Owning Alere Inc (ALR) May Not Be Healthy for Your Portfolio

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Alere IncCompanies 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 Inc (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 Inc (NYSE:ALR) 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 Inc (NYSE:ALR) 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, Inc. (NYSE:MDT) and Honeywell International Inc. (NYSE:HON) alongside savvy smaller competitors, like ActiveCare have gleefully entered this market with great aggressiveness. Medtronic, Inc. (NYSE:MDT) is a medical device behemoth with over $16 billion in revenues, and approximately $1 billion of it coming from remote care management.

Honeywell International Inc. (NYSE:HON) has made headway into the patient monitoring industry through their HomMED division, which brought in roughly $25 million of the $36 billion in revenue for the parent company. This is a small section of the company’s overall revenue picture; the potential for it to become a game changing one for Honeywell International Inc. (NYSE:HON) is small. Analysts expect the HomMED division to bring in just $35 million next year. Because of this, investors should shy away from investing in Honeywell for the purpose of being exposed to the growing patient monitoring industry.

Medtronic offers patient monitoring for chronically ill patients as part of its overall medical device offering.  Between Medtronic, Inc. (NYSE:MDT) and Honeywell, they take just under 35% of the remote patient monitoring market. “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.

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