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Executives

Doug Guarino - Director, Corporate Communications & Corporate Relations

Ron Zwanziger - Chairman, CEO, and President

David Teitel - CFO

Analysts

Isaac Ro - Goldman Sachs

Bill Bonello - Craig-Hallum

Jon Groberg - Macquarie

Greg Simpson - Wunderlich

Jeff Frelick - Canaccord

Pete Lawson - Mizuho

Zarak Kursid - Wedbush

Dan Leonard - Leerink Swann

Anthony Petrone - Jefferies

Roger Gordon - Feingold Capital

Alere (ALR) Q4 2012 Results Earnings Call February 15, 2013 8:30 AM ET

Operator

Good morning, and welcome to the Alere Inc. conference call to discuss fourth quarter 2012 results. [Operator Instructions] I would now like to turn the conference over to Doug Guarino. Please go ahead.

Doug Guarino

Thank you, and good morning and welcome to the Alere conference call to discuss our results for the quarter and year ended December 31, 2012. We are joined today by Ron Zwanziger, Chairman and CEO; and Dave Teitel, CFO.

Before we get to that discussion though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of the U.S. securities laws. These statements reflect our current views with respect to future events or financial performance, and are based on management’s current assumptions and information currently available.

Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors including, without limitation, our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring and new business activities; our exposure to changes in interest rates and foreign currency exchange rates; our ability to successfully develop and commercialize products and services; the market acceptance of our products and services; continued acceptance of health management services by payers, providers, and patients; our ability to develop enhanced health information solutions through the integrated use of innovative diagnostic and monitoring devices and to recognize the expected benefits of this strategy; the impact of health care reform legislation as well as future reform initiative; the content and timing of regulatory decisions and actions; the impact of the FDA warning letter and the OAG subpoena, as well as the impact of changes in reimbursement policy and budgetary constraints, both in the United States and abroad; the effect of pending and future legal proceedings on our financial performance and the risks and uncertainties described in our periodic reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2011, as well as in our quarterly reports on Form 10-Q. Our company undertakes no obligation to update forward-looking statements.

Additionally, please note that during this call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available on the company’s website at www.alere.com.

With that, let me turn the call over to Alere Chairman and CEO Ron Zwanziger. Ron?

Ron Zwanziger

Thanks, Doug, and good morning everyone. We finished the fourth quarter of 2012 with characteristically strong revenue, EBITDA, and cash flow from operations. However, lingering issues with our Triage manufacturing capacity negatively impacted our profit in the quarter.

Despite the greater than expected challenge with Triage production, which Dave will go into in greater detail, the organic growth in our professional diagnostics business, excluding the impact of U.S. flu and Triage was 5% in the quarter, as most of our units performed well.

New product sales were particularly strong in the fourth quarter at $17 million, and were helped particularly by the Alere CD4 and Epocal systems. Both of these platforms show great promise for particularly strong growth in 2013. We continue to believe that the Alere CD4 platform has the potential to revolutionize the way in which HIV is managed throughout the world.

Last week, we were very pleased to announce the completion of our acquisition of Epocal, which followed through on a contractual obligation we entered into several years ago. Enjoying the full economics of this best-in-class platform as well as gaining final control over end-user pricing will enable us to maximize the benefit of the expanding test menu, not only in the U.S. but around the world.

With built-in connectivity that allows test results to be transmitted in real time to electronic health records and decision support systems, the Epoc platform mirrors our internal design philosophy of seamlessly connecting rapid diagnostic platforms with healthcare technology to deliver faster, more comprehensive data to healthcare providers.

Alere is the market leader in point of testing in each of our three main business areas of cardiology, infectious disease, and toxicology. Our diagnostic solutions are designed to provide accurate, timely, and actionable information which increasingly can be accessed by patients, physicians, and payers through clinical and mobile platforms.

This combination of [unintelligible] patient diagnostics with our connected health system will enable individuals to take better control of their own health while supporting the emerging needs of accountable care organizations and other organizations that are looking to share risk in healthcare.

As 2012 progressed, we saw a significant increase in interest for our connected health solutions from both current and potential customers. We expect to see increasing sales this year as a consequence of our integrated approach.

With the Epocal transaction closed and our company formation essentially complete, Alere is now entering a phase of significantly reduced acquisitions and improved cash flows with a corresponding deleveraging of the balance sheet.

Supported by our addition of a chief operating officer, Namal Nawana, at the start of this year, we’re making organizational and leadership changes to allow greater focus on programs to improve operational effectiveness in several aspects of the company in order to ensure predictable, long term revenue and profit growth. We expect to see some financial benefits toward the end of the year and substantial contributions in 2014 and beyond because of these actions.

Now let me turn the call over to Dave for a discussion of our reported financial results.

David Teitel

Thanks, Ron, and good morning. Net revenues for the quarter of $756.5 million compared to $652.6 million in Q4 2011 and $692.3 million in Q3 2012. Included in royalty revenues in Q4 2012 was $11 million associated with the licenses of certain of our molecular intellectual property. The effects of foreign currency translation decreased Q4 2012 adjusted revenues by $1.3 million compared to Q4 2011 and increased revenues by $4.2 million compared to Q3 2012. Adjusted earnings per diluted share for Q4 2012 were $0.55.

By business segment, adjusted net products and services revenues from our professional diagnostics segment were $584.9 million in Q4 2012 as compared to $497.4 million in Q4 2011. Acquisitions accounted for $77.9 million of this increase.

Revenues from our North American flu sales were $23.0 million in Q4 2012 compared to $8.3 million in Q4 2011. Excluding the change in U.S. flu sales, and excluding the impact of the reduction in our U.S. meter-based Triage product sales, which I will discuss in a moment, the currency adjusted organic growth rate for the quarter was 5% for our professional diagnostics segments.

Within our professional diagnostics segment, net product revenues for our cardiology business were $116.7 million in Q4 2012 compared to $128.1 million in Q4 2011. Sales of our meter-based Triage products in the U.S. totaled $24.3 million in Q4 2012 compared to $47.4 million in Q4 2011 and $34.9 million in Q3 2012. Included in these revenues were $4.5 million of cardiac panel sales in Q4 2012 compared to $17.7 million in Q4 2011 and $7.1 million in Q3 2012.

Q4 2012 also included $18.5 million of combined BNP and d-dimer sales compared to $21.5 million in Q4 2011 and $20.2 million in Q3 2012 and toxicology revenues of $1.3 million in Q4 2012, as compared to $8.3 million and $7.6 million in Q4 2011 and Q3 2012 respectively.

We indicated during our last earnings call that we expected our production capacity for Triage meter-based products to increase from 1.8 million tests in October to approximately 3.3 million tests per month by the close of 2012.

Addressing the final release specifications implemented as of October 2012 proved more difficult than we anticipated during the third quarter call. As a result of raw material and production equipment constraints, we have been delayed in reaching the 3.3 production capacity that we expected as of the end of 2012, and now will not likely do so until the end of Q1 2013.

Due to these supply constraints, Q4 panel toxicology sales of $4.5 million and $1.3 million respectively were below our previous estimates for the quarter of $6-8 million in panel sales and $2 million of toxicology sales.

Net product revenues from our infectious disease business were $190.6 million in Q4 2012 compared to $159.4 million in Q4 2011. The increase in revenues in 2012 relates to the increase in U.S. flu revenues that I discussed earlier, as well as improvements in both HIV and malaria revenues and an increase in sales of respiratory-related products.

Our toxicology business grew from $119.4 million in Q4 2011 to $149.5 million in Q4 2012, with our recent acquisitions contributing net $40.9 million of the increase, offset in part by the decrease in Triage toxicology sales that I just discussed.

Adjusted gross margins from our professional diagnostics segment were 54.4% in Q4 2012 compared to 60.0% in Q3 2011. The inclusion of $36.9 million of revenues from the eScreen acquisition, along with a reduction in margins as a result of reduced Triage revenues and an increasing percentage of overall revenues generated from sales outside the U.S. accounted for most of the margin decrease.

Adjusted operating income in the professional diagnostics segment was $144.2 million, or 24% of adjusted net revenues in Q4 2012, compared to $145.6 million, or 28.9% of revenues, in Q4 of 2011.

Net revenues from our health information segment were $131.0 million in Q4 2012, compared to $125.9 million in Q4 2011 and $135.1 million in Q3 2012. Compared to Q3 2012, the reduction in revenues relates principally to the lower revenues from our wellness and disease and case management businesses.

Adjusted gross margins from our health information segment were 44.2% in Q4 2012 compared to 46.2% in Q3 2012. Adjusted operating income from our health information solutions segment was a loss of $2.6 million in Q4 2012 compared to income of $2.9 million in Q3 2012.

Product and services revenues from our consumer diagnostics business segment were $23.4 million in Q4 2012 compared to $23.5 million in Q4 2011. Q4 2012 revenues included $16.5 million of manufacturing and services revenues for product and services provided to the joint venture, compared to $19.6 million in Q4 2011. Adjusted gross margins from our consumer diagnostics segment were 22.3% in Q4 2012 compared to 19.5% in Q4 2011.

Adjusted selling, general, and administrative expenses were $222.2 million, or 29.4%, of adjusted net revenues in Q4 2012 compared to $212.9 million, or 30.8%, of adjusted net revenues in Q3 2012. Acquisitions added $900,000 of incremental adjusted SG&A compared to Q3 2012 and changes in foreign exchange rates added $600,000.

The remainder of the interest relates principally to increased personnel costs compared to seasonally low levels of expenses in Q3 2012 as well as certain investments, principally in our outside the U.S. businesses.

Adjusted research and development expense was $39.9 million, or approximately 5.3%, of adjusted net revenues compared to $38.5 million in Q3 2012. We expect R&D expense to remain at or below $40 million per quarter in 2013.

Adjusted interest and other expense was $59.7 million in Q4 2012, compared to $46.9 million in Q4 2011. Adjusted interest expense net of interest income was $54.5 million in Q4 2012 compared to $47.6 million in Q4 2011. Q4 2012 other expense includes a $3.9 million charge associated with the settlement of a prior dispute with a former distributor.

In Q4, our adjusted tax rate was approximately 33.2% of pretax income compared to 35.3% in Q3 2012. On a year to date basis, our adjusted tax rate was 33.8%.

Adjusted EBITDA for the quarter was $148.0 million, which includes deductions for restructuring charges of $10.2 million and a $3.6 million of acquisition-related expenses. Adjusted free cash flow for the quarter was $25.8 million, reflecting cash flow from operations of $65.9 million offset by capital expenditures of $40.1 million.

And now let me turn the call back over to Ron.

Ron Zwanziger

Thanks, Dave. Alere’s exceptional combination of rapid diagnostics with connectivity and clinical decision support for the healthcare professional positions us to benefit particularly well from the global healthcare trends, including an increasing focus on the prevention and management of the most costly chronic diseases. Our new diagnostic platforms, which are designed with built-in connectivity to ensure information is both timely and actionable, represent the foundation of our approach.

Our ability to improve outcomes in chronic care treatment through a combination of rapid diagnostics and healthcare IT to support healthcare professionals and patient monitoring services provide a distinctive solution to the primary cause of the healthcare crisis. Nowhere will this approach be more valuable than the areas of metabolic disorders and cardiology, which are so closely intertwined.

Over the next few years, if proved diagnostic and monitoring technologies combined with greater clarity around the prognostic value of remote monitoring using BNP and other traditional hospital-based or physician office biomarkers will open a significant new opportunity in these areas.

The majority of our cardiology programs have been developed around the use of proprietary biomarkers and today we offer the most comprehensive array of cardiorenal biomarkers available with continued expansion planned in this area.

In the area of infectious diseases, the novel diagnostic platforms we have launched, or will be launching soon, will continue to extend our market-leading position in rapid testing, and will support an eventual expansion into chronic care management. For example, our Alere CD4 analyzer, which I mentioned earlier, provides [unintelligible] CD4 results to initiate and help manage antiretroviral therapy for individuals with HIV.

Continued growth in our CD4 platform has allowed us to expand our global footprint as the world’s leading provider of chronic HIV management diagnostics. With the launch of our rapid HIV viral load device outside the U.S. later in 2013, our position will be further improved as new markets become available to us. Over time, this rapid molecular platform will be expanded to address additional areas such as [HGB] and TB, which are currently in development.

Our second near patient molecular platform, which is focused on a broad spectrum of infectious disease targets, is currently progressing through U.S. clinical trials. The first use of this cartridge-based system will be rapid flu testing, but follow-on applications are planned for additional targets such as strep A, RSV, and C. difficile.

Although we are relatively late to the field of molecular diagnostics, this delay was the result of our conviction that for success in a near-patient setting, a molecular platform needs to be not just accurate but incredibly fast and easy to use. Having identified the required necessary underlying technology several years ago, there is growing excitement as the complete platform approaches commercialization.

Our large, direct global sales program for rapid diagnostics is combined with proprietary devices that offer speed, ease-of-use, and quantification have us extremely opportunistic about our ability to capitalize on the global trend toward molecular testing. As established markets begin the transition to the improved performance associated with molecular testing without sacrificing simplicity, we expect to benefit from both expanded reimbursement and usage.

While I’ve just outlined our emerging opportunities in cardiology and infectious diseases, our third primary business area, toxicology, rarely receives attention when we are discussing new products. However, that should change over the next few years with the launch of a sophisticated hand-held drug testing meter which we expect to file for 510(k) clearance in 2014.

With drugged driving already a criminal offense in many states, and drug impairment levels becoming a topic of discussion with many state legislatures, our roadside device is currently being evaluated in a field study by the National Highway Transportation Safety Authority. Over time, the combination of the new technology with an emerging market is likely to result in a large global opportunity for this device in law enforcement, workplace testing, and regulated industries.

With so many novel diagnostic platforms launched or in late stages of development, we’ve now begun to refocus R&D away from long term projects toward product enhancement and menu expansion for our existing platforms. This focus, combined with a significantly reduced acquisition pace, use of excess cash flow to repay debt, and select divestitures of noncore businesses should enable us to achieve our goal reducing our debt to EBITDA ratio to 4x by the end of 2015.

Alere is entering a new and critical phase in the evolution from a relatively small manufacturer of consumer pregnancy tests 11 years ago into the global leader in rapid diagnostic and chronic care management. With virtually all the pieces now in place outside of diabetes, our focus can turn increasingly to delivering the highest quality products and services, completing the integration and rationalization of our businesses and ensuring operational excellence throughout our organization.

And now, let me open up the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from Isaac Ro at Goldman Sachs.

Isaac Ro - Goldman Sachs

Thanks for the color you gave on 2013 expectations. Without being specific, can you guys commit to maybe raising your earnings this year year over year?

Ron Zwanziger

Well, as you know, we decided not to give earnings guidance, but it would be a surprise if we didn’t manage to do that.

Isaac Ro - Goldman Sachs

That’s fair. And maybe just on the molecular strategy, I was interested by your comments there. Across the landscape, there have been first movers here who’ve seen really solid growth. But having said that, the core test opportunities, as you pointed out, are somewhat crowded. And having said that, it’s also, I think, notable that achieving profitability for some of these companies has also been a challenge. So can you just help us understand how you think you’re differentiated, both on the technology as well as your channel strategy?

Ron Zwanziger

Sure. So, the reason we were late was because we wanted to wait and find and acquire and develop the kind of technology that really would lead to a rapid test. And when we talk about a rapid test, we mean a test that anyone can use by themselves in any setting, any ambulatory setting. So our channel, in fact, tends to be different to what you’ve been talking about.

And secondly, as it relates to the technology, we’re only ever interested in technology which, because of the nature of our rapid diagnostics, involves very high volume, the technology has to lend itself to high-volume manufacturing, which necessitates much more effort up front in terms of plants, and design, and optimization and so forth.

And once you get through that, you end up with good gross margin ability to make some real money, which I think is probably where you were heading. And by the way, that explains why we’ve been carrying so much losses in the development program.

So, for example, in 2012, we probably carried around a $30-32 million loss on this program, just out of our facility in [unintelligible] with a good chunk of that cost, dealing with the issues of scale up and manufacturability and process issues, which if you don’t deal with them you can never enter profitability.

And we’re seeing a sharp improvement as a result of the optimization in our cost structure. And what we now need, because we’ve built the expensive plant, and now that we’re beginning to see growth, and expect some real growth in 2013, you get efficiencies and profitabilities.

And so as a result, we’re optimistic, both about the nature of our platform, the fact that ours is truly rapid, in the sense that we mean. I just realized, that was probably a rather longer response than you expected.

Isaac Ro - Goldman Sachs

No, I appreciate it. That was very helpful. Last one, any updates on potential divestitures of noncore assets?

Ron Zwanziger

We have some due diligence being done on some units at the moment as part of a process. Whether that will lead to divestitures, I don’t know, but we do have a process, and we are doing some due diligence on some assets at the moment.

Operator

Our next question comes from Bill Bonello of Craig-Hallum.

Bill Bonello - Craig-Hallum

Do you maybe want to give us an explanation of why you no longer give guidance? And then Ron, I thought I heard you say you’d be surprised if you couldn’t do better on a net income basis, which is a little bit surprising to me, given the trajectory of where earnings has gone. I’d just love to hear the thinking behind that.

Ron Zwanziger

Well, I mean we only started giving guidance at the time of the financial crisis, when the world was falling apart and everyone was in a panic, and we didn’t see that we would have particular issues. And so in order to sort of give reassurances that our earnings weren’t about to unravel completely, the way so many had predicted, we thought we’d come in. And so we did it. And a lot of people encouraged us to do it. But I don’t think we get particular benefit for providing it, and so we’re going back to the way we had been for years. So for us, it’s actually the norm not providing guidance as opposed to providing guidance.

And what was the second part of your question?

Bill Bonello - Craig-Hallum

The second part was, in response to Isaacs question, you said you’d be surprised if you didn’t earn more in ’13 than in ’12, which just, given the Triage issues and the trajectory of earnings in ’12, I’m just trying to understand how that’s possible.

Ron Zwanziger

The main reason is, I think that despite the fact that we have delays on Triage, and Dave went to a great deal of trouble to give you folks so much information around it, the bottom line basically is that we are a quarter behind where we thought we would be in a very complex issue involving several hundred people, in dealing with the issues in San Diego. Now, the extra quarter delay means that we’ll have been out of the market, or many of the customers that have been out of the market longer, which means recovery will be difficult.

But all that said, I’m actually quite optimistic that we will, in fact, get on top of the volume issue. From the customer that we are shipping to - and after all, we are shipping a fair amount anyway - we’re getting sort of very good feedback. And so I’m actually fairly optimistic that even if we do encounter more delays beyond anything we’ve already said, and the indications that Dave already gave, I’m actually fairly optimistic that we’ll recover.

And in many ways, you can sort of view Triage as a new growth opportunity given the hammering we’ve taken in the third and fourth quarters of last year. And so I do think that as we get on top of it, that later this year we should see a good recovery.

Bill Bonello - Craig-Hallum

And then just one housekeeping. Is the $11 million royalty a one-time item? And just to be clear, it was included in the adjusted EPS?

David Teitel

It was included in the adjusted EPS, as we always include royalties.

Bill Bonello - Craig-Hallum

Now, as to whether it was a one-time issue, first of all, this particular involved additional royalties, including some minimums, so that would be pretty encouraging. And the license was actually nonexclusive, and we’ve had significant interest in the technology. And these are in areas that we don’t plan to develop ourselves. And so in some respects it wasn’t really a one-time event.

Operator

Our next question comes from Jon Groberg at Macquarie.

Jon Groberg - Macquarie

I appreciate you setting down your leverage target by 2015. Could you maybe just talk about how much of that is dependent on some of these divestitures that you mentioned being somewhat likely, and how much is organic?

Ron Zwanziger

Given that one can never know when divestitures will actually happen, and what price you’ll get for them, we can get there a number of different ways. I think we can get there, in fact, with relatively minimal divestitures, just through earnings. So the reality is we’ve allowed ourselves, given that 2015 is a long time, it’s three years obviously, that we have a number of different ways that we can achieve that goal.

Jon Groberg - Macquarie

And then can you maybe talk a little bit more about - you mentioned some of the organizational leadership changes - can you maybe just here on this call give a little bit more explicit understanding of what Namal is going to be focusing on as he’s joined the firm and what kind of specific guideposts we should be following as we look to see the impact that’s being made there?

Ron Zwanziger

He hasn’t finally decided exactly on all the issues, but he’s actually very much getting into it. From an organizational change, which is not quite what you asked, we operate on quite a matrix structure at the moment. And he’ll be reducing that matrix to a fair extent. Not completely, but altering it so that there is more accountability with individuals, which we obviously have less of in a matrix structure. That’s from an organization standpoint.

In terms of specific actions, there are a bunch of costs, both at the expense line and also in the service costs, which he’s identified as low-hanging fruit and he’s going to be going through and making a host of changes. And those changes are just beginning to get underway.

Jon Groberg - Macquarie

It sounded like you were making a little bit more of a comment, and I think you’ve changed health management to health information - and I know you’ve had this portal that you guys started a little bit ago, but it sounds like maybe now you’re looking at trying to figure out ways to commercialize that more. Could you maybe just help us understand how, just from a revenue standpoint, or commercial standpoint, how you’re going to market with this portal?

Ron Zwanziger

It’s not just the portal, it’s the portal but also getting good use of information from other people’s electronic medical records, to be acted upon at the same time. So it’s the full connectivity of data coming in from multiple other electronic medical records, whether they’re regulatory or in hospital systems, and getting all that data. And we made a specific comment about it, that we’ve had substantial increase in active interest. And we’ve had a lot of discussions down to negotiations, some through RFPs and some directly with us on opportunities in the space.

So it’s really the ability to move around the data and then analyze the data, and then actually do something useful with the data in its entirety that I think we’re seeing [unintelligible], which at the end of it, also ends up using the care services we also provide. So we’re seeing a distinct pickup in interest in this, not just in the U.S. but everywhere.

And the reason, of course, is fairly obvious. Because the healthcare crisis that everyone’s experiencing, all the providers are experiencing, all the health plans are experiencing, the various government agencies and insurance companies around the world, they’re experiencing, the really only way one can get on top of this is by having comprehensive data around the patient, knowing what’s going on with the patient, in a true sense of the word, not making decisions on only part data in the hands of the physician.

And of course that is what our whole approach is, because our belief is that you can provide all these diagnostic devices, and obviously that’s the bread and butter of our business, but unless you can get it to a site and have it properly interpreted, and the right action taken, what are you actually doing? And so in a sense, to drive risk-sharing organizations, whether in a technical term in the U.S. of accountable care, but really in any risk-sharing entity, you need all this data.

And we are providing that, and if you think about how much of the costs are embedded in chronic care in the healthcare crisis, which is obviously the vast majority, our diagnostics are designed to help do that. And so when you combine the data transmission, the analytical capability, on that data, with the diagnostic data, you end up with a much better solution and action taken by the physician on behalf of the patient. And so I think our approach now is beginning to come into its own. And I think that’s the reason why we’re having a lot of discussions, as we said in our prepared remarks. I think there’s a chance that 2013 will see some serious revenues in this space.

Jon Groberg - Macquarie

Just to be crystal clear, is this a part of a health management offering? Or you finding discrete product sale type of opportunities just for that offering?

Ron Zwanziger

That’s a particularly good question, because we’re offering, and have got proposals which have already been accepted, and we expect to proceed with, in which we provide the entire system, but at the same time, we provide elements to it. So if a risk-sharing entity or some entity actually only wants a component of our system, we will provide that as well.

So we provide it both ways. But frankly, to be most effective, you need to have the entire system, because that’s the way a risk-bearing organization can have the highest assurance that it has the best data, and with the best data, you’ll get best outcomes. But we will go both ways. And we are doing that at the moment, we are doing it precisely both ways. We can sell a component to someone that’s got some of these elements already, or selling the system in its entirety.

Operator

Our next question comes from Greg Simpson at Wunderlich.

Greg Simpson - Wunderlich

Obviously a tough, sloppy, difficult year, whatever adjectives you want to put on it, but obviously if you step back, signs that the big picture might be starting to come together. So let me start with a big picture question for you, Ron, focused on the hiring of Namal. What’s kind of your thought, and I’m not asking you to get too terribly specific, because maybe that decision hasn’t been made, but what’s kind of the thought on how the gameplan is going to be communicated? Are you guys going to identify and kind of share specific targets and goals with us as maybe we get through the year a little bit more, in terms of operational improvements, cost savings, whatever it might be?

Ron Zwanziger

We haven’t determined what we’re doing, but we will get Namal’s Street exposure as the year wears on, particularly once he’s actually started making significant changes, which are just getting underway. And once he has that under his belt, he’ll have more to talk about, and I think that’s when we’ll have Street interaction.

Greg Simpson - Wunderlich

Will he ultimately be included on the conference calls?

Ron Zwanziger

We haven’t thought about that. His role is very much internal, but we’ll think about that. But we haven’t really thought about that too much.

Greg Simpson - Wunderlich

Dave, a couple for you, then. It seems, given the Triage situation, just all the moving parts on a short term basis, you talked about the margin impact in general terms, but could you maybe quantify the bottom line impact of maybe the remedial actions related to Triage in the fourth quarter? Just trying to get a better feel for, going back to the previous question, as we move past that issue, kind of what’s the earnings run rate here that we can kind of really start with.

David Teitel

I’d rather not say [unintelligible] around that, but clearly from a revenue perspective, we were down relatively significantly quarter over quarter and year over year, as well as just from a manufacturing cost increase, and the margins came down in that business. It still remains a good margin business, but it started as very good and is now just above average in the professional diagnostics space. So I’d rather not precisely quantify it, but directionally, we should make progress in terms of the second half of the year as we being to grow the revenues as well as the yields begin to improve. Should see some costs come out of the process.

Greg Simpson - Wunderlich

So, fair to say that we’ll see some short term costs burn off as we move through the first half of the year and get back to in the direction of more-normal margins in this business?

David Teitel

Yeah. We should see some benefits in the second half of the year.

Greg Simpson - Wunderlich

And then just one I was going to cover with you privately, but I’ll ask it here. The medical device tax, could you maybe give us your thoughts on just kind of quantifying that for 2013?

David Teitel

Yeah, it’s still in the range that we talked about, $2.5-3 million a quarter is the right way to think about it.

Operator

Your next question comes from Jeff Frelick at Canaccord.

Jeff Frelick - Canaccord

Ron, could you just maybe give us a sense of, I know you’re a little bit constrained on the raw materials side for the cardio products, but is demand starting to come back? Are you seeing that pick up? And should we just kind of assume that business steps up sequentially through 2013?

Ron Zwanziger

When we began to realize the magnitude of the problem, we actually went through a process of figuring out which customers had difficulties with backup alternatives, and we chose to, and have done that, and are continuing to supply those customers that would have had difficulties that didn’t have an alternative.

So to your question about it, because of the shortage of product, we have not started going after aggressively getting customers back yet. And not only that, despite what we think is a relatively good organic growth in the professional diagnostics segment of 5%, if you exclude the impact of U.S. flu and U.S. Triage, we’re actually constrained on supply of some products outside the U.S. too, as well. And so we haven’t gone back to it.

And actually, this goes back to one of the first questions about where do I get the optimism from. I mean, the point is our units are screaming for this product. There’s this tremendous demand for this product, because it is highly differentiated, relative to alternatives that customer have in the U.S. and elsewhere. And I do think we’re getting on top of the yield issue, even if it has set us back a bit, and it’s going to take us to the end of this quarter to get back to where we were hoping to be by the end of last quarter.

So I do think that we will both get back there from a volume perspective, which will allow us to go back and start [clawing] the customers back. So that’s really why I’m fairly optimistic about the situation, notwithstanding it was obviously a nightmare for us for 2012.

Jeff Frelick - Canaccord

And with respect to the Epoc analyzer, can you just maybe review with us what’s driving the wins that you’re getting in the hospital with the device, with specifically the features and the benefits of the handheld?

Ron Zwanziger

If you think about blood gases and electrolytes, and where they’re needed, they’re often needed in critical care situations. So our product, as always, is not designed for a hospital lab. It’s designed to go to point of care, where you can provide immediate feedback. And so emergency rooms, those sort of secondary locations, where patients are really getting the treatment, is where we are taking the product.

And obviously if you’re going outside of the hospital, where some electrolytes might be needed and so on, of course that’s a standard point of care device. And so that’s where we see growth on this product, and that’s where we’re getting it.

The product has been constrained. Even though we’ve had significant increases in the product, the product’s been constrained by the menu, and the reason expansion of the menu we’re just getting going with that expansion, makes our offering much more attractive, and we’ve managed to get some pretty good growth in the last year or two already, and so we’re pretty optimistic that with the menu completion we should see accelerating growth.

Jeff Frelick - Canaccord

Dave, just a sense on strep test sales in the quarter? Were they pretty decent this quarter?

David Teitel

Yeah, they were slightly up.

Operator

Our next question comes from Pete Lawson at Mizuho.

Pete Lawson - Mizuho

Maybe for Dave, just if you can give us some color around the Epocal acquisition. What’s the impact on the top line and the bottom line?

David Teitel

From a top line standpoint, you may recall we’ve been the distributor of these products for the past few years, so there will be no incremental top line impact to this as we’re already recording the third party revenue. The relationship prior to the acquisition was we were sharing 50% of the revenue back to Epocal as their share of the revenues to cover their manufacturing costs.

So we will pick up the gross margin that they were previously earning. That will be offset by picking up a bit of incremental R&D, which we think we can largely cover within our existing R&D budget as well as smaller amounts of G&A expense. So as the revenue grows, we will continue to see incremental earnings from the business over the course of the year, but it won’t be huge bottom line impact in the short term.

Pete Lawson - Mizuho

What kind of bottom line impact do you think it could be for 2013?

David Teitel

Relatively minor for 2013.

Ron Zwanziger

One of the things about the revenue growth, although we’ve been booking all the revenues on the product, I think we’ve been constrained because we haven’t controlled the margin entirely. And I think there’s some units in some countries that are now feeling relieved that they might be able to address, so I’m actually quite optimistic that there will be additional countries, and so we should see more of a revenue growth as well.

Pete Lawson - Mizuho

R&D spend, what was the reason for the jump up in the quarter?

David Teitel

It was largely in line with where we anticipated it to be. We said we expected $40 million in the quarter, and that’s where it came. I think it was about a million up from the third quarter, so it wasn’t a huge increase.

Pete Lawson - Mizuho

And then just around the Medicare round two competitors bid, what’s the impact, and where does it hit the company do you think?

Ron Zwanziger

It will impact us clearly in the third and fourth quarters, which of course we’d anticipated, although the cut in reimbursement was actually slightly higher than we expected. It does mean that we have to do more rationalizing and more aggressive cutting in response to what Medicare did.

Pete Lawson - Mizuho

And then just around that licensing royalty line item, how much of this continues into 2013? Can you help us in any way to kind of get an indication of what’s a rough run rate for licensing and royalty? Or does that just become more lumpy?

David Teitel

Yeah, it is lumpy, because of the timing of when we get paid. It’s generally run around $3-4 million per quarter, absent the significant new increases.

Pete Lawson - Mizuho

And that new increase, that molecular increase, that’s kind of a lumpy business that may happen in 2013 or may not?

David Teitel

There’s a relatively minor minimum for 2013, which increases over time, and obviously the expectation is we [unintelligible] over time on the percentage royalty as opposed to the minimums.

Operator

The next question comes from Zarak Kursid at Wedbush.

Zarak Kursid - Wedbush

On the molecular strategy, Ron, you emphasized the ease of use. I was just wondering if you could clarify whether we should expect a CLIA waiver for the platform? And would that be ready for the next flu season? Any thoughts on pricing for the cartridges?

Ron Zwanziger

Speculating on regulatory matters in the U.S., I think you’d have more chance going to a casino. So of course the product is designed with that in mind, and it’s a very easy to use product. By its very nature, anybody could use it. So it’s designed to be CLIA-waived.

Zarak Kursid - Wedbush

Any thoughts on pricing relative to your rapids and the other competitors?

Ron Zwanziger

None that I’m going to share at the moment.

Zarak Kursid - Wedbush

And Dave, with respect to acquisitions, was there anything new in the quarter, and did acquisitions contribute to the sequential revenue improvement?

David Teitel

There was nothing that significant in the quarter. So a minor amount.

Operator

The next question comes from Dan Leonard at Leerink Swann.

Dan Leonard - Leerink Swann

Ron, can you give an update on the process for trying to lessen your dependence on the health management business via a JV or divestiture?

Ron Zwanziger

How do you mean, reduce the process?

Dan Leonard - Leerink Swann

You mentioned before reduce dependency, or some similar language to that, via a JV or a divestiture of what you consider the non-differentiated piece within health management?

Ron Zwanziger

Oh, we have those kind of discussions continuing, and we have actually some good interest, and so those discussions are continuing.

Dan Leonard - Leerink Swann

Do you expect you’re going to report a health information technology line within your health information business and talk a little bit more about what a transaction looks like in terms of license fee or whatnot, so we can think about modeling that?

Ron Zwanziger

After we land our first few specific ones that we’re going to share, we’ll get into more of a discussion around it. We will. We will be more helpful as this thing clarifies in the next few months.

Operator

We have a question from Anthony Petrone at Jefferies.

Anthony Petrone - Jefferies

Ron, just a more direct question on Apollo, I guess. Can you provide an update on how many hospital customers and maybe patients captured in that system right now? And then maybe as it’s related to health info management, the HIS segment, the past two quarters you’ve had 4% growth there. I’m just wondering if there’s any read through as to the expansion of Apollo and the increases in that business over the past few quarters.

Ron Zwanziger

I don’t have those numbers at my fingertips, so we will get those numbers, but I will say that not all, but unlike in previous years, by the end of last year, the vast majority of our customers are on Apollo. So we have a huge number of people on the system. You may recall that when we started Apollo several years ago, we had several operating systems and multiple different sites, and we’ve been going through and sorting that out after Apollo was developed. So we’ve had a tremendous consolidation. And while it’s not finished, it’s substantially complete.

Anthony Petrone - Jefferies

So is it fair to say, just as we look at the improvements in the HIS segment, you know, 4% this quarter and last quarter, and then flat this year versus 11% decline last year, more of that is just market related as opposed to any benefits from Apollo?

Ron Zwanziger

Well, the increase in revenues we’ve been getting, of course, are more from our patient [unintelligible], our monitoring unit. So it’s that aspect which has helped us with revenue.

Anthony Petrone - Jefferies

And then as we look at ’13, without getting into specific numbers, you have two drivers, I guess, of margin expansion. One would be potential JVs, divestitures, and the other being efficiency gains from Namal’s initiatives. As we look at ’13, which of those two categories would you say would be the bigger driver?

Ron Zwanziger

My guess is that toward the end of the year it will be operational efficiency and effectiveness.

Anthony Petrone - Jefferies

Dave, the tax rate was down sequentially. I’m just wondering if the E.U. operations are up and running, and if there are further tax efficiency gains that we should see for ’13?

David Teitel

I think you should model still around 33.5% as the right rate. But we are far more involved in the European structure. It is up and running and more effective at this point, and we’re taking out some of the transitional costs that were associated with that. As that drives profitability into Europe, that does obviously benefit the tax rate. Europe, while fairly stable this quarter, is still an overall difficult business environment. So in terms of significant impact of that until we start to see Europe grow again, it will be a little bit limited.

Operator

We have Roger Gordon at Feingold Capital.

Roger Gordon - Feingold Capital

I hate to bring this back around, especially at the end of a phone call, with such mundane issues as trying to get some financial statement housekeeping, but I must. Can you answer, or give me answer to the following questions I have? Number one, can you tell us what cash flow from operations and free cash flow were for all of 2012? Number two, can you give us the adjusted EBITDA number for the fourth quarter of 2011 and all of 2011 and what the revenue base measuring that would be? And is there any way to, since there’s no real balance sheet detail supplied, break down long term debt at the end of the year between senior secured, senior, and other?

David Teitel

Except for the last piece of your question, all of that information is on our website, and I encourage you to go through it there rather than take up time on the call. In terms of the debt, we had roughly $3.6 billion worth of debt at the end of the year, $2.2 billion was in the bank loans, spread across the various high-yield instruments we have outstanding in the convert.

Roger Gordon - Feingold Capital

And you’re saying that both my CFO and free cash flow question and my adjusted EBITDA question are available on the website? Because I’m looking at it right now.

David Teitel

They are all up on the website, so you can see it there.

Ron Zwanziger

Just to close up, our goal at Alere remains to become the world leader in enabling individuals to take charge of their health under medical supervision at home, everywhere in the world. This requires a company-wide commitment to ensuring the highest quality level of our products and services, combined with an intense focus on operational effectiveness.

As we continue to combine new diagnostic platforms and services into an integrated technology-based solution focused on the most expensive chronic conditions, we expect that stable, consistent earnings growth will engender increasing shareholder confidence in our company and our prospects for future success. As always, I’d like to thank you for your continued support and interest. Thanks very much, and have a good day.

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