Inverness Medical Innovations Inc. Q1 2009 Earnings Call Transcript

Inverness Medical Innovations Inc. (IMA)

Q1 2009 Earnings Call

April 27, 2009; 10:00 am ET

Executives

Ron Zwanziger - Chairman & Chief Executive Officer

David Teitel - Chief Financial Offocer

Doug Guarino - Director, Corporate Relations

Analysts

Erik Schneider - UBS

Bruce Cranna - Leerink Swann

Greg Simpson - Stifel Nicholas

Peter Bye - Jefferies & Company

Zarak Khurshid - Caris & Company

Ashim Anand - Natixis

Daniel Owczarski - Avondale Partners

Matthew Scalo - Canaccord Adams

Presentation

Operator

Good morning, and welcome to the Inverness Medical Innovations quarter one earnings call. My name is Chris, and I will 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.

Doug Guarino

Thanks, Chris. Good morning and welcome to the Inverness Medical Innovations conference call, to discuss our results for the quarter ending March 31, 2009. We are joined today by Ron Zwanziger, Chairman and CEO; and Dave Teitel, 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 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 integrate our acquisitions into recognizing the expected benefits or restructuring and new business activities, the impact of the recent crisis in 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 in foreign currency exchange rate; our ability to successfully developed and commercialized 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 in the United States and abroad; the effect of pending and future legal proceedings on our financial performance and 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, 2008. 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 measures discussed in the most directly comparable GAAP financial measure is available on the company’s website at www.invernessmedical.com.

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. I’m pleased to report another strong quarter of financial results highlighted by solid earnings despite some revenue headwind. During the quarter, we experienced continued weakness in U.S. doctor’s office visits which carried over from the fourth quarter. Additionally it was a full flu session, particularly in comparison with a very strong first quarter 2008.

We were also faced with negative foreign exchange rate trends as well as continued impact to our Health Management business from a reduction in U.S. employment levels. Nonetheless, favorable underlying trends in our business helped to offset these factors and brought cost control measures that allowed us to strong cash EPS of $0.61 in the fourth quarter, an increase of 27% over the same period last year, which represents our 11 consecutive quarter of year-on-year earnings improvement.

This quarter was highlighted by several important areas of growing sales momentum which gave us confidence that our organic growth rates will continue to accelerate. This includes strong performance by our cardiology unit, which has posted high single digit organic growth for the last several quarters. The Triage business continues to be fueled by growth in the point-of-care cardiovascular market segment with increased utilization of the Triage meter in the emergency setting for chest pain and heart failure.

Our QAS subsidiary also recorded strong Q1 revenues growth of 51% over the prior year, increasing acceptance of home monitoring for patients taking warfarin has allowed us to expand rapidly over the past few quarters and we expect revenues to continue to increase significantly in 2009 compared to 2008. Europe, Asia and Latin America also recorded a strong quarter as our increased focus in these geographies over the past year begun to pay dividend.

Despite revenue pressures from rising unemployment in the U.S. on the Alere and our health management unit, high volumes of request for proposal persist and strict cost controls does for our protected operating margins. We expect to obtain new business and for this to begin to work its way into the numbers through the remainder of 2009 allowing Alere to return to strong organic growth rates in 2010.

Finally, our recently announced acquisition of ACON Second Territory business provides us with the strong direct presence in China as well as providing a flow of highly profitable product to other key emerging market. With historical revenue growth rates of greater than 25% we expect this business to contribute to our overall revenue growth rates for many years to come.

From an operational standpoint, we are seeing a number of indicative that our manufacturing costs will continue to decline over the remainder of this year as a result of our numerous cost reduction programs. Based on these considerations, combined with a number of additional factors that I’ll outline later in the call, we remain confident in our previously provided guidance of achieving a minimum of $2.50 a share on an adjusted cash EPS basis in 2009 with significant annual organic revenue and earnings growth to follow over the next several years.

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

Dave Teitel

Thanks, Ron. Good morning, everyone. Revenues of $473.9 million earned in the first quarter of 2009 compared to revenues of $372.2 million from Q1 2008 and $459.3 million in Q4 of 2008. The effect of foreign currency translation reduced reported Q1, 2009 revenues by $16.6 million compared to Q1, 2008 and by $3.3 million compared to Q4, 2008.

Q1, 2009 revenues include a $5 million royalty received in connection with the license arrangement in the field of animal health diagnostics compared to a $3.3 million license fee from a non-exclusive license of our antibody discovery technology earned in Q1, 2008. Adjusted cash earnings per diluted share for Q1, 2009 were $0.61 compared to $0.48 in Q1, 2008.

By business segment, product and services revenues from our Professional Diagnostics segment were $261.4 million in Q1, 2009 as compared to $259.6 million in Q1, 2008. Acquisitions accounted for $8.7 million of this change offset by $13.5 million of adverse foreign currency translation effects.

Revenues from North American flu sales declined to $6.4 million in Q1, 2009 from $18.8 million in Q1, 2008 as a result of the relatively mild 2009 flu season. We believe that our flu related inventory levels at major distribution partners are appropriate exiting 2008 - 2009 season and that our Q3 and Q4, 2009 sales levels will not be adversely impacted by any excess quantities remaining in the channel.

Excluding the impact of the year-over-year decrease in flu sales, our currency adjusted organic growth rate for professional segment revenues, excluding acquisitions was approximately 8%. Net product revenues for Biosite, Cholestech and HemoSense grew by a combined 13.8% during the first quarter of 2008 compared to the same quarter a year ago, which includes 39.2% year-over-year growth rate for the business outside of North America.

Adjusted gross margins from our Professional Diagnostics segment were 63.4% in Q1, 2009 compared to 63.1% in Q1, 2008 with strong sales of cardiology related products offsetting the decrease and high margin flu revenues, which I discussed earlier.

Revenues from our Health Management segment were $122.2 million in Q1, 2008, including $70.6 million of revenues from legacy Matria. Revenues from legacy, Alere and Paradigm, grew by approximately 4.8% compared to the 2008 revenues. Legacy Matria revenues decreased from $78.0 million in Q4 largely as a result of the expected termination of certain contracts upon the January 1, 2009 expiration date and were down 11% from Q1, 2008.

Revenues from our QAS subsidiary were $9.5 million in Q1, 2009 a year-over-year increase of 51%. Adjusted gross margins from our Health Management segment were 56.3% in Q1, 2008 compared to 56.0% in Q4, 2008.

Product and services revenues from our Consumer Diagnostic business segment were $32.5 million in Q1, 2009 compared to $36.0 million in Q1, 2008. The impact of foreign currency translation reduced reported results in this segment by $3.1 million. Q1, 2009 revenues include $25.7 million of manufacturing and service revenues for products and services provided to the joint venture.

Looking at the results at the joint venture level, product revenues sold by the joint venture were $48.1 million in Q1, 2009 compared to $54.4 million for the year ago period. Approximately half of the joint venture’s revenues are derived from sales outside the U.S. and therefore has been adversely impacted by foreign currency translation. Adjusted gross margins for our Consumer Diagnostic segment were 14.2% in Q1, 2009 compared to 18.0% in Q1, 2008.

Revenues from our nutritional business were $18.7 million for Q1, 2009 compared to revenues of $20.5 million in Q1, 2008. Adjusted gross margins from our nutritional segment were negative 1.3% in Q1, 2009 compared to 2.0% in Q4, 2008.

Selling, general and administrative expenses decreased to $120.8 million in Q1, 2009 from $131.6 million in Q4, 2008. Compared to Q4, Q1 spending benefited by approximately $1.1 million as a result of foreign exchange rate changes. Additional spending reduction resulted from a decrease in discretionary spending and reduced hiring in response to normal attrition across all businesses. Given the continued economic uncertainties, we will continue to emphasize expense controls throughout 2009.

Adjusted research and development expense was $24.6 million or approximately 6% of revenues compared to $25.5 million in Q1, 2008 and $22.9 million in Q4, 2008. First quarter R&D spending includes a $500,000 benefit from the exchange rates as compared to Q4, 2008. We expect R&D expense to continue at approximately 5% to 6% of net revenues for 2009, pending any future decisions to increase certain investments, which Ron will discuss in a moment.

At $101.2 million, our adjusted operating income reflects a $23.1 million increase over the first quarter of 2008. Overall, we expect improvements in adjusted operating profits against comparable prior year’s quarters to continue throughout 2009.

Adjusted interest and other expense was $20.5 million in Q1, 2009 compared to $19.1 million in Q1, 2008. Included in this line item is adjusted interest expense, net of interest income of $17.6 million in Q1, 2009 compared to $21.8 million in Q1, 2008. Also included in other income during Q1, 2009 is a $3.0 million realized and unrealized foreign exchange loss associated with changes in exchange rates during the quarter.

Equity earnings of unconsolidated subsidiaries in Q1, 2009 includes $3.5 million related to our share of earnings from the joint venture with Procter & Gamble. In Q1, our tax rate was approximately 33.7% of pre-tax income compared to 35.0% in Q1, 2008. We expect our tax rate to range from 30% to 35% throughout 2009, with respect to our debt and related exposures and changes in interest rates. In addition to the interest rate hedge that we entered into in January 2009 covering a notional $500 million at a one-month LIBOR rate of 1.195% through January, 2011.

In March, we also extended our existing interest rate hedge, which covers a notional $350 million at a LIBOR rate of 4.85% through September 2010 for an additional two-year period commencing September 2010 at a one-month LIBOR rate of 2.54%. Through the combination of the above, we’ve hedged $850 million of our $1.35 billion of floating rate debt.

Through the first third of 2009, we’ve been pleased to note signs of light in the credit markets, especially over the last month as interest rate spreads have trended somewhat favorably and interest rates have remained at historical lows, although credit spreads are exceedingly high. As a result, we expect to range some level of debt financing in the near future the amount of which will be determined by interest rates at the time.

Now, let me turn the call back over to Ron.

Ron Zwanziger

Over the next several months, we expect a number of recently launched products to gain traction around the world. Since this July, await initial launch of Clearblue Digital with Conception Guide Indicator has become the best selling Clearblue product in key European countries such as the UK, Spain, and Germany and has been a significant driver of market share in all countries in which it has been launched.

We expect this highly differentiated product to help drive strong sales and profitable growth for our joint venture with Proctor & Gamble for many years to come along with, next new product under development to the consumer joint venture which is scheduled for at least by the end of this year or early in 2010.

Our Determine HIV Combo test with p24 antigen began commercial sales in Africa during the first quarter based on the strength of numerous clinical studies which demonstrated comparable sensitivity and specificity to fourth generation lab-based analysis as well as tremendous interest from potential customers we believe that this novel rapid diagnostic will capture significant global market share as it sense a new standard of care for HIV screening.

Our portable CD foreign analyzer branded pima has now become clinical trials of one side in Africa with several other facts scheduled to go online in May and remains on track for mid-year 2009 commercial launch to select African markets. Designed specifically for future introduction to the U.S. physicians office, clinics and ultimately to the home, Pima embodies the essence of the Inverness Product Development Strategy and we help tried the convergent to diagnostics and services.

We are also making good progress on the cloud diag point-of-care molecular platform which will offer true multiplexing capabilities using the single drop of whole blood. The first commercial application for this revolutionary platform would be on the measurement to HIV viral load with ample applications to follow.

We continue to be very excited about our stirling CHF platform, can just translate the platform which would be introduced in the professional setting and beginning clinical trials for the home setting in the fourth quarter. This portable test system is easier for patients to use at home and requires only a small fingers example in whole blood from the patient to generate a result. Designed specifically for patient’s health testing, we believe that this unique device will serve as an important tool for use by patients with established heart failure to assess ongoing disease stations for physician intervention prior to becoming hospitalized.

The current Biosite Triage meter will remain an important near-patient platform for cardiac and other panel testing for both physicians, officers and hospital [essence] and a series of enhancement to which will be commercially available later this year will further differentiate this industry leading device.

NGAL, our novel biomarker for cardio renal disease assessment was introduced commercially in Europe late in the fourth quarter and the first quarter. We have received a high level of interest in the products from clinical community which is seeking improved markets for assessment on the status of the kidney. While it is too soon to know how effective NGAL will ultimately be as an early market for kidney injury, we are looking forward to providing updates about this opportunity later in 2009 as investigational work progresses.

Clearly, our R&D programs are proceeding well and we fully expect to meet our previously stated goals on 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.

Our manufacturing cost reduction programs are also on track. With the move of collecting manufacturing from Hayward, California to the Biosite campus in San Diego plant to occur before the end of 2009. Additionally by that time we expect to have made significant progress on our transition of lateral flow devices from Unipath in Bedford, England to several other low cost facilities around the world, including our Avon faculty in China. Both if these projects will help support continued improvement in our gross margin for the next several years.

Finally, the combination of our multiple health management IT systems in to a single integrated platform is on schedule for implementation in early 2010, successful completion of this highly complex project will provide us with the state-of-the-art technology backbone, which will remain unmatched in the industry for years to come.

As the world around us continues to unravel, remaining focused on our long-term programs, while maintaining strong physical controls and a commitment to operational leverage has allowed us to continue to succeed. At this time, we fully do expect to meet our financial targets despite the current economic environment and to capture global market share through the duration of the recession and at an accelerated rates as the economy eventually moves to recovery.

As we’ve mentioned on previous calls, healthcare reform with the focus on disease prevention and the high-cost of chronic condition should help support our growth as we are well positioned to take advantage of these trends.

During the first four months of 2009 compared with late 2008, we’ve noticed that additional negative economic trends affecting our business have failed to emerge. We’ve also been pleased to see that our cost control programs have been effective in off-setting the bottom line impact to Inverness from the ongoing recession.

Assuming the economy does not significantly worsen over the next few months, during the summer we expect to reconsider our expense levels with the view towards increasing some marketing and R&D spending during the second half of the year. However, clearly we will not make these changes unless we continue to feel confident about our full 2009 earnings outlook.

Now, let me open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Erik Schneider - UBS.

Erik Schneider - UBS

Hi, good morning. I think just two quick questions, one on the Abaxis royalty; did it flow through the revenue component for license and royalties? Did you sign any costs to those types of royalty payments?

Ron Zwanziger

We assigned generally cost of royalties to management of our IP portfolio, but when something like this comes in generally there is very little costs associated with it.

Erik Schneider – UBS

Is it essentially 100% gross profit?

David Teitel

Essentially so, yes.

Erik Schneider – UBS

Then future royalty payments on that, I guess $500,000 or $1 million a year will those flow through in other income or those be added to the license and royalty revenue in future years?

David Teitel

No, those that show up on that are royalty line.

Erik Schneider - UBS

Then, with all of the news on swine flu today, do you have any comment about the testing portfolio associated and applicability to swine flu test?

Ron Zwanziger

Well, my first comment is that I hope that none of our products will be needed at all, but we expect that we are in touch with the CDC and we will do our peace to make sure that what’s needed to help contain the epidemic is available, and then our products will obviously be available. We have inventory and we can turn on production at the moment noticed if it’s necessary, but let’s just hope none of this is necessary.

Operator

Your next question comes from Bruce Cranna - Leerink Swann.

Bruce Cranna - Leerink Swann

Good morning. Ron, I guess just thinking about physician office sales in general, is there any way we can or you can comment about net of what’s going on with flu season. I know you mentioned there has been weakness in this challenge, just trying to figure out can we tease out the flu part of it and get some sense as to, I guess for lack of a better term patient volumes or physician office visits, net of the flu noise in the quarter?

Ron Zwanziger

Well, I mean we’ve given all the different growth numbers. I think probably most important thing is what’s going on; you’re essentially asking what’s going. We recently did an in-house survey to see what’s going on and it’s hard to say that we’re seeing deterioration beyond what’s happened before. That’s why we made the comment earlier that we haven’t seen any changes, any additional so the negative factors affecting our business beyond the factor that there has been this reduction. There is no sense that it’s accelerating in other words there is increasing absence of doctor’s visit, but there has been this reduction so far.

Bruce Cranna - Leerink Swann

But if you had to put sort of a percentage change on a year-over-year basis, and again I’m trying to get you do some of the math form because I’m having trouble doing it taking out flu and some of the FX noise in the professional segment, what do think, I mean it’s sort of physician offices that channel down a few points year-over-year or what?

Ron Zwanziger

Yes, you see it’s very hard for us to do it because we are having such significant growth in some of the product lines. So, it’s even hard for us to deconvolute, the decrease we are seeing. We saw decreases, flu related obviously, but we didn’t see too much decrease in the ones which are not flu related like pregnancy for example. So, it’s very hard for us to do it, overall we haven’t been too badly affected in the U.S. because of the growth of the cardiology side and of course overall if you include our entire business of course we’re seeing growth in general.

Bruce Cranna - Leerink Swann

Dave, can you comment, I know you mentioned, I think an FX benefit on the SG&A line, can you comment a little about, and I think I heard you say there is some hiring may be your freeze on there and some discretionary spending, but you definitely came in below what I was looking for in terms of SG&A. Is that sort of reasonable from a modeling perspective to think that that kind of number on a going forward basis or was just some sort of one-time drop out of that line?

David Teitel

There were very few one-time items in that line, so I think trend wise we’re pleased to see the expense controls and the impact of the expense controls. Going forward we’ll obviously watch their growth rates in our business and make sure that we put in the appropriate infrastructure that continue to support the growth, but there are no sort of immediate step-ups that will come in Q2 based on the current run rates.

Bruce Cranna - Leerink Swann

Then lastly, Ron, I have to ask this because I think it’s been several quarters since any one asked, but you mentioned the negative margins in the nutrition business, it kind of always begs the question in my mind why not remove this from the portfolio?

Ron Zwanziger

Well, we are thinking it more than we have done in the past, we are thinking about this more than we have done in the past.

Operator

Your next question comes from Greg Simpson - Stifel Nicholas.

Greg Simpson - Stifel Nicholas

Good morning. Congratulations on the quarter guys. Dave, if I had follow up on Bruce’s question on SG&A, I mean you beat my number by almost 200 basis points. If we look at a run rate going forward, again you kind of just addressed it, but is there really aren’t are any major spending issues that kind of lay out into the future and it should just be looked at from our perspective as significant cushion on your part as we go through the rest of the year?

David Teitel

Well, we have a number of product launches coming, particularly in the second half of the year. Some of those will require some spending to support them. The point at this point is that we are closely watching operating expenses, we are managing the discretionary piece of it as appropriate and what we decide to do in the back half of the year is largely going to be driven by how we feel about revenue growth. So with modulus in absolute, but I do think there are some savings that are just built in as a result of just closer and tighter management in some of the discretionary side.

Greg Simpson - Stifel Nicholas

Then Ron, you talked a little about swine flu, but if everyone else is having the same experience that’s I’ve had this morning, it’s been 90% of the questions. Can you may be go into just a little more detail, you have got HN51 for the avian flu, but can you may be talk a little more, the traditional flu tests are actually sensitive to swine flu is that the correct understanding here or is there a special product?

Ron Zwanziger

I mean that tends to be a true statement, because this swine flu is essential flu and then variant and we tend to pick them all out, but obviously we can’t make a cling like that because we don’t have a product with that sort of a claim, but we’ll do what we can and we work with the CDC on these issues and product if it’s necessary for screening on a large scale if that becomes essential. But as I said in my earlier comments, we are available, we will do everything we can as an organization to help and just hope that none of this will be necessary. We are geared up and we can respond, we do have inventory and we’ll do what we can.

Greg Simpson - Stifel Nicholas

Right. Okay. Thanks. Then on the health management side, that business continues to move forward and looks like in very good fashion. Can you may be talk a little more about the trends that you are seeing and specifically, forgetting about may be the current short term environment, but may be again elaborate you have in past quarters on the communication you’ve been having with clients, with customers and the kind of talks that have been ongoing and not trying to get to the given specific patient or customer wins, things like that, but what detail can you may be give us as it projects out to the confidence you have in this business going forward?

Ron Zwanziger

Well, I can answer that in two different ways. First of all, as you rightly observed and as we commented we are having huge number of discussions around new opportunities and I think customers are very careful about this and they are looking for ways to help them manage their own cost and therefore we provide a solution and as a result we are having numerous interactions.

We expect to pick up of a share of this later this year which will translate into helping us with the growth in 2010, but in the mean time we continue to pick up the service side of the business associated with patients taking volforins. So that’s going well and the other programs that we have around the merging of Diagnostics and Health Management are also progressing well. So, all together we are feeling really quiet good about what’s happening here in this business.

One more thing, Greg the only downside of course is that because there are few people employed and because we get paid by the number of employees enrolled in the health plans are the employers, obviously we are seeing a slight decrease on that. But, obviously that will naturally continue for the rest of the year.

Greg Simpson - Stifel Nicholas

Right. So, if we look past the current economic environment and project long term whether you want to say two years, five years what ever the number is, you guys in the past have been willing to talk in a very general fashion about organic growth rates in the health management business and kind of your objective for organic growth rates in this business long term. Can you may be refresh some of that --?

David Teitel

Well, I’m not sure that we have been given specific numbers, but we do expect to have some significant organic growth in 2010 based on the type that we do anticipate getting some new contracts to deal with these issues and beyond. Now that beyond one gets even more encouraged, because of what we’re seeing around the volforin program and the PTI and our program as well as the other programs that we’re working on, whether it’s related to congestive heart failure or even infectious diseases. So we’re feeling really good about the potential for significant growth rate in this business.

Operator

Your next question comes from Zarak Khurshid - Caris & Company.

Zarak Khurshid - Caris & Company

Good morning guys, thanks for taking my questions. First, where there any small acquisitions in the quarter and if so could you describe them?

Ron Zwanziger

There were no acquisitions in the quarter.

Zarak Khurshid - Caris & Company

Okay. Great.

David Teitel

Well, it’ not the small one, but the one --

Ron Zwanziger

Which wasn’t closed in the quarter.

Zarak Khurshid - Caris & Company

Then, I was curious just what if you remained rapid point-of-care competitor’s side at the current full inventory levels as less than ideal. It seems link your channel is relatively okay, i.e. somewhat flushed. Could you perhaps give us some perspective on kind of what’s going on in that segment? Is it a function of share gains on your part or something different about the way you sold in the prior year?

Ron Zwanziger

I think we just sold in normal levels and we had quite a lot of success in the marketplace despite the mild flu season and as a result there are no particular inventory issues of our products in the marketplace, because we were careful and I can’t comment about what other people have done.

Zarak Khurshid - Caris & Company

Okay, great. Then I was just curious with respect to the cardiac platform. Could we expect any news well this year about a true molecular DNA or RNA based type of a test?

Ron Zwanziger

We do expect to give an update later this year, yes we do.

Operator

Your next question comes from Peter Bye - Jefferies & Company.

Peter Bye - Jefferies & Company

Just a couple of clarification, you said QAS revenue was 9.5, is that correct?

David Teitel

That’s correct.

Peter Bye - Jefferies & Company

That’s all products then? In our model we had one-one from your last year on the service segment out of it. Can you help us a little bit what the components there are?

Ron Zwanziger

That’s the product and services revenue combined and I don’t have the breakout in front of me.

David Teitel

Peter, the vast majority of the growth is all in the service line. Obviously what Ron had discussed it’s actually all the growth we’re seeing is on the service line.

Peter Bye - Jefferies & Company

Then, Ron you addressed it some on your SG&A expense in the back half of the year, but obviously we’ve got some potential product there. Is there anything now that, hey, with a little bit of different environment, the accrued portfolio product that you’d ramp the SG&A as well, if numbers continue to come through for the back half the year or would incremental SG&A be sort of almost all geared towards new product flow?

Ron Zwanziger

It’s mainly related to marketing issues around new product introductions. We have not restricted ourself as to existing product in our estimate.

Peter Bye - Jefferies & Company

Then obviously the sort of your outlook in the minimum guidance, I guess do you view the new product flow as I guess in ‘09 if it were to occur as it neutral to earnings or is it accretive and will be accretion really last way for 2010?

Ron Zwanziger

No, I mean, the accretion related to products that when we’re launching are at the best 2010 and probably even to 2011 before they kick in. I mean the products that might kick in 2010 are the ones that we introduced in 2008 that might have some impact at 2009, but though we have an impact at 2010.

But the point about our controlling expenses really relates around making sure that we achieve our commitment to the minimum of $2.50 a share and then we will increase expenses, but the point about the increase is expenses that we would do in the back half of the year, it’s both from marketing and R&D and I would expect that the majority of that increase would actually end up in the R&D not so much in the marketing, because we really have installed our organization when it comes too much to marketing.

So the increase that we are looking at while it’s both marketing and R&D most of it will be -- it’s likely to be in the back half of the year in R&D and as we said we wouldn’t do either of those if we feel it was going to risk delivering a minimum of $2.50 a share of cash EPS this year.

Peter Bye - Jefferies & Company

Just two more of the HIV p24 antigen; any color or commentary on how that’s going and maybe outlook for the rest of the year?

Ron Zwanziger

Yes, well of course when introducing a new product like this in HIV, you have to get all the customers around to evaluate and those evaluations are going extremely well. Then they have to introduce it into their protocols, before you can start selling into those same countries and all that’s ongoing. Our anticipation is that p24 will become the standard of care in screening for HIV.

Peter Bye - Jefferies & Company

Okay, great. Just one last one for Dave. Dave, it was a nice bounce back on the free cash flow, when we saw upon the website there. Given you earnings, you’re going to be at least the same or better to the next three quarters, or it looks like if you’re down on guidance. Was there anything in free cash flow there as well as in terms of taking our working capital or that will not be recurring or is that sort of a decent proxy going forward? I know you don’t give free cash flow guidance, but --?

David Teitel

Well, so we did have a decent working capital this quarter which helped a bit. So that piece of it will bounce around a little bit from quarter to quarter, but there is nothing else in that number that sort of unusual.

Ron Zwanziger

Peter, but just one thing. It might have sounded if you are assuming that the quarters are going to be –

Peter Bye - Jefferies & Company

I was just doing the math right 250, four times 61.

Ron Zwanziger

Gets you pretty close.

Peter Bye - Jefferies & Company

Right, that’s all. I wouldn’t say.

Ron Zwanziger

I will go a little easy on Q2 because traditionally it’s been our weaker quarter and it goes up a little bit. Although it’s pretty much multiplied by four, I would just, well I’m not getting get drawn into quarterly guidance. I would say that one has to realize that our Q2 tends to be a little weaker and then it tends to be slight come back a little bit in Q3 and then it’s the highest in Q4, so just as you look at the 250, don’t do a straight line.

Peter Bye - Jefferies & Company

Yes. I appreciate that we have only one and I was just doing here that I appreciate you adding color. Thank you.

Operator

Your next question comes from the line of Ashim Anand - Natixis.

Ashim Anand - Natixis Bleichroeder

Congrats guys. I think I missed the gross margins on the professional, if you can give that again?

David Teitel

Yes. In the professional space, it was 63.4%

Ashim Anand - Natixis Bleichroeder

63.4%. Now in terms of the Medicaid Advantage changes, have you guys seen any effects yet or any commentary on what you might expect?

David Teitel

We haven’t seen much so far, we have to work a little bit with our customers on this.

Ashim Anand - Natixis Bleichroeder

In terms of growth drivers towards the end of the year in professional diagnostics, most of it would be international in cardiology or what do you expect to be the main growth driver there?

David Teitel

For the balance of the year?

Ashim Anand - Natixis Bleichroeder

Yes. Towards the end of the second half of the year.

David Teitel

Well, I mean we do expect cardiology to keep growing internationally but we are getting significant growth of cardiology within the U.S. as well. So, sure we expect cardiology to contribute, but actually the other products we want to contribute as well.

Ashim Anand - Natixis Bleichroeder

Any specific ones you would like to point out may be HIV or what would you like to point out in terms of growth revenues?

David Teitel

The HIV is harder to say how that will develop because we are in the midst of the product launch in p24 and we are also going to have to have the CD team as well and so those two are going to contribute as well, but we feel we’ve got, we are in quite a role when it comes to the cardiology products and so it’s a safe a bet to assume that those will carry on growing while the infection to these ones come up.

Operator

(Operator Instructions) Your next question comes from Daniel Owczarski - Avondale Partners.

Daniel Owczarski - Avondale Partners

Yes, thanks and good morning. I had a couple of questions on health management. First Ron, are you still taking cost out of that business line or you guys pretty set there and if you are not, I mean what’s the potential timing or how much is still to go?

Ron Zwanziger

Well, I’ll then comment on the specific numbers, but to of course we are still cutting cost out there of the IT integration that we’ve talked about and we’re getting more effectiveness out of the nurse call centers, which continue to get rationalized for sure. The cost savings will continue.

Daniel Owczarski - Avondale Partners

Any timing as to when those could be completed by?

Ron Zwanziger

No, but there will be at least throughout ‘09.

Daniel Owczarski - Avondale Partners

Then anything specific on heart failure, have you published anything or do you have any data sets showing how your programs, your systems are reducing re-admissions. It seems like that’s a big focus, the new administration these unplanned re-admissions and heart failure seems to be top, top priority, but you have data that you can show that your efforts are having success there?

Ron Zwanziger

Well, of course we do, that’s why it’s almost successful health management program and why the renewal rate amongst our customers around congestive heart failure is so high because our customers can see the value what we bring and this should certainly help. These types of programs, this one in particular, some other that we have I think could be very beneficial in healthcare reform.

Daniel Owczarski - Avondale Partners

Is there any thing that you could point us to as far as published data?

Ron Zwanziger

Not at the top of my head, but I’m sure that maybe once you call and we’ll get you some reference, but that may be references out there. There was a nice article published recently in the General Family Medicine talking about treatment changes that one can expect overtime, talking about the benefit of regular BMP monitoring for patients.

Daniel Owczarski - Avondale Partners

Just a last question and move back to that Determine HIV Combo test. Who are you actually selling the test to and who is paying for, are these funded by World Health Organization or something like that or do you have an event do you have existing distribution channels out there right now?

Ron Zwanziger

Well, I mean of course we do really. We are by far the market leader going into Africa for these types of products, but a very large percentage of intend to get funded by either European or American government fund. It’s who obviously going to pay for most of this screening.

Ron Zwanziger

Operator, I think we’ll take one more question, if there is one.

Operator

Your final question comes from Matthew Scalo - Canaccord Adams.

Matthew Scalo - Canaccord Adams

It sounds like the Stirling heart failure test launch at least in the U.S. is probably the most important product we should focus in on. Could you just kind of provide us a little bit more details for Triage sales to the physician office right now kind and what the growth rate looks like on that side of the business? And then how we should look at, how you’re going to sell through the Stirling heart failure product without cannibalizing that existing market?

Ron Zwanziger

Well, that’s a very good question, because the Triage has been selling well into the doctor office segment and we’ve been experiencing some considerable growth as well as good utilization of the product one to ten, reasonable utilization of the product one to ten in the doctor’s office, but the point about the Stirling platform is because it’s fundamentally designed the simplicity of it’s design for home use.

When we introduced it initially into the doctor’s office, it will allow far more doctor’s offices to think about utilizing it simply because of its very nature and it’s easier to use. So, when you talk about cannibalization, it’s not a quiet a way to look at it when you want to look at it, the way you want to look at it is that it’s going to be an order of magnitude with more locations of physician offices who will be able to pick up the Stirling platform relative to doctor’s offices who are willing to deal with the Triage in the doctor’s office today.

Matthew Scalo - Canaccord Adams

So as physicians are seeing there, their visit volumes decrease here, their interest in that product probably increases just to be able to run more revenues to their own office I would assume.

Ron Zwanziger

I suppose you could say that, that’s generally true or that’s true in general for an office testing not just for --.

Matthew Scalo - Canaccord Adams

And would you be willing to kind of quantify what the Triage revenue in the physician office?

Ron Zwanziger

I don’t have it handy, but it’s been growing up significantly.

Ron Zwanziger

In closing, at the start of 2009, we laid out a series of goals for this year, which can be found in our investor presentation posted on our website. These included in establishing a significant market present both for the Conception Guide Indicator and Determine p24 products. The successful launch of the PMC initially in the developing world and establishing the first commercial health management program for triangulation monitoring, the substantial completion of our manufacturing and IT infrastructure and rationalization and the achievement of a minimum of 2.50 of cash basis EPS for the year.

Despite the challenges that all companies are currently facing and the reduced expectations of the economy has causes in many cases, we’ve remained on track with all of the 2009 investor commitment and in fact we’ve never been in a stronger position to achieve our long term goal. We are well positioned to deliver strong financial results for many years to come.

Over the next several years we expect increasing organic growth rates 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 EPS accompanying by growing portfolio of break through diagnostics designed specifically for home use.

Our goal remains to become the leading company in the world focused on enabling individuals to take charge of their health under medical supervision through the merging of Diagnostic and Health Management and we expect success in this approach to have a major impact on our long term financial performance.

As always, I would like to thank you all 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!