|Shares Out. (in M):||95||P/E||0.0x||0.0x|
|Market Cap (in M):||3,000||P/FCF||0.0x||0.0x|
|Net Debt (in M):||3,400||EBIT||0||0|
Alere is a point-of-care diagnostic company focused on chronic diseases that was just the battleground for a proxy fight and now I believe if very well set up from a risk/reward perspective. It has been written up before, so I won’t waste too much time laying out the business. Suffice to say it has 3 main franchises – Cardio, Infectious disease, and toxicology and a couple of smaller ones in diabetes and women’s health. It is has been built by and is still currently run by a visionary CEO – Ron Zwanziger, who owns roughly $125 million of stock personally and has a substantial option position which he and the Board continue to price at $50 even when the stock had dipped down to $18. He has build two prior diagnostic companies – both of which have been sold. His vision for ALR is to build a world class diagnostic company that will focus on allowing better and more efficient outcomes by diagnosing and monitoring patients in a less costly environments like at home and in the doctor’s office. Interesting to note that this morning Medtronic announced a deal that seems to emulate what Ron has been driving towards.
Just a little bit of background - it is also important to understand that as smart as most investors believe that Ron is and as interesting a company as ALR might be, the last several years have been marked by terrible communication, arrogance and a total lack of execution. The company has been built by a series of acquisitions and significant R&D focused on the long term. Ron seemed fine running ALR like a private company with no focus on near term results or shareholder concerns and had a Board that seemed ok with that as long as they continued to believe that ultimately there was a big story that was going to unfold.
Finally with the stock at $18 (down from $60) which threatened to derail his long term vision (not to mention his continued position at the company) Ron seemingly had a “come to Jesus moment.” On the Year End conference call Ron found religion and announced the ALR was exiting the build out phase and was entering the harvest phase. While at the time, the full definition of what that meant was still blurry, it did at a minimum include and end to serial acquisitions, a promise to pay down debt, and focus on ROIC, the recent hiring of a well thought of COO from JNJ, and a focus on margins and organic growth. At roughly the same time an activist investor emerged (Coppersmith) who engaged in a proxy fight with management. Coppersmith laid out a plan of selling some non-core assets and refocusing the company on a smaller core diagnostic footprint which would deliver near term values in their estimation of roughly $50+ a share with potential for significantly more. Here is there presentation:
With a combination of fed up shareholders and a thoughtful presentation, ISS sided with the activist slate.
In response to the pressure, management engaged in a campaign of promises to shareholders and various concessions in an effort that squeezed out a narrow vote in favor of management’s slate at the last second. As part of this process management has now promised organic growth targets, SG&A targets, R&D targets, and leverage targets that if laid out should get you to the area of $5.00 of eps in 2016. You can see this by reading the last quarterly call. This does not seem crazy – given how much room there should be for improved results for a number of reasons. In fact given how many times they have missed targets and the microscope they are currently under – it seems like these targets might be conservative and that a combination of margin upside together with new products could lead you higher. In addition to the financial targets, management now has five new independent directors who are focused on accountability and results, a Board the majority of which comes up for election next year, lower corporate defenses, and a large shareholder on the Board as a shareholder representative. In short, it does not look like management “won” but rather got a last second stay of execution. It is also worth noting that in the last q reported investors could begin to see the earnings power as some of the renewed focus not to mention pressure brought to bear lead to a significant beat. Also, looking at the Board members who are coming on - they do not seem to be doing it for the money and they were clearly stepping into a mess, but seemingly found the space/assets attractive enough to get involved which i think is a nice vote of confidence in the company if not the managment.
So in short – ALR seems well set up as a stock with very good risk reward. Management now has defined financial targets, an independent Board committed to driving results and accountability, a shareholder base that is clearly at the end of its rope and probably just handed out is last pardon and a number of tailwinds going for them. The recent Medtronic’s deal lends some credence to Ron’s vision and makes him seem early rather than a lone nut. Should management prove successful and deliver – with $5.00 of eps more or less in 2016 which would mean upper single digit and accelerating organic growth and one would think the stock would not trade for less than 20x…with a pipeline of molecular tests and the successful demonstration of the business model – it could be more. Now, it is a very fair point to ask how one has confidence that this management team can deliver…not sure you can. This is why the recent involvement of Coppersmith together with how this process played out I think gives shareholders the best of both worlds. If management can deliver, a $100 stock seems achievable in a reasonable timeframe. If not, there is now a clear “plan B” that shareholders have (and almost voted for anyway) with the existing Board and management fresh out of legs to stand on. Sort of heads you make a lot of money or tails you make a decent amount of money – but either way the risk/reward from $32 seems attractive.
|Subject||Recent downgrade to sell|
|Entry||08/12/2013 12:01 PM|
Intersting write-up. Thank you. Recently Craig Hallum downgraded Alere to sell due to valuation, increased competition for troponin and BNP testing and lateral flow patent expiration. Can you comment on their concerns regarding troponin and BNP testing competition as well as the patent expiration? Do these areas make up a large part of their business? You mention future products. Can you elaborate on expectations for those products? Thank you.
|Subject||RE: Recent downgrade to sell|
|Entry||08/13/2013 10:17 AM|
The CH analyst William Bonello is generally been negative on ALR - which by the way has been the right result - but often i think for the wrong reasons...just turns out that the result was the same. As far as his comments:
1) Most lateral flow patents outside the US expired several years ago and ALR's market shares have continued to expand in those geographies. ALR produces roughly 10x as many lateral flow tests as the next largest competitor (Quidel). Over the last 5-6 years ALR's low production cost based on volumes, component quality, manufacturing know-how, breadth of portfolio, etc. have become much more important than the patents themselves. In terms of royalty revenue, the primary lateral flow royalties were historically paid by Quidel on their US sales. ALR converted Quidel to a fully paid-up license for which they paid approximately $26M spread across the fourth quarter of 2011 and the first quarter of 2012. After that agreement took effect, the remaining lateral flow royalty revenues have been relatively modest. In the end, it seems reaonable that ALR is actually likely to grow its royalty and licensing revenues over the next few years through some of its recent molecular technology.
2) Trinity says they are working on a high-sensitivity Troponin test in a rapid format. It’s a leap to conclude that ALR's cardiology business is at risk based on that statement, especially since Trinity has not had past success with rapid quantitative platforms. ALR feels that its in-development tests and new platforms will allow it to protect and expand its cardiology business, despite competition, which has always been there and comes primarily from Abbott and the central labs, not from new entrants which always sound most dangerous before their product exists.
3) Most rapid flu customers will not change their buying habits based on a potential for some tests to come off the market 2+ years from now. The ALR current rapid flu test meets the new requirement for the most common flu A strain, but falls just short on the relatively uncommon flu B strain. The original flu B sample size was extremely small and ALR is looking at various alternatives including resubmitting the flu B data using a larger sample size which might show performance above the proposed new requirement. More importantly, the new regulations may also accelerate the transition to molecular flu testing, which ALR will benefit from. Molecular tests will come with higher price points and might help significantly expand the market say in places like Europe where reembursement is limited because of concerns about flu test accuracy. There are several smaller firms that are likely to be sqeezed out as requirments tighten - concentrating market share in the bigger players. Net-net the proposed changes together with the ALR pipeline is likely to be a nice positive for the company.
In a $3+ billion revenue company there are always puts and takes - competiton and regulations at various product levels. Clearly for a number of reasons ALR has been on the wrong side of some of them lately, but seems well positioned to carry its new found momentum for the next few years as a renewed focus on the business as well as harvesting the R&D comes to fruition. As far as new products - there are a lot of them and each of them has a pretty sizable TAM. The question is which ones will prove successful and what the ramp will be. They held an investor day a couple of years ago that highlighted some of them - although new ones have popped up since. You can check out the presentation and the analysts at JEFF and Wunderlich have done a lot of work around them. Based on the products highlighted they were projected to contribute roughly $330-450 of revenue in 2013 and $780-1200 in 2015. Clearly they have fallen behind as in 2013 they are likely to contribute around $75 vs the project low end of $330. You can spend a lot of time debating each one - but the way i look at it is that you get a lot of optionality...should a couple hit and ramp, there should be a lot of upside.