A Well-Run Health Stock at a Good Price

03/02/2012 7:30 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

There has been a lot of premium built into a lot of health care stocks at this point, but this company is still a good value and has plenty of headroom, writes Taesik Yoon of Forbes Investor.

Alere (ALR) is a leading global provider of patient monitoring tools and value-added health care services focused on cardiology, women’s health, infectious disease, oncology, and toxicology. Customers consist of hospitals, laboratories, physician offices, private and government health-care providers, self-insured employers, drugstore chains, and other retailers.

Its larger professional diagnostics segment (72.3% of revenue through the first nine months of 2011) makes products used to identify a specific medical or toxicological condition, measure response to therapy, and monitor patient health. These products focus on point-of-care, rapid diagnostic testing, health monitoring, and self-testing markets.

Its health management segment (23.5% of revenue) offers several programs designed to improve patient outcomes and reduce medical expenditures. This includes programs for managing chronic and high-cost conditions; services that support anticoagulation management; obstetrical care services; cancer management programs; and wellness programs that help organizations reduce health risks and improve employee health and productivity.

The remainder of revenue was derived from the sale of consumer diagnostic products, including over-the-counter pregnancy and fertility/ovulation tests, at-home drug testing kits, and cholesterol monitoring and colon cancer screening tests. The bulk of these products are sold to SPD (Swiss Precision Diagnostics), a joint venture equally owned by ALR and Procter & Gamble (PG).

Third-quarter 2011 net revenue climbed 8.7% year-over-year to $585.8 million. Professional diagnostics segment sales grew 18.6% on strong organic growth of 9%, a rebound in flu-related product sales in North America, and contributions from acquisitions.

Consumer diagnostics sales rose 9.7%. These gains more than offset weaker health management services revenue, which fell 15% on competitive pricing pressure, decreased funding in state-run anti-smoking programs, and unfavorable reimbursement policy changes by Medicare and Medicaid.

Lower segment profit margins stemming from these challenging conditions resulted in a 139-basis-point decline in ALR’s overall adjusted operating margin, which excludes restructuring expenses, acquisition-related charges, and other special items, to 20.85%.

Yet, boosted by contributions from its SPD joint venture and other unconsolidated entities, adjusted net income available to common stockholders rose 10.6%, to $58.6 million, or 67 cents per share. This was well ahead of the 59 cents consensus estimate.

Despite these strong results, ALR’s stock ended 2011 down 37% for the year. Investors were likely concerned by cuts in government-funded health care programs and lower-than-expected reimbursement rates by Medicare and Medicaid. Given the slow economic recovery and high federal budget deficit, investors may fear that additional cuts will be called for.

Yet with the majority of ALR’s revenue derived from sales to private sector customers, investors may be overestimating the company’s reliance on government-funded programs. Additionally, the effects of many of the funding cuts have been absorbed, suggesting their future impact should be limited.

Based on global revenue trends and projected contributions from new products, ALR expects strong and increasing organic growth in professional diagnostics sales in 2012. Among the products we expect to support this growth is its rapid flu test, which was cleared by the FDA last month. ALR should also continue to benefit from higher sales of new cardiology products in Japan.

The recent acquisition of Axis-Shield, a UK-based producer of in vitro diagnostic tests used in clinical laboratories and point-of-care applications, is also likely to contribute in 2012. ALR’s global point-of-care salesforce should allow for greater market penetration of Axis-Shield’s products, while Axis-Shield’s distribution system results in increased selling opportunities in the Anglo-Scandinavian market.

Additionally, the launch of its global principal operating company and service center in Ireland during the third quarter is expected to improve customer service levels and lower operating costs in ALR’s global operations. We are also encouraged by results from a recent clinical trial, which suggests that the company’s Heart Check device could potentially be used by patients to manage congestive heart failure remotely from home.

Thus, despite a few challenges in its health management business, we expect ALR’s operations as a whole to show solid improvement over 2011. As they do, so should the price of the company’s stock, which currently trades at an exceedingly attractive 9 times the consensus estimate for 2012.

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