What a telehealth device company may be worth

Brian Dolan of Mobihealthnews did some panning among Alere‘s SEC filings and found this nugget in their 8 November 10-Q (not cited in the article, but readily available on the Alere corporate website). Under ‘Acquisition-related Contingent Consideration Obligations’ (page 26), this refers to the undisclosed July acquisition price of MedApps, now Alere Connect:

With respect to MedApps, the terms of the acquisition agreement require us to make earn-out payments upon achievement of certain technological and product development milestones through January 15, 2015. The maximum amount of the earn-out payments is $22.0 million.

The headline and article, Alere to pay as much as $22M for MedApps, created an interesting debate on the Digital Health LinkedIn group (member access only) on what seemed to be a dismayingly low price for a company considered to be a development pioneer and quality leader in wireless telehealth, replete with FDA Class II, CE and Health Canada clearances, plus plenty of sweat and tears. Editor Donna pointed out that the SEC filing did not disclose the closing payment at time of sale–the earn-out structure, so typical of early-stage technology acquisitions, is in addition to the closing (which could be substantial, or little, in cash and stock) because outside investors generally want to exit at that time. What is also apparent is that the earn-out is based on ‘milestones’, which look fine in the rosy light of purchase but can prove to be very difficult to achieve, potentially reducing the $22 million earn-out. But what this bit of legwork gives us is a chalk mark on the board for mobile telehealth devices, and it’s a little lower than we thought.

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Comments

  1. Donna,
    What we are seeing is that devices in this space are becoming commoditized. While MedApps, Kent and team, have done a really nice job of putting together an industry leading device, all manufacturers are having trouble differentiating themselves and therefore the prices (equipment and monthly fees) have come down 30%-50% across the board over the last couple of years. Plans/providers have also realized that when manufacturers ship 1,000 devices to the plans/providers front door, they are having trouble figuring out what to do with them. How do you get members/patients engaged? How do you get the devices in the home (hint: direct ship doesn’t work)? Once they are in the home what do you do with the data that is generated? How do you get the patient’s/member’s clinicians involved when there is an alert that requires intervention. Manufacturers haven’t put those pieces together yet. Service providers have and therefore are grabbing the sales channel real estate. With falling prices and low differentiation I think that its really hard to get a premium valuation. Just my $.02.
    Andy

  2. Donna Cusano--Editor

    Andy, this is cold comfort for those innovators who’ve put heart, soul and plenty of cold cash (theirs, investors and VC) into their telehealth/telecare devices.

    It should be noted that by selling to Alere, MedApps is now part of a health management and monitoring company, thus integrating their tech with a service provider.

    Adding to the pressure, of course, is that angel investors and VCs have short clocks on these companies, generally 18 months or so.

    What may be a better way is that device developers joint venture themselves from the start with health or service providers. And that those already seeking financing seek provider partners.

  3. Steve Hards, Editor

    [quote]Plans/providers have also realized that when manufacturers ship 1,000 devices to the plans/providers front door, they are having trouble figuring out what to do with them. How do you get members/patients engaged? How do you get the devices in the home (hint: direct ship doesn’t work)? Once they are in the home what do you do with the data that is generated? How do you get the patient’s/member’s clinicians involved when there is an alert that requires intervention.[/quote]
    This is a wonderfully concise description of the problem that telecare and telehealth device suppliers in the UK have been wrestling with for the past decade.

    In the price-driven market fostered by the requirement on UK councils and NHS organisations to purchase through tenders or via the framework agreements, it must be irresistibly tempting for companies to sell several thousand devices and leave the purchasers to wake up to realise that what the salesman persuaded them they wanted was not what they actually needed.

    A few companies have cracked the need to sell a developmental process along with the devices but the hand-holding nature of those is that they are hard for the supplier companies to scale up.

    The ‘managed service’ model seems to have emerged as a compromise but it will only work if the suppliers do not abuse their position and inflate costs or provide equipment that users do not actually need.

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