to reach US$7.67 billion by 2027.

Companies like Salona Global Medical Device Corporation (TSXV:SGMD, Forum) are looking to tap into that market through the acquisition of private medical device companies across North America.

The newly-listed company has a strong pipeline of companies which are in the midst of discussing potential acquisition by Salona Global Medical Device. These companies have revenues between US$5 million and US$20 million, with positive cash flow, and which will benefit Salona Global Medical Device moving forward.

Stockhouse Editorial’s Jocelyn Aspa had the opportunity to speak with interim CEO Les Cross and Michael Dalsin an M&A advisor to the company, about the company’s business model and why investors should act on Salona Global Medical Device now.


SH: Can we start off with you providing us with a little bit of an overview of yourself and the company?

LC: Thank you for the opportunity to speak with you today. My name’s Les Cross, and I am Chairman and interim CEO of Salona Global. Prior to Salona Global, I was the Chairman and CEO of DJO Global, a New York Stock Exchange-listed company under the symbol DJO. I led a leveraged buyout of that business from Smith & Nephew back in the late 1990s and we built that business through acquisition and organic growth, particularly organic growth outside the US, and eventually sold that company to Blackstone in a private transaction for $1.6 billion.

Salona Global is an acquisition-focused company where we plan to acquire privately-owned medical device companies in the US. The companies that we’re interested in, focus in a space we call recovery science. And the way to think about recovery science, is the products that are used to help a patient recover from injury, surgery, chronic pain, and the complications of diabetes. The market is estimated to be $30 billion, and there are thousands of small private companies around the world designing, filing for intellectual property, getting regulatory approval to operate in this recovery science space. With that, I’ll put it over to Michael.

MD: My name is Michael Dalsin, I am an M&A advisor to Salona Global. I was the chairman of Patient Home Monitoring, and I'm on the call today mainly to talk about acquisitions and acquisition strategy.

My background is as an M&A banker and I was, as I said, the chairman of PHM — Patient Home Monitoring — which is now Quipt on the NASDAQ and Viamed on the NASDAQ and that was a company that I took from $3 million in sales to $160 million in sales through 15 acquisitions over 18 months. Our stock price went from 16 cents to $2 and a lot of that was down to the structure of the acquisitions that we made and I'm bringing that to bear here in Salona Global.

SH: Because the company is so focused on M&A activity, and that’s how the company is looking to grow its business, can you talk about the company’s business model and what we can expect going forward?

MD: Sure. Well, on the acquisition side, the business model is based on accretive acquisitions. Obviously Les has a view of acquiring companies that mostly sell in the US and expanding them globally - that's the organic growth side of the growth strategy. Inorganically, when we look to acquire these companies, obviously Les has a very deep relationship in this industry for almost 30 years. He knows a lot of the sellers and a lot of the sellers know him, more importantly. And so finding the targets has not been too difficult for us. And structuring the deals, well, that's kind of what Roger Green and myself do, we understand how to structure these deals. So how are the deals structured? They're generally structured on an earn-out basis. When we acquire a company, we give them small cash down payment off our balance sheet. We have a very strong balance sheet with a lot of cash. We give them some shares upfront, although it's a minority of shares. Predominantly most of their payment is on the backend. Now you would ask why would they do that?

A lot of these companies want to take the ride with us. They are looking to get the upside with us. They want to take stock and ultimately they want to be able to be measured on their success after we expand them into Europe. Usually, they take a one or a two-year earn-out and they take that in restricted stock or cash at the end, and the cash at the end would usually be debt, which of course, would be performance-based. For us, what we get, which is fantastic as shareholders, is we own 100 percent of the company when we give them the down payment, the stock payment, and then over time we accumulate the cash flow that they throw off, we accumulate the growing cash flow that they throw off, because we'll be growing in Europe and adding cash flow that way.

At the end of that five, six, seven, eight quarters, we obviously owe them a cash payment. We can do that through the cash that they have thrown off, or we could do that through a debt that we can service easily because of the cash flow they are throwing off. Then the restricted stock component keeps our float very, very tight. And I know that one of the great successes that PHM had was, we issued shares to sellers, kept them involved, kept them in as partners, but ultimately there was a very, very tight float and very few of the total outstanding shares for trading because so many were being held by these US sellers, who had an incentive to stay and actually were locked up for long periods of time. We are going to bring that same structure here to Salona Global and that's a very important part of the success is to make accretive acquisitions that Les has picked out and believes he can expand into Europe.

LC: I think our plan is simple; you know we plan to buy these recovery science companies. The companies we’re targeting range from $3 million in revenue to $30 million in revenue, maybe even more. They are cash flow positive companies, but most of these companies have very little or no sales outside the US.

With DJO, about a third of our revenue came from outside the US. So you can see there's quite an upside we can give to these companies quickly. We have the contacts, the relationships, and the network to help these businesses grow, but also we will acquire other products to feed into the companies that we own, that we've acquired, to even further accelerate that growth.

SH: In addition to M&A acquisitions, how does Salona plan to grow its business?

LC: We're an acquisition company, so we are going to grow by buying companies. Then we have a plan of what to do with those companies, right? Which is integrate operations, if it makes sense, but really focus on accelerating their business outside the US and growing the company organically in the US and also through acquisitions of product lines that fit into the companies we've acquired, which is exactly what we did at DJO.

SH: As a newly listed company, why should potential investors invest now?

MD: This is a question I often got at PHM and since Les and his team have traded on NYSE, and I have traded on the Toronto exchange, maybe I should take that question.

I think it really comes down to just the question of risk appetite. At the end of the day at PHM, a lot of the investors that I would speak to, wanted to see the acquisition happen first. They wanted to see the two or three quarters that followed the acquisition to make sure that the organic growth was there. For those investors, the good news is they lowered the risk, perhaps the bad news is they lost out on a pretty tremendous reward. It just depends on where you sit in your portfolio. Is this a high-risk, high reward play for you, or are you waiting for this company to be a little bit more mature and get three, four, acquisitions under our belt?

Of course, where we stand today, we're going to be about a $16 million revenue run rate when we list. I can see acquisitions that can get us to 60, 70 million in sales without raising any money. The question is, how quickly can we do that? Can we close those acquisitions in months? Or do we wait quarters? Obviously, I'd like to think we can do it in months. We can't always control the selling party, but I feel like we can do this very, very quickly. My job with my team is to deliver the acquisitions as quickly as possible, I think I have a good track record of doing that. Les’ group, once they have the acquisition, integrates them and grows them, and I think we can see pretty quick organic growth on the back end of an acquisition.

This is really a question of, where do you want to position yourself? Do you want to position yourself at the beginning of this train, that's moving and getting on early and getting the best seat, or do you want to wait for the train to mature and for us to really be able to show that we can execute on our business plan? Obviously, at that point, I think we probably won't be trading at a low multiple, we would be trading at a pretty high multiple. This is just the question of where you want to be, obviously from our perspective, we bought stock and we bought stock in the recent offering and we think we can move it pretty quickly and we'll see, I'm sure we'll be checking in with you periodically to share our successes.

LC: I think in summary our plan is simple, you know, acquire and grow these businesses in this space we know and we understand. We have the talent to execute once we acquire these companies and growth. We have the connections — Michael and myself between us — I have the industry connections, he has the connections up on your exchange. We have a strong balance sheet, and I think probably the most important thing to our shareholders that there is a target-rich environment out there. There are thousands of companies, as we say, privately owned in this space. We have done it before. Michael's done it before, and we intend to do it again. We have made a lot of money for shareholders in the past then, let’s do it again. Thank you very much for your time today.

SH: It’s great to learn about your company and your business plan. If there is anything else I’ve missed, please feel free to elaborate.

LC: One thing I didn't tell you, who our customer is. These recovery science products are sold to, orthopedic officers, orthopedic surgeons, physical therapists, chiropractors, athletic sports teams that buy these products to protect. There are a lot of companies and there's a lot of customers for these kinds of products.

FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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