Owning Alere May Not Be Healthy for Your Portfolio

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This article has been amended to remove Honeywell.

Companies offering comprehensive patient vital sign monitoring was once a business many investors were unaware of. Ever since the (attempted?) implementation of the Affordable Healthcare Act, and the subsequent flight to cut patient claims costs, the industry began reaping a windfall. The impact of real-time patient monitoring is not only in the expectation of the member to have a higher quality of life, but also offers aggregated data to insurance providers to help predict and curb future claims risk.

This transparency into a large, and potentially expensive, data pool is worth billions to insurers, and companies like Alere (NYSE: ALR) have been providing the service to the patients for the benefit of the insurer. But just like any other developing market sector, Goliaths enter in, making for tough competition.

Alere’s Connected Health

Alere is a healthcare solutions provider offering real-time, comprehensive, vital monitoring for patients suffering from a range of chronic illnesses, including congestive heart failure, diabetes, and autoimmune diseases. Its main offering is through Alere Analytics, Alere Home Monitoring, Alere Wellbeing, and Connected Device Technologies.

The specific market for medical monitoring is relatively small, compared with the market for pharmaceuticals and implant devices. It is a $11.6 billion market in the U.S. and it shows signs of exponential growth, according to NERAC.

Of the $11 billion market for remote monitoring, Alere accounts for approximately $615 million of the market share as of December 2012. This number has remained at that approximate level since fiscal 2010, and is showing no immediate sign of growing.

The competition

Medical device giants, such as Medtronic (NYSE: MDT) and savvy smaller competitors, like ActiveCare have gleefully entered this market with great aggressiveness. Medtronic is a medical device behemoth with over $16 billion in revenues, and approximately $1 billion of it coming from remote care management.

Medtronic offers patient monitoring for chronically ill patients as part of its overall medical device offering.  "Large vendors dominate, but half of the revenue of this market are small players with nominal global market share," said Bruce Carlson, Publisher of Kalorama Information. "Small vendors will drive growth in the market and offer cheaper or more effective products. This is particularly true in the home care and telemedicine segment."  This speaks volumes to where investors should seek out opportunities in this niche market segment. Medtronic may be the market leader, but investors should look at smaller companies that are gaining a foothold in this industry.

ActiveCare has snuck behind these giants and acquired contracts from insurers and state governments to provide services to over 24,000 members amounting to an annual run-rate of $16 million. It was able to do this with a proprietary platform that digests patient vital data, through which its "CareCenter" provides live, real-time care.  It also has been able to realize the importance of patient data, and translated aggregated data into savings for insurers using ActiveCare's monitoring service for their members. Look for this company to continue its growth as management forecasted the company to be monitoring 40,000 members by year's end.

Financial Outlook

The last fiscal year, ending March 31, Alere grossed $2.886 billion in revenue but ended up losing $1.09 in earnings per share. Its revenue growth from the prior year has been lethargic, to say the least, and that also can be said about its operating income.

Alere has consistently lost money over the years while pulling in decent revenue numbers. It is understood that this business requires a tremendous amount of research and development, and Alere’s debt load reflects the company’s growing need for future financing. As of fiscal year, ending in March, it holds over $3.7 billion in long-term debt and only $1.5 billion in common equity.

Serious point to consider

Alere is competing in a market that has many cash-rich companies entering into. The migration from traditional biometric monitoring to remote, real-time monitoring is one that does not require a swift change in focus for the likes of Medtronic and HomMED. Where these companies have multi-billion dollar research and development teams and budgets, Alere may run into significant headwinds if they continue to focus primarily on the remote monitoring market. Additionally, should Alere attempt to diversify its services, additional, unaffordable cap-ex would be required.

Also a shake-up with the board of directors is happening as Coppersmith Capital Management — which owns 7% of the company — went public to run three candidates for four seats up for election. This comes amid charges from the shareholder that Alere has been mismanaged for years and needs better oversight. Alere’s counter-plan to Coppersmith’s is its own plan to increase revenues, which is falling on deaf ears.

Conclusion

It is surprising investors seem to continue to want to buy this stock. The shares have risen over 58% over the past year without the fundamentals increasing in lock step. With the future of this company going through a bit of a managerial struggle, it is best to either take profits here, or stay away altogether.

Should a standoff between Coppersmith Capital and Alere result in a more aggressive and innovative board of directors, then the stock would warrant revisiting. Until then, my approach is to keep Alere out of the portfolio, but still on the radar.

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Michael Mandala has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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