Inverness Medical Innovations, Inc. Q4 2008 Earnings Call Transcript

Inverness Medical Innovations, Inc. (IMA)

Q4 2008 Earnings Call Transcript

February 18, 2009 10:00 am ET

Executives

Doug Guarino – Director, Corporate Relations

Ron Zwanziger – Chairman & CEO

David Teitel – CFO

Analysts

Brooks O’Neil – Dougherty & Company

Eric Schneider [ph]

Bruce Cranna [ph]

Greg Simpson [ph]

Josh Jennings [ph]

Eric Henderson [ph]

Lee Rimaldo [ph]

Hashim Ahmad [ph]

Andrea Nesey [ph]

Potonto Rita [ph]

Presentation

Operator

Good morning, and welcome to the event Inverness Medical Innovations fourth quarter earnings conference call. My name is Tasha, and I’ll be facilitating the audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. (Operator Instructions) At this time, I would like to turn the event over to Doug Guarino. Mr. Guarino, you may begin your call.

Doug Guarino

Well thank you, Tasha. And good morning, and welcome to the Inverness Medical Innovations conference call. To discuss our results for the quarter and year ended December 31, 2008. We are joined today by Ron Zwanziger, Chairman and CEO; and, David Teitel, our CFO.

Before we get to the 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 US 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 accounting of certain events could differ materially from those projected or contemplated by the forward-looking statements to the numerous factors, including without limitation to, our ability to successfully integrate our acquisitions into recognizing expected benefits of restructuring and new business activity; the impact of the recent prices on the global financial markets, including the credit markets, on our plans and operations and those of our suppliers and customers, our exposure to changes in interest rates and foreign currency exchange rate; our ability to successfully develop and commercialize products; the market acceptance of our products; continued acceptance of health management services by payers, providers, and patients; our ability to develop enhanced health management programs through the integrated use of innovative diagnostic and monitoring devices and to recognize the expected benefits of this strategy; the content and timing of decisions by regulatory authorities, both from 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, 2007. 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 in the most directly comparable GAAP financial measure is available on the companies Web site at invernessmedical.com.

And with that, let me turn the call over to Inverness Medical chairman and CEO, Ron Zwanziger. Ron?

Ron Zwanziger

Thanks, Doug, and good morning, everyone. Obviously, I’m pleased to report strong financial results for the quarter, highlighted by record revenues of $459 million as well as record cash adjusted operating income of approximately $103 million. Our adjusted cash EPS for the quarter is $0.56, representing our tenth consecutive quarter of year-on-year improvement.

Whilst overall, the strength of our results would indicate that we have not been impacted by the global recession, to a small extent we have. We have seen weakness in US doctor’s office visits, along with distributors choosing to reduce their inventory levels in Q4 as well as other impacts caused by reduction in US employment levels. These trends are likely to continue as we look forward into 2009.

Additionally, the negative impact on revenue of foreign exchange was particularly pronounced in Q4, compared with the previous quarter. And we assume that this effect will persist through most of 2009.

Fortunately, however, our broader business trends are positive and likely to continue to develop favorably. Our organic growth rates continue to improve, benefiting from sales and marketing rationalization in the US and a focus on sales expansion in major markets around the world. In a number of the largest countries outside of the US, our products survived being recently introduced of only lately received the necessary focus. In addition, several of our products are only now claiming regulatory clearances.

In the US we have seen continuing strength of buy side and improvement in our program of working with individuals who are taking the blood thinner, Coumadin. As a leader, I help management units. We expect 2009 revenues to be slightly up compared to our pro forma in 2008. But the stimulus package and the expected healthcare reform with a focus on improved outcomes for chronic disease, and the (inaudible) fiscal discipline should further help fuel growth.

Therefore, despite the challenges and uncertainties caused by the world recession and volatility in the equity and debt market, based on the strength of our fourth quarter and our 2008 results in general as well as the review of our general business trends compared against the assumptions in our 2009 operating plan, we remain confident in our previously provided guidance of exceeding $2.50 per share on an adjusted cash basis in 2009.

And now, let me turn the call over to Dave for discussion of our reported financial results for Q – third quarter.

Dave Teitel

Thanks, Ron, and good morning, everyone. Comparing our fourth quarter results to Q3 2008, revenues of $459.3 million earned in the fourth quarter exceeded Q3 revenues of $438.8 million. Interest and exchanges rate during the fourth quarter reduced reported revenues by 13.8 measures, compared to Q3 2008 rate. Adjusted cash earnings per diluted share for Q4 2008 was $0.66, compared to $0.40 in Q4 2007 and $0.40 in Q3 2008.

Our business segment, products and services revenues from our professional diagnostic Segment were $266.8 million in Q4 2008, compared to $217.5 million in Q4 2007.

Acquisitions accounted for $33.5 million of this increase. The currency adjustment organic growth rate for our professional segment revenues, excluding acquisitions, was approximately 10.7%. Net product revenues for Biosite, Cholestech and HemoSense grew by a combined 9.7% during the fourth quarter of 2008, compared to the same quarter a year ago.

Professional diagnostics revenues (inaudible) of $252.6 million in Q3, with recent acquisitions contributing approximately $3.6 million of incremental revenue, offset by an $11.5 million adverse impact of exchange rate. Adjusted gross margins from our professional diagnostic segment were 65.5% in Q4 2008, compared to 59.4% for 2007 and 62.5% for Q3 2008, with the particularly strong quarter in Biosite products contributing to the improved margins.

Revenue from our health management segments were $130.6 million in Q4 2008, including $38.0 million of revenues from Legacy Matria. Revenues from Legacy, Alere, and Paradigm improved by approximately 15.5%, compared to 2007 revenues. Legacy Matria’s revenues increased from $75.2 million in Q3, and were down 12% from Q4 2007. Revenues from our QAS subsidiary were $10.1 million in Q4 2008, a year-over-year increase of 79 %. Adjusted gross margins from our health management segment were 56% in Q4 2008, compared to 55.7% in Q3 2008.

Products and service revenues form our consumer diagnostic business segment were $30.6 million in Q4 2008, compared to $29.7 million in Q4 2007. For the 2008 period, these revenues include $24.4 million of manufacturing service revenues for products and services provided to the joint venture.

Looking at the results of the joint venture level, products and revenues built by the joint venture were $46.9 million in Q4 2008, compared to $46.0 million for the period a year ago. Adjusted gross margins from our consumer diagnostic segment were 19.0% in Q4 2008, compared to 21.1% in Q4 2007 and 23.0% in Q3 2008.

Revenues from our nutritional business were $26.8 million for Q4 2008, up 39.8% from revenues of $19.2 million in Q4 2007, with strong private label sales accounting for the increase. Adjusted gross margins from our nutritional segment were 2.0% in Q4 of 2008, compared to 16.0% in Q4 2007 and 8.5% in Q3 2008.

Selling, general, and administrative expenses decreased to $131.6 million in Q4 2008 from $132.0 million in Q3. Compared to Q3, Q4 spending benefited by approximately $4.3 million as a result of exchange rate changes. Offsetting this benefit was approximately $1.2 million of incremental spending from recently acquired acquisitions. As a precautionary response to the financial crisis, we continue to emphasize expense control as we move into 2009.

Adjusted research and development expense was $22.9 million or approximately 5% of revenues, up from $21.1 million in the comparable quarter last year, reflecting our continued investments in our cardiology related research, and down slightly from $23.3 million in Q3 of 2008. Fourth quarter R&D spending of $22.9 million includes a $1.3 million dollar benefit form exchange rate as compared to Q3. We expect total R&D expense to continue at approximately 5% to 6% of net revenues for 2009.

At $102.6 million, our adjusted operating income reflects a $51.8 million dollar increase over Q4 of 2007.

Overall, we expect improvements on adjusted operating profits against the comparable prior years’ quarter to continue throughout 2009.

Adjusted interest and other expense was $19.1 million in Q4 of 2008, compared to $22.9 million in Q4 of 2007. Included in this line is adjusted interest expense net of interest income of $21.3 million in Q4 of 2008, compared to $23.0 million in Q4 of 2007. Also included in other income in Q4 2008 was $4.0 million of realized and unrealized exchange rate gains associated with changes in exchange rate during the quarter, offset in part by a $1 million charge to write off the value of an option to purchase a personal plan near our Biosite facility.

Equity earnings of unconsolidated subs in Q4 of 2008 included a $1.1 million related to our share of earnings from the joint venture with Procter & Gamble.

In Q4, our tax rate was approximately 29 % of pre-tax income and included an R&D credit benefit of $2.1 million. We expect our tax rate to range from 30% to 35% throughout 2009.

With respect to our debt related interest expense – exposures, effective January 14, 2009, we entered into an interest rate hedge covering a notional $500 million at a one-month LIBOR rate of 1.195% through January 2011. These hedged supplements are existing with interest rate hedge covering a notional $350 million at LIBOR rate of 4.85%, which runs through September 2010.

During the Q3 earnings call, we indicated that we expected to achieve a minimum of 25% earnings growth in 2009, compared to 2008. Our adjusted earnings per share was at least $2.50 per diluted share. Despite the worldwide recession and due to specific issues such as a weak start to the US full season, we believe that the momentum that we have in the marketplace and in our cost reduction programs as well as improvements that we are seeing in our health management unit, enable us to continue to be confident in achieving our objective.

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

Ron Zwanziger

Thanks, Dave. Our previously announced manufacturing rationalization programs are progressing well. Script manufacturing at (inaudible) plant in San Francisco was moved to the Biosite campus during the second half of 2008. And now, all new strips are being made in San Diego. Late in 2009, we expect to have completed the transition of collecting manufacturing from our Haywood, California to the Biosite campus in San Diego as well. This major move will continue to improve overall cost absorption of Biosite lowering unit cost margins for the (inaudible) unit, but for Biosite and HemoSense as well.

Additionally, by the end of 2009, we expect to have substantially completed our largest and most complex manufacturing move of lateral flow devices from the Hewlett-Packard desk in England to primarily China, but also to several low cost facilities around the world in unit definite numbers, expensive manufacturing site, and it’s principally engaged in the manufacturing consumer of pregnancy tests. So this rationalization will primarily benefit the SPD consumer joint venture and float back to us at the equity earnings line. The combination of Cholestech, HemoSense and unit (inaudible) rationalizations will help support continued improvements in our gross margins throughout 2009 and 2010.

During the second half in 2008, we launched or announced the series of breakthrough products. And I’d like to give you now brief update on the status of the most important of them.

Clearblue Digital and Conception indicator has now been launched by SPD throughout Western Europe and has surpassed our expectations, gaining market share in every market in which it has been launched. Conception Guide is the only pregnancy test, which also tells the woman when she has conceived. And this report and additional piece of information is clearly capturing the attention of the consumer.

Advertising began in November in the UK, and in January across the Spain and the Netherlands. Already, Conception Indicator has become the bestselling Clearblue product in the majority of these countries. While on the one hand, high advertising costs are temporarily impacting SPD profit margins, the tremendous consumer response to the products suggests that this will be a major success for many years to come. US introduction is expected to occur late in 2009 pending FDA clearance.

Our next novel product under development in the consumer JV is scheduled for release in late 2009 and will address an area on woman’s health other than pregnancy.

The Determine HIV combo test with p24 antigen has now completed nine clinic studies at clinical sites outside the US, The data generated was very positive, demonstrating comparable sensitivity and specificity to fourth generation lab-based ELISAs, which are traditionally used for blood bank screening.

As we have detailed in previous calls , we believe that this novel rapid diagnostic will set a new standard for care of HIV screening as it can identify acute HIV infections before an antibody response is generated. With the global focus being to stand the tide of transmissions and the fact that those acutely infected are responsible for a significant number of new infections, this product will be an important tool to help control the HIV/AIDS epidemic in some parts of the world. Last month, we made the first commercial sale of Determine HIV Combo test in Africa. We’re now scaling production capacity at two separate manufacturing sites to prepare for the anticipated success of this product over the next several years.

Our revolutionary portable CD foreign analyzer developed in our San Diego research facility, as discussed in previous calls, have been branded (inaudible) and was shown publicly for first time in December.

In the fourth quarter, we completed a preliminary clinical study in Uganda, which demonstrated strong results in line with current goal standard lab-based analysis. Initial response from potential customers has been very positive and we continue to believe this devise has the potential to revolutionize the management of HIV positive individuals in the near term by delivering CD4 quantification, and to point of care where it is needed most and where few tools are available today. We will begin formal clinical trials at two states in Africa, shortly, and are on track for a mid year 2009 commercial launch to select African markets.

Our sterling CHF platform, to be branded the Triage [ph] test system, is on schedule to be introduced in a professional setting in late 2009. The portable test system is easy for patients to use at home and requires only a small fingertip sample of whole blood from the patient to generate results. Designed specifically for patients self-testing, we believe that the Triage test system will serve as an important tool for use by patients with established heart failure to assess ongoing disease patients' status for physician intervention prior to becoming hospitalized. Our first clinical trial in a home setting for the Triage test system should begin during the third quarter.

Also in the area of heart failure, we’ve been working on a series of enhancements to our Triage meter, which will further differentiate this platform in the marketplace. A number of these additions will be commercially available towards the end of the year.

Finally, developed work has continued on (inaudible), on (inaudible) market for cardio renal disease assessment and we expect to make further announcements concerning this opportunity throughout 2009 as investigation of work progresses.

Clearly, our R&D programs are proceeding well and we are confident that we’ll continue to meet our previously stated goal of multiple product launches in various disease categories every year for the next several years, helping to support a steady increase in our rate of organic growth.

Cash management and cost controls continue to be areas of intense operational focus for us. Throughout 2008, we experienced improving EBITDA, free cash flow, and we tend to continue to increase these measures through 2009.

As a result of interest rates swaps that we put in place as well as a low current LIBOR rate, our debt is inexpensive and does not require pay down or refinancing to more than four years. As a result of these combination of factors combined with our expected – expectation of continued steady annual earnings growth through 2012 and beyond, despite the economic dislocation in the world, we feel comfortable with the trajectory of our business.

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

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Brooks O’Neil .

Brooks O’Neil – Dougherty & Company

Hi. This is Brooks O’Neil with Dougherty & Company. Good morning, and congratulations on the good quarter. Ron, thank you very much for your comments on integration of your diagnostics business and the progress with new products. Could you also provide us with a brief overview of your integration efforts on the health management side and any successes you’ve had recently in driving convergence between the two sides of your business?

Ron Zwanziger

Well, the integration at Alere has gone very well. And most of the rationalizations have taken placed. And there are still some rationalizations around 90 and closing of those call centers, which will continue throughout 2009. In terms of successes, clearly the – of the merging of rapid diagnostics in health management, clearly our view has done particularly well around individuals who are taking blood thinners. You probably noticed from Dave’s comment that we have a stellar quarter in the unit dealing with this. And the vast majority of the increased we have had is around the service model of providing the service function to the individuals so that – through the service functions.

So that’s the first one where we’re seeing significant results. We’re also seeing changes in behavior by insurance companies and the payers around this as well. And they see the benefit of what we’re doing. So we’re really very pleased about – not only on the integration going on at Alere, but the integration of rapid diagnostics into their programs.

Brooks O'Neil – Dougherty & Company

Great. Thank you very much. Secondly, could you just give us a feel for recent contacts with employer’s health plan in government entities? Obviously, some people think that the response of those types of players to the softening economy is to cut benefit programs and eliminate out management efforts. Are you seeing that today?

Ron Zwanziger

No. We’re not. There have been one or two minor requests for some health plans for some delays and delay in starting. But that’s been very minor. We have seen because of less employment and because we get paid by number of members, we have seen a decreased because of this sort of layoffs going on around the world. I mean, in the US in particular. So we have seen a bit of a fall off from that.

Now to answer you comment about people in delaying payment, I think that’s exactly the opposite of what’s really going on. I think that the payers through themselves are having issue themselves are looking at ways of dealing with their own fiscal issues and are realizing that there are number of programs in health management, which actually help them. And so what we are actually seeing is a very large increased in request of proposals and we have been very, very busy, extremely busy actually submitting new proposals. And I think the payers, particularly because of the economic crisis, are actually thinking more rationally and therefore concluding that effective health management program do help. And as a result, we’re seeing record requests for assistance.

Brooks O'Neil – Dougherty & Company

That’s great. I just have one more quick one. Healthways recently put out a press release indicating that they thought that their patent portfolio and the arrangement they made with the German partner really positions them well in the area of remote home monitoring. And I’m just curious if you’ve had a chance to think about that, assess that? And how do you feel about your position in that same are?

Ron Zwanziger

Well, since we have a litigation with them on the subject, I won’t comment other than to say that we’re very confident about our position.

Brooks O'Neil – Dougherty & Company

Thank you very much.

Operator

Your next question comes from the line of Eric Schneider [ph].

Eric Schneider

Good morning, gentlemen.

Ron Zwanziger

Good morning.

Eric Schneider

The first question on your view on the credit market. If that market unfreezes, as it looks like it’s doing. What’s your expectation around raising debt during further acquisitions? Do you expect to go out and raise the maximum you can and then take off acquisitions as they come up? Or look for acquisitions meant to incremental debt raises as necessary?

Ron Zwanziger

Well, as you probably know, we’re extremely disciplined about timing of any capital raises, whether debt or equity. And we’ll remain extremely careful about it. As you commented, the credit market has been improving. I don’t know if you follow, but of you who follow, our particular debt is improved – our own debt has improved no end in the last few weeks. We did say, would we – your question seems to focus on whether we would raise debt to the extreme or to the maximum extent we can. We will not do that because I do not see interest falling sufficiently to be attractive to us in the longer term in the next few months.

With that said, we may well take advantage of the credit markets if we think that interest rate are coming towards an acceptable level to help do some – to do some acquisitions. But if we do that, it won’t be a huge amount because even if it will reflect the fact that we have a number of acquisitions we’d like to do. But will not reflect the fact that the credit is at the level that we would like to see it. So if we do raise debt, we will raise some and then raise some more later.

Eric Schneider

And is there an indication about what level of debt cost is attractive to you given the investment opportunities you see?

Ron Zwanziger

I’d rather not comment.

Eric Schneider

Okay. And then just one more question on the debt side, could you describe how you’re managing the – around the excess cash flow requirement inclusive with your term loans?

Ron Zwanziger

Sure.

David Teitel

So generally, there is a requirement to please and pay down debt with excess cash flow, but one of the things that go into that calculation is acquisition. But to the extent, we funded some of the smaller acquisitions we’ve gained in the second half of the year out of cash. It offsets that requirement. So at this point, we don’t exactly – to have to make an excess cash payment for 2008.

Eric Schneider

Thank you.

Operator

Your next question comes from Bruce Cranna [ph].

Bruce Cranna

Good morning, guys.

Ron Zwanziger

Good morning.

Bruce Cranna

Ron, care to take any shot at ’09 guidance from a top line perspective? I know you guys sound like that the 250’s a reasonable place to be in the bottom line. How do you think we should think about the top line? And maybe what I’m getting at is–

Ron Zwanziger

You’re kidding right?

Bruce Cranna

Say it again?

Ron Zwanziger

I said, you’re kidding, right?

Bruce Cranna

Well, only half. I guess, what I really want to know is do you think – you guys have been putting up organic rates of growth. So maybe another way to ask is you this – is that rate of organic growth is that all at risk and your mind for ’09? And I assumed we should be thinking about disease management as being slightly up year-over-year?

Ron Zwanziger

Yes. I mean, it is very, very slightly up year-over-year. And at the moment, our organic growth driven by the same factors that you saw all last year, we think will continue as we’ve said in our prepared remarks. But the reason we’re not going to get drawn into revenue guidance is because we are committed to our earnings target of exceeding $2.50 a share. And that may mean us taking various steps and we can take advantage of the gross margin improvements and the expense cost that we have, which themselves can impact revenues if the two said cuts in expenses. And so, we are more focused on making sure in these turbulent times that we achieve our earnings commitment rather than as if still doing times exactly hitting particular growth targets on our organic growth although, we do expect our organic growth to continue to continue well.

Bruce Cranna

So it’s fair to say you’re a little more bottom line focused this year than perhaps typically?

Ron Zwanziger

It is then normal. Yes. So on that comment, we’re also more careful this year. As Dave said earlier and as we’ve said in our last call on expense levels, that obviously played into a making – great probability to make sure that we complete our goal.

Bruce Cranna

Yes. If you didn’t buy anything else this year, could you give us some idea of what the non-organic addition to revenues would be in ’09 over ’08?

Ron Zwanziger

The what? The non-organic?

Bruce Cranna

Yes. I’m just trying to figure out what’s closed basically over the last year. I mean, I understand this quarter there was $30 million or so that was due to acquisition you have anniversaried [ph]. I’m trying to figure out what that number would be on an annual basis for ’09.

David Teitel

Drops off pretty quickly, Bruce. I think that the biggest pieces you should think about are the fact that we bought Matria in the middle of May. So we have the first two quarters, which you have to add back their numbers. Most of the rest of the acquisitions have been with us for a fair amount of 2008, more relatively strong acquisitions or relatively small acquisitions to begin with.

Bruce Cranna

Yes. Okay. That’s what I thought. And speaking of that, Dave, what is exactly – I know you guys had a stake in Dyamics. And it says in the press release that is that closed? Did you actually buy that out right?

Ron Zwanziger

No. We’ve actually pretty much co-funding it. It’s basically as far as we can tell didn’t work out. There is some residual technology we’re just planning what to do with it. But it essentially hasn’t worked out.

Bruce Cranna

Is that just a write off of basically damage–

Ron Zwanziger

Right.

Bruce Cranna

Okay. And lastly, for me, Ron, I know you’ve mentioned the stimulus package and perhaps there’s some tale on there with respect to the disease management business. Could you just sort of walk us through your thinking there? How that actually might kind of flow through to dealer business?

Ron Zwanziger

Well, in the sense that a good deal of it is going in to medicate and to the extent that – and since a lot of that evolves around women’s health and high risk pregnancy, it seems to us that it’s through that mechanism. It’s through that part of the business that seems to us may well benefit from increased utilization. Which I should point out is also where we’ve had weakness – reduction in hospital, individuals going to see their doctors. Perhaps now, with this amount of extra money flowing in to medicate there will be more doctor visits. So that’s what our comment was about.

Bruce Cranna

Okay. Thank you.

Operator

Your next question comes from Greg Simpson [ph].

Greg Simpson

Okay. Thanks. Good morning, guys. Congratulations on the quarter. Ron and I guess, Dave, if I could dig in to a little bit on the gross margin side, you guys are obviously showing and guiding toward continued gross margin improvement. Now, but obviously in this quarter, the strength of nutritional is significant. Our performance on nutritional on such a low margin kind of artificially disguises the improvement in gross margins. As you think about your 60% target for 2012 and then if we look at this year with the manufacturing consolidations out in California, does that target look conservative? And how should we think about gross margins in ’09 specifically?

David Teitel

Well, I mean, we are being cautious and we have to assume in there that there maybe some pricing pressure, but we’re not seeing excessive pricing pressure. But so I think the 1% the year that we’ve guided I think at this stage is reasonable. It maybe an area which helps us. It’s one area I think, which could well help us make sure that we achieve our earnings guidance. And it’s possibly true, but I certainly wouldn’t encourage anyone to build as models taking more than the 1%. With that said, I do think it’s an area that might help us actually achieve our goal.

Greg Simpson

Great. And Dave, if I could drill down a little bit on that. Just focus on – you mentioned Biosite as source of strength in the fourth quarter. As you combined those facilities and get greater over head absorption, could you maybe specifically comment on the kind of levels of improvement you might see just in that part of the business in ’09.

David Teitel

I think we’d rather not get into the individual pieces and stick with the notion of continued improvement on the over all.

Greg Simpson

All right. I thought I’d try. Secondly, on the floating rate debt, you locked in obviously the LIBOR portion on half of it. Any thoughts on locking on the rests?

Ron Zwanziger

Yes. I mean, we think about it from time to time. Locking in the other – we wouldn’t lock the other 500 anyway because we have pay downs over time. But we might think about another 350. And we’re thinking about it. I don’t think there’s any argument in interest rate that going to move one way or the other at the moment. But we’re contemplating it.

Greg Simpson

Okay. And then on R&D, if I could ask about that, Ron? Knowing you for as long as I have and going back to the previous company, you’ve never hesitated to spend on R&D if you thought it made sense from a long term perspective. Your guidance for R&D going forward actually, unless my notes are deceiving me actually looks lower that what you have been guiding. Knowing that you would never under spend on R&D, can you maybe make a comment with respect to the efficiency of your R&D process? Or what you’re seeing in R&D? A lot of stuff obviously going on, a lot of new product flow. What do you see in the R&D that appears to be allowing you to rash it that down a bit to an even lower level?

Ron Zwanziger

Well, first of all your observation is correct. This year is an exception to our general approach. But it’s also part of our general theme of responding to all the unknowns at the moment around the world. The quality of our R&D just evidence by the shear magnitude of the number of highly innovative products we have coming, which I don’t think really any other company has anything approaching our scale of novel diagnostic products, which is obviously very good. And I think that in comment to your perspective about or inclination to spend money on R&D.

As the year progresses, as it becomes clearer to us perhaps in the August time frame, as we assess the Q2 as we sort of look at the first half of the year. If it looks, which we expect it’ll will that we’re going to exceed the 250. You will see us like almost certainly increase R&D expenses in Q3 and Q4, but you will also see increases. You may also see as we can see that we’re achieving our objective, you’ll also probably see increases in sales and marketing as well.

And so, yes, we are holding back a little bit relative to our norm in R&D, but hopefully only for basically the last few months and the next couple of quarters.

Greg Simpson

Got you. And then final question, I’d get back in line. En gal is something you have taken a very conservative approach to at least publicly since the biocide acquisition and over the last few months you seemed to be increasingly vocal at least by your standards. Increasingly vocal about it, which tells me you’re more optimistic about it. Can you maybe add a little more commentary that what you’ve said in your scripted remarks?

Ron Zwanziger

Well, we are a little more confident about it. There have been some good date, not just by us, but by others as well. And so we are – it is looking better, but I think it’s a long way from us talking about having home (inaudible). We hope to have some more good date around later in the year as we’ve made in our remarks.

Greg Simpson

Previously, you guys had suggested maybe mid-’09, maybe third quarter you guys will have a much better idea. Is that still (inaudible) or is it a little bit more longer than that?

Ron Zwanziger

No. I mean, I would thought that in Q3 and Q4 we would be able to make some comments about it.

Greg Simpson

Got you. Okay. All right. Thanks very much.

Ron Zwanziger

I intend to comment about conservative. You may have noticed that in our sort of laying out of our agenda for the year at the JP Morgan conference. Beginning, we didn’t have that listed as one of our objectives because we didn’t want to lay out of case to something that is so technically – that could have difficulties or failure because of clinical trials that we didn’t actually put it down as one of our critical objectives for this year.

Operator

Your next question comes from the line of Josh Jennings [ph].

Josh Jennings

Good morning. I guess this is just to start of. Can you just review your disease management numbers and the major numbers. I think I missed it. Dave, I think you went out. A little technology glitch on my end.

David Teitel

So Matria in the quarter was $78 million.

Josh Jennings

Okay.

David Teitel

And that compares to $75.2 million in Q3. And it was down 12% from what they reported pre-acquisition Q4 of last year.

Josh Jennings

And did you give a total for each of these management divisions?

David Teitel

I did. It was $130.6 million in Q4.

Josh Jennings

Okay. Great. And as it continue – could you just give us some commentary around what you’re seeing out there? Some of these management industry trends. Are you seeing any price pressure out there in terms of negotiation of new contracts? Or are your new customers renegotiating contracts? And just what the competitive landscape is like.

Ron Zwanziger

Well, we’re not – As we’ve already said in our prepared remarks, we’re not seeing much pressure. What we are seeing is customers being far more rational in terms of what types of programs they want to see in. And the customers, the payers are employers and insurance companies are more focused on programs that have better effectiveness. And the point is that’s where we focus, in particular, chronic disease and in high risk pregnancies. So if you look at our particular offerings, they’re quite differentiated, which I think probably explains why we are seeing such a high rate of request for proposals that we commented on – that I already commented in another question earlier.

Josh Jennings

Okay. And can you give any updates on the Great West contract? Was that secured?

Ron Zwanziger

We commented a long time ago that that was secured and extended. I don’t really need to return to that.

Josh Jennings

Okay. And just on the gross margin and professional diagnostics division of 65.5% in the midst of the week (inaudible), Dave, if could you give us some details on what drove that team expansion and if this is sustainable run rate for this division going forward?

David Teitel

We already commented for most of the year. You could check if the increase came from our side.

Josh Jennings

Was it just from – any further details on that? Was it from some of the inventory flowing through and manufacturing efficiencies?

David Teitel

Well, we can target was that we are seeing improved efficiencies there but in prior results of the growth in there cells, they came from a higher proportions in total, and exceed the average. So as they grow, they grow faster than the total. It brings up the overall average.

Josh Jennings

Okay. And in terms of the equity on insure from consolidated entities and the $1.1 million from the P&G JV and then the advertising for it took a hint of the possibility of the JV, but can you comment on what can move that up or down the trail in 2009 and is there a inflection point for the P&G JV to bring a higher number down into that equity and incline?

David Teitel

Sure. We do expect sales to be realized from the advertising standing we’ve been making and finally, in comparison, that same number a quarter ago was $2.8 million so clearly, the earnings in the quarter did suffer from the advertising, but hopefully that bodes well for focusing on our revenue line and some movement for 2009.

Ron Zwanziger

Yes. The products, and we tried to emphasize in our (inaudible) month charges, the product’s been incredibly well received. Our market shares are up everywhere as soon as the product comes out even before the advertising and then after the advertising stopped, they’d immediately respond. We’ve been gravitating this product so it’s hard to see anything but growth and earnings coming out of the year, out of the JV.

Josh Jennings

All right. And just the GAAP earnings number in the quarter $0.14 was impressive. Can you share the amount of charges left on the books and maybe what a reasonable GAAP in this number could look like in 2009?

David Teitel

Restructuring, I’m sorry, amortization about $60 million for most of 2009 and restructure charges was a bit hard to predict as we move from period to period that’s why we tend to focus on the cash basis earnings. It was about $7 million in stock up charge. The net should, again, continue at about that level.

Josh Jennings

Okay. And despite the – do you have the cash flow for the quarter?

David Teitel

We do. If you drop on our Web site, EBITDA was about $115 million in the quarter and free cash flow was reported at $14.5 million, but in getting to that number, the way you report, the benefits from stock up, most of that ends up in cash flow from financing activities as opposed to operations. It really results in additional cash flow received during the quarter, benefited during the quarter, and there was an additional $17.1 million of that kind of cash flow that came through there. So on a run rate basis, the number was about $31 million in the quarter.

Josh Jennings

Okay. Thanks a lot.

Operator

Your next question comes from Loree Shiek [ph].

Eric Henderson [ph]

Yes, it’s Eric Henderson. Thanks for taking the questions, guys. Nice quarter. We’ll take tremendous growth in the QAS business, can you describe the market dynamics behind that growth, the sustainability of that growth, and then, what kind of leverage we can expect in that business?

Ron Zwanziger

Well, clearly, we’re beginning to see the impact of the change in reinvestments that took place back in earlier part of 2008, and so that benefit is beginning to come through. But I think there’s more going on here, I think more and more positions are getting comfortable with expectations on how monitoring, and so they’re increasing the putting patients on home monitoring. We’ve built quite a large infrastructure to accommodate this stocking.

Last year, we expanded quite aggressively to have the infrastructure. I think we’re very well positioned to take advantage of this growth. I know that growth in the quarter was particularly large. I would assume that sort of magnitude growth every quarter, but I do think that we’re going to see considerable growth in the business this year. And we expect the business to breakeven in by around Q3 and be profitable in Q4. So it’s clearly one of our growth engines. It’s small at the moment, but we think this business will grow considerably.

Eric Henderson

Okay. And then, I was wondering if you could break out the flu sales in the quarter and then the specific growth rate for Biosite.

Ron Zwanziger

Well, flu sales were pathetic. Well, they went too bad the last quarter, (inaudible) into this quarter, but I think they’re about – what were they about?

David Teitel

They were a little over $8 million in the quarter, $8.4 million in Q4.

Eric Henderson

Okay. And what I’m hearing is –

Ron Zwanziger

What’s the second part of your question?

Eric Henderson

And then the growth for Biosite?

Ron Zwanziger

We already provided it. We provided the cardiology group the group, what was it again?

David Teitel

It was $9.7 million – Biosite was finally less than our overall average but was pretty close to it.

Eric Henderson

Okay. Great, that’s fine. And with respect to the disease management business, can you describe what is essentially locked in or secured with reduced contracts for the year?

Ron Zwanziger

Well generally, the contracts have about a three year life, generally. But about a set of our business, which is the high risk pregnancy is separate from that so you can just do the math.

Eric Henderson

And so as the total–

Ron Zwanziger

Well it’s roughly – crudely speaking, just about a quarter.

Eric Henderson

About a quarter, okay. Great. Thank you.

Operator

Your next question comes from Lee Rimaldo [ph].

Lee Rimaldo

Yes. Two questions regarding your cash flow from off, looks like working capital must have consumed cash. Could you elaborate on that, and also earlier, you talked about your free cash flow being $14 million or by another measurement, a $31 million, but I’m seeing your cash net bed is actually up, so it sounds like there’s a missing part there. And second question is just to clarify on your disease management where you’re locking contract, but since your revenue is still based on per head, do you generate on per head basis, how would you be impacted by unemployment rate going up?

Ron Zwanziger

Well, we all pay (inaudible) per head and we did say that’s one area that there has been some issues for us and we have been impacted, not by the unemployment rate but by those companies that are laying off workers. But as for the first question, I’ll let David answer it.

David Teitel

Yes, there was a bit of an increase in working capital there in the quarter. It was more or less, unfortunately, with the sales growth. We’ve seen both receivables and inventory levels at about the same days as a quarter ago, so we didn’t see a significant increase restructuring in our receivables or anything like that. From a net debt perspective, as you suggest, we did spend money during the quarter on acquisitions, both paying some of the final charges associated with a major acquisition for about $15 million, as well as funding another $20 million. So additional acquisitions, including the acquisition in Brazil that we talked about at the end of last quarter and a small acquisition of the drugs of the View space at the end of this quarter.

Lee Rimaldo

Okay. Thank you.

Operator

Your next question comes from the line of Hashim Ahmad [ph].

Hashim Ahmad

Hi, guys. Thanks for taking my call. Congrats on a good quarter.

Ron Zwanziger

Thank you.

Hashim Ahmad

I was wondering – most of my questions are answered. I was wondering, in the background of this product released in December for drug Overview, can you give us some color on how much revenues were there that from drugs from Overview?

Ron Zwanziger

Which product launched?

Hashim Ahmad

The platform that you launched in December for drug Overview?

David Teitel

If you’re referring to the acquisition, I just talked about it was done effectively on the last day of the quarter so there’s no P&L charged or benefits associated with it.

Hashim Ahmad

Okay. In terms of health management, do you generally see seasonality in terms of (inaudible) and using (inaudible), as people are towards the end of their deductibles and all. Do you see that?

Ron Zwanziger

What you generally see is Q1 is impacted based on the losses that you might have had of accounts during the year because they end abruptly at the end of December. So you see an abrupt – you can see a reduction in Q1, which we’ll see. Mains [ph], which you gain, because they take a while to enroll, so even though you gain the contract and start working it at the beginning of January, because it takes a while to enroll people, you don’t really see the benefit until Q2 or beyond. So that’s the only seasonality that we have. There’s not much else.

Hashim Ahmad

Any guidance on cash flow in 2009?

Ron Zwanziger

Well, we haven’t given a forecast, but given that our EPS should be up, it should be good.

Hashim Ahmad

Okay. And finally, in terms of consumer diagnostics, the revenue and gross margins, both were a little low. And on the other hand, digital pregnancy tests has been doing really well, so can you comment on that? I know you’ve already commented on SG&A in that regard. So if you can give me some color on that.

Ron Zwanziger

What? On the revenues?

Hashim Ahmad

Your revenue contributions are a little low considering that digital pregnancy test has been doing well.

David Teitel

Sure, so remember that the revenue that was through our P&L as our supply of products in the joint venture. We have, obviously, as joint venture prepared to launch the digital product earlier this year. There was a bit of inventory filled in preparation for that. So this quarter, you saw a little bit of a reduction as that normalized in our P&L.

Hashim Ahmad

Thank you very much. (inaudible).

Ron Zwanziger

Thank you very much.

Operator

The next question comes from Andrea Nesey [ph].

Andrea Nesey

Hi. Can you give what CapEx in the quarter and what the guidance is for in 2009?

David Teitel

It was a little under $20 million in the quarter and we would expect to run it at about that rate in the quarter next year.

Ron Zwanziger

Okay? Operator, fast, we’ll just take one or two last questions, if there are any.

Operator

Your next question comes from Potonto Rita [ph].

Potonto Rita

Given that your free cash flow is going to be so strong, will you actually consider de-levering?

Ron Zwanziger

No.

Potonto Rita

Okay.

Ron Zwanziger

Because it’s a diluted transaction doing that, and we paid for – if you look at the cash, if you look at our debt, as we’ve explained, we just fixed $500 million of LIBOR, paying 3.19%, so if we take $100 million of free cash flow and pay it back, we’ve saved ourselves $3.19 million. If we use it to make acquisitions, and we replace ten times EBITDA, we get $10 million. So on the one hand, we can pay down debt and save ourselves $3.19 million. On the other hand, we can add $10 million to EBITDA. So it’s senseless in these economic times to pay down debt, particularly when our debt burn is not at all significant. We have a very low total debt to EBITDA ratio. It’s fallen considerably, and of course, it’s going to continue falling as our earnings go up. So I think it’s senseless to contemplate things out there.

Potonto Rita

Thank you for answering my question.

Ron Zwanziger

Okay.

Operator

There are no further questions at this time.

Ron Zwanziger

Okay. Well, in closing, folks, just want to remark that we remain on track to deliver strong financial results for many years to come. Over the next several years, we expect increasing organic revenue growth, which will be accompanied by steady gross margin expansion to 60% by 2012. Throughout this time period, investors should expect significant annual growth in adjusted cash basis EPS.

Our goal remains to becoming the leading company in the world focused on enabling individuals to take charge of their health and the medical subdivision at home through emerging diagnostics and health management. And we expect to success in this approach to have a major impact on our financial performance for many years to come.

Twelve months ago, as I closed off 2007 fourth quarter call, I commented that when 2008 was complete, and shareholders were able to reflect in our performance, they would find that we have continued to deliver steady growth and cash basis EPS and we judge our business to be further strengthened strategically, including the integrations of our acquisitions in health management.

I also projected that we would be in the midst of ongoing launch as a pioneer age of diagnostic products designed to allow individuals to take charge of their health at home and reduce healthcare costs to payers supporting comfortable growth for many years to come. I’m obviously pleased to report that we have delivered on those commitments.

For 2009, we’ve laid out a series of new goals, which can be found in our investor presentations posted on our Web site. These include establishing a significant amount of presence to both the Conception guide and Determine p24 products, the successful launch of (inaudible) analyzer in the third world, establishment of the first commercial health management program for health calculation monitoring, substantial completion of our manufacturing and IT infrastructure rationalizations, a further increase in our already strong rates of organic revenue growth, overall gross margin expansion of at least 100 basis points, and the achievement of at least 250 of cash basis EPS of the year.

I’m confident that when we speak one year from now, you will once again find us to have achieved our goals in terms of both our earnings performance and our positioning for our future success. As always, I’d like to thank you for your continued support and interest. Thank you very much and have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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