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Executives

Doug Guarino - Director of Corporate Communications & Corporate Relations

Ron Zwanziger - Chairman, Chief Executive Officer and President

David A. Teitel - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Namal Nawana - Chief Operating Officer

Analysts

Jonathan P. Groberg - Macquarie Research

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Alere (ALR) Q1 2013 Earnings Call May 9, 2013 8:30 AM ET

Operator

Good morning, and welcome to the Alere Inc. conference call to discuss the first quarter 2013 results. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Doug Guarino. Please go ahead, sir.

Doug Guarino

Thanks, and good morning, and welcome to the Alere conference call to discuss our results for the quarter ended March 31, 2013. We are joined today by Ron Zwanziger, Chairman and CEO; Dave Teitel, CFO; and Namal Nawana, COO.

Before we get to that discussion, though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of U.S. securities laws. These statements reflect our current views with respect to future events or financial performance and are based on management's current assumptions and information currently available. Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors, including without limitation, our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring and new business activities, including the benefits of our recent acquisitions of Epocal and certain assets of Liberty; our exposure to changes in interest rates and foreign currency exchange rates; our ability to successfully develop and commercialize products and services; our ability to develop enhanced health information solutions through the integrated use of innovative diagnostic and monitoring devices and to recognize the expected benefits of this strategy; the impact of health care reform legislation; the content and timing of regulatory decisions and actions, including the impact of the FDA warning letter and the OIG subpoena, as well as the impact of changes in reimbursement policy and budgetary constraints, both in the United States and abroad; 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, 2012, as well as in our quarterly reports on Form 10-Q. Our company undertakes no obligation to update forward-looking statements.

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

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. We have a lot to cover today. But before we begin our discussion of Alere's first quarter results, I'd like to take a minute to address the Coppersmith and the members of its Section 13(d) group recent actions and their interest in the company. I'm sure many of you saw the letter that was issued yesterday, stating an intention to nominate a slate of 3 director candidates to stand for election at Alere's upcoming 2013 annual meeting. Alere's board and management team are committed to creating value for all our shareholders. We've had conversations with the group and we're open to hearing their input. We're focused on delivering the highest quality products and services, completing the integration and rationalization of our businesses and ensuring continued operational excellence throughout the organization. Alere's board and its management team will continue to take action that is in the best interest of all of the company and all its shareholders. We will conduct our regular process in reviewing these director nominees.

As I said, there's much to cover this morning and we're eager to discuss our quarterly results. With that said, the focus of today's conference call is to focus on earnings, and I'm pleased to report another quarter of progress across the organization, both from an operational standpoint as well as in regard to the financial objectives we laid out over the past several quarters.

During the first quarter, we continued to concentrate on improving cardiac Triage yields, and we were very pleased to see consistent improvement beginning to emerge in the second half of March on the cardiac products. This improvement has continued through to the present time and additional progress is expected. It's been approximately 1 year since Triage panel supply began to be constrained and I'd like to thank our customers and employees for persevering through this challenging period. With the improved supply, we expect to resume building the Triage business in the second half of the year, not only in the U.S., but also in those regions around the world in which expansion had been curtailed.

To accelerate our previously announced debt reduction plan to an initial target of 4x EBITDA by the end of 2015, during the past few months, we've been engaged in discussions with multiple parties concerning the divestiture of several of our non-core businesses and these multiple discussions are active and ongoing.

From an acquisition standpoint, consistent with recent history, there was little in the way of M&A activity during the quarter other than the closing of the previously committed-to acquisition of Epocal, and we expect little in the way of additional M&A activity over the next several quarters.

As you will hear from Dave, our Health Information Solutions unit posted another quarter of organic growth and an operating profit. This is a strong signal that the division has emerged from the top line headwinds that we have been confronted with for several years now, and we're confident that the unit will continue to strengthen going forward.

In addition, the rapid progress we're making in delivering health care IT solutions to large hospital systems represents a significant transformation of our business from one that has been historically focused on disease management to a health information technology-driven platform. Through our connected health approach, customers are increasingly recognizing Alere's potential to improve outcomes in chronic care treatment while reducing costs through a turnkey system that encompasses rapid diagnostics, health management and health care IT. Our connected health business showed good progress during the quarter and continued to get traction across the U.S., including promising customer wins in Pennsylvania and New Jersey. This included an expanded agreement with Virtua Health System during the quarter to deliver a comprehensive accountable care solution, which includes home monitoring, decisions support analytics and patient engagement.

And now, let me turn the call over to Dave for a discussion of our reported financial results. Dave?

David A. Teitel

Thanks, Ron, and good morning. Adjusted net revenues for the quarter were $739.9 million, compared to $672.4 million in Q1 2012 and $756.5 million in Q4 2012. The effects of foreign currency translation decreased Q1 2013 adjusted revenues by $3.3 million, compared to Q1 2012 and by $2.0 million compared to Q4 2012. Adjusted earnings per diluted share for Q1 2013 were $0.53.

By business segment, adjusted net product and services revenues from our Professional Diagnostics segment were $579.3 million in Q1 2013 as compared to $516.7 million in Q1 2012. Acquisitions accounted for $62.0 million of this increase.

Revenues from our North American flu sales were $34.3 million in Q1 2013, compared to $6.6 million in Q4 2012.

Excluding the change in U.S. flu sales and excluding the impact of the reduction in our U.S. meter-based Triage product sales, which I will discuss in a moment, the currency-adjusted organic growth rate for the quarter was 1.1% for our Professional Diagnostics segment, which I will address further in a moment. Within our Professional Diagnostics segment, net product revenues for our Cardiology business were $114.9 million in Q1 2013, compared to $138.8 million in Q1 2012. Sales of our meter-based Triage products in the United States totaled $21.6 million in Q1 2013 compared to $50.5 million in Q1 2012 and $24.3 million in Q4 2012. Included in these revenues were $4.1 million of cardiac panel sales in Q1 2013, compared to $19.3 million in Q1 2012 and $4.5 million in Q4 2012. Q1 2013 included $17.1 million of combined BNP and D-dimer sales, compared to $22.8 million in Q1 2012 and $18.5 million in Q4 2012 and toxicology panel revenues of $0.3 million in Q1 2013 as compared to $8.3 million and $1.3 million in Q1 2012 and Q4 2012, respectively.

During March 2013, we achieved a production level of 2.9 million triage tests. For our BNP and D-dimer and cardiac panel tests, we are now producing products substantially equivalent to our U.S. demand levels. With inventories of our BNP and D-dimer products now approaching historical carrying levels and with inventory of product -- panel product beginning to ramp, we plan to turn our attention by the end of the second quarter to the process of winning back customers who have opted for other alternative supplies. While this process will be challenging, given the relatively long period of supply disruption, we are eager to commence selling Triage product lines to both former and new customers for the first time in over a year. Further, we are exploring options around panel configurations for our Triage toxicology products. We have made less progress with these products and are seeking to reduce the number of drugs included in our panels from 11 to around 7 as an alternative method to increase our supply of these products in the second half of 2013.

Net product revenues from our Infectious Disease business were $189.8 million in Q1 2013 compared to $151.0 million in Q1 2012. The increase in revenues in 2012 relates to the increase in U.S. flu that I discussed earlier, as well as improvements in both HIV and non-flu respiratory products. Our Toxicology business grew from $121.7 million in Q1 2012 to $149.0 million in Q1 2013 with our recent acquisitions contributing a net $43.6 million of the revenue increase, offset in part by the decrease in Triage toxicology sales that I discussed earlier and a reduction in commercial pricing for our pain and rehab businesses implemented in early Q2 2012.

Adjusted gross margins from our Professional Diagnostics segment were 55.1% in Q1 2013, compared to 60.3% in Q1 2012 and 54.4% in Q4 2012. As compared to Q1 2012, the inclusion of $37.7 million of revenues from eScreen along with a reduction in margins as a result of the reduced U.S. Triage revenues and toxicology pain and rehab services margins accounted for most of the margin decrease. Adjusted operating income in the Professional Diagnostics segment was $134.4 million or 23% of adjusted net revenues in Q1 2013, compared to $144.4 million or 27.8% of net revenues in Q1 2012.

Net revenues from our Health Information Solutions segment were $134.2 million in Q1 2013, compared to $130.8 million in Q1 2012 and $131.0 million in Q4 2012. Compared to Q4 2012, increases in our disease and case management wellness businesses and patient self-testing businesses more than offset slightly lower margins in our women's and children's health revenues. We are particularly pleased with the year-over-year revenue growth achieved in the quarter in our disease and case management and patient self-testing businesses, reflecting the continued stabilization of our business in the period that has historically been most impacted by the timing of client terminations.

Adjusted gross margins for our Health Information Solutions segment were 44.2% in both Q1 2013 and Q4 2012. Adjusted operating income from our Health Information Solutions segment was $3.0 million in Q1 2013 compared to a loss of $2.6 million in Q4 2012, reflecting both the revenue and margin stability that I just mentioned along with a reduction in SG&A expenses of $3.7 million as we continue to focus on rightsizing our cost structure in this business.

Product and services revenues from our Consumer Diagnostic business segment were $22.3 million in Q1 2012 as compared to $22.0 million in Q1 2012 with product and services revenues related to our consumer joint venture of $17.4 million in both Q1 2013 and 2012. Adjusted gross margins from our consumer diagnostics segment were 21.1% in Q1 2013 compared to 17.5% in Q1 2012.

Adjusted selling, general and administrative expenses were $217.9 million or 24. -- 29.4% of adjusted net revenues in Q1 2013, compared to $222.2 million or 29.4% of adjusted net revenues in Q4 2012. Lower advertising expenses in our mail order Diabetes business and reduced expenses principally in our Health Management businesses accounted for the majority of the quarter-over-quarter expense decrease, offset by $2.3 million of incremental expense related to the medical device tax in the U.S., which became effective on January 1. Adjusted research and development expense was $39.4 million or approximately 5.3% of adjusted net revenues, compared to 39.9% in Q4 2012. We expect R&D expense to remain at or below $40 million per quarter in 2013.

Adjusted interest and other expense was $56.7 million in Q1 2013, compared to $37.5 million in Q1 2012. Adjusted interest expense, net of interest income, was $55.2 million in Q1 2013 compared to $48.8 million in Q1 2012. Q1 2012 interest and other expense includes $13.5 million of other income related to a final royalty termination payment received from Quidel.

In Q1, our adjusted tax rate was approximately 34% of pretax income compared to 29.4% in Q1 2012.

Adjusted EBITDA for the quarter was $153.3 million, which includes deductions for restructuring charges of $3.9 million and $0.9 million of acquisition-related expenses.

Adjusted free cash flow for the quarter was $35.0 million, reflecting cash flow from operations of $71.1 million offset by capital expenditures of $36.1 million.

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

Ron Zwanziger

Thanks, Dave. I would like now to introduce you to our recently appointed Chief Operating Officer, Namal Nawana, who joined Alere at the start of the year. Namal spent 15 years at Johnson & Johnson in various leadership roles, most recently serving as Worldwide President to one of their units where he recently managed global operations. Prior to that, Namal served in a variety of senior leadership positions in Asia and Canada. Namal's varied global operation experience, along with his hands-on experience with integrating large, complex acquisitions, made him the ideal candidate for his new role at Alere. As a result of shareholder interest in the approach that Namal plans to take towards our business, I felt it was appropriate on this particular call for you to hear directly from him what his key priorities will be. Namal will give updates from time-to-time on future calls.

Now, let me turn the call over to Namal.

Namal Nawana

Thanks, Ron, and good morning, everyone. The first few months of my tenure at Alere has been extremely busy and very rewarding. My initial focus has been on visiting as many of the key locations as possible, listening, learning and really beginning to get to know the global organization. Through this process, I've been able to develop a good set of working assumptions concerning our primary opportunities and challenges for both the near and longer term.

Drawing from this set of base assumptions, I've worked with the senior team to define a set of critical, strategic imperatives. We've prioritized key strategies and initiated tactics for the 2013 calendar year, which we've already begun to execute against.

An important first step towards executing against our goals has been a high level of reorganization within the company, creating a governance structure, which will better support tactical execution and operational effectiveness. This reorganization, which occurred late in the first quarter should result in improved P&L accountability. In addition, the new structure should support customer centricity and accelerate our efforts to break down remaining business silos to create operating expense leverage opportunities throughout our business globally.

Alere's formation over more than a decade has resulted in a complete portfolio of products and services, along with geographic reach into most major markets in the world. This has generated strong historical revenue growth, which we believe can be sustained in future through a greater focus on organic growth. The number and geographic dispersion of our business units, combined with multiple new product launches, both in the recent past and planned for in the near future, brought us to peak expenditure level of SG&A as a percentage of sales, in 2012. As such, my principal near-term financial objective is to begin generating leverage in our operating model.

Numerous initiatives have already commenced, including the creation of a global shared services team, aggregation of expenses and activities across multiple business units to obtain economies of scale, standardization of key business processes and aggressive steps to relocate support functions to lower-cost environments. I should point out these SG&A initiatives will have a particular benefit over the next year to our service-oriented businesses, and notably, Health Information Solutions, returning the business to predictable profitability while maintaining strong service levels.

Beyond SG&A improvements, we've embarked on a rigorous prioritization process to better focus our efforts on a reduced number of objectives with a bias towards global and company-wide priorities versus those that have only a local benefit. Our primary objectives include an intense focus on organic revenue growth for key platforms across our business, including Triage as it comes back online fully, as well as critical growth geographies like China. We should also note a renewed focus on our tax planning initiatives.

In summary, the organizational and leadership changes which have already been made will foster greater focus throughout the organization on operational effectiveness, as well as predictable and sustainable revenue and profit growth. While it's too soon to set out specific targets to the market, I feel confident that the changes we're making should begin to generate measurable financial benefits by the end of 2013 and substantial contributions in 2014 and beyond.

And now, let me turn it back to you, Ron.

Ron Zwanziger

Thanks, Namal. On the new product front, our near-term molecular platform development programs have continued to progress and we're on target to launch Alere Q, which is our fully integrated point-of-care rapid quantitative molecular platform before the end of the year. The first application of this platform is HIV viral load, which will be introduced outside the U.S. in the fourth quarter. Over time, the menu of the Alere Q will be expanded to address additional therapeutic areas such as HCV.

Approximately 2 months ago, we announced that the Bill & Melinda Gates Foundation awarded Alere a grant of $21.6 million plus a $20.6 million loan at below market rates to develop and launch a point-of-care molecular TB test based on proprietary isothermal NEAR amplification chemistry combined with the Alere Q platform. We expect the test cartridge to be produced at a low cost very early in the commercialization cycle as a result of this support.

We also made further progress on the molecular front as we successfully completed clinical trials on our second near-patient molecular platform, the Alere i, which is focused on broad spectrum of infectious disease targets. The first assay of this cartridge-based system is a rapid flu test that delivers results in approximately 15 minutes. We're anticipating making U.S. FDA submission later this year with subsequent menu items to include Strep A, RSV, C. difficile and chlamydia.

With our company formation substantially complete, with Triage showing signs of recovery, with Health Information Solutions showing signs of growth and with our significant pipeline of new product launches, we are confident in our ability to achieve improved operating expense leverage along with a return to our historical organic revenue growth.

And now, let me open the call up to questions. As the purpose of today's conference call is to focus on first quarter results, I would ask you to limit your questions to this topic. Operator, Denise, can you take questions for Q&A, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jon Groberg from Macquarie.

Jonathan P. Groberg - Macquarie Research

Ron, so obviously, in the first quarter here, on the revenue side, it looks like things are stabilizing a bit, getting a little bit more comfort on the Triage side of the business. I guess, can you maybe talk about, when you make the comment that you expect to get back to historical organic growth rates, maybe give us a little bit of a time frame on that and how important winning back share is on the Triage side in order for you to hit those targets?

Ron Zwanziger

Well, I think to get back to growth targets, there's sort of a number of different ways and a number of different products, including Triage. The significance of Triage is it's expanding and we're seeing a lot of demand from most countries around the world, including a number of countries in Europe, South America and obviously a number of countries in Asia. So the greater availability of product is going to help and the certainty around it is also higher. Of course, winning back customers in the U.S. may be a bit difficult, as we said, because of the long interruption. But fortunately, there's inherent demand for the nature of our products because of their immediacy and the advantage of point-of-care solutions in urgent situations where some of the -- where Triage is used. So Triage will play a factor, but we have a lot of other products that have launched and are launching, which will contribute to the growth.

Jonathan P. Groberg - Macquarie Research

Okay. And then if I could just follow up on, again, on Professional Diagnostics and, I think, about 55% since you got 1.1% adjusted gross margin in that business. Obviously, flu had a pretty good quarter. So where do you think we are in terms of outside of the elements that Namal talked about? Where do you think we are just in terms of gross margin on the Professional Diagnostics side?

David A. Teitel

So flu clearly was helpful in the quarter, offsetting the energy we're putting into Triage to get that back online. The number of tests we're making is producing a bit of a drag on earnings in the short term here, but we continue to make progress on yields and have more improvements in the pipeline. So we're optimistic that we can get that back. As I said, the pricing change we made a year ago in the Toxicology business had an impact on both gross margins year-over-year, as well as our organic growth rate in the quarter. But that business is growing very well and still has very good margins. So there's opportunities to continue to stabilize margins and hopefully begin to grow them as Triage stabilizes further.

Jonathan P. Groberg - Macquarie Research

So just to be clear, so is 1Q x flu, if we x flu, would you expect this to be the lowest gross margin for the year?

David A. Teitel

Well, so I think on a like-for-like basis, likely we are at that point. I do think you have to consider the pricing change coming in the Diabetes business, which will have an impact on gross margins effective July 1. That also has to be considered.

Operator

The next question is from Greg Simpson from Wunderlich Securities.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

So let me start -- let me follow up with organic growth. You saw the nice bounce back in Q4 to normal levels and then you dropped back. Can Dave, maybe you can go into some details. Asia has been strong, Europe's been disappointing. Can you just going into the dynamics a little bit and maybe kind of the near-term prognosis?

David A. Teitel

Sure. So Asia, the business outside the U.S, the rest of the world business continues to grow quite nicely. We saw growth in the U.S. x flu, x the Triage situation so the business is reasonably stable and growing in many of the markets it has historically grown in. The European market was down slightly year-over-year on an adjusted basis, but we feel better about Europe over the past couple of quarters. We see some stability there and certainly have seen better operating income contribution in Europe. I alluded earlier to the Toxicology business year-over-year was impacted by the Triage situation, but was also impacted by the pricing change we made at the beginning of the second quarter over year ago, which anniversary-ed this year in the pain and rehab businesses. Our sample volume in that business was up quite strongly. I think we're up about 18% year-over-year from a sample volume standpoint, which is encouraging. But the impact of the pricing change, if you exclude that, our overall organic growth rate was about 4% in the quarter, which on an overall basis, is sort of more in line with we've historically been. So those are the highlights in the quarter.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Okay. Ron, you talked about -- I don't think I'm violating your focus on the Q1 dynamics here, but you talked about the ongoing process and potential divestitures of non-core businesses, things like that. Is that focused primarily on the Health Information assets or is -- I know you guys consider Toxicology a core business at this point and specifically because of the EBITDA, but the shareholder or the letter you received that came out last night brings up an interesting point about the tax implications and things like that. And I know the big gain you would incur if you were to sell Toxicology has always been certainly an impediment to the sale of that business. That's a significant, I guess, chunk of value that the Street hasn't recognized in terms of the value of the Toxicology business. Can you maybe give a general answer, but maybe talk about kind of the process and what is exactly non-core these days?

Ron Zwanziger

So we commented before, Greg, and it really hasn't changed that we're looking at a number of peripheral businesses, all of which are profitable, particularly lab-based diagnostics. As we built the system, we picked up a number of units which are profitable and are in good shape and we're looking at divesting some of those and there is -- some of them have some scale. So there's a whole variety. We are looking at some assets within the Health Information Solutions, which possibly may be non-core. But to your other sort of more general point, we are extremely careful as we do this to make sure that we do it in a tax-efficient way. And that any divestitures we do, we do carefully not to have excessive leakage. Because one of the things you have to be careful of is not to create too much dilution as a result of selling assets. So we're very careful about how we're going about the process.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Okay. And just one final one. Namal, good to hear you on the call. Obviously, Ron, your thought on how soon do we maybe start to hear from you guys with respect to specific targets, and it's 2 calls in a row now you guys obviously talked about seeing operational improvement and things like that by the end of the year. But I mean, when and kind of what form do you suspect you'll lay out the specifics of the plans?

Ron Zwanziger

Well, we haven't decided specifically when we would make the specific announcement. I don't know if you picked up, Namal talked about some specifics around the service part and bringing back the profitability. But I think as we make some of the headway and as we get more confident as we -- again, our own confidence rises in that, I think then we'll become more specific. But there should be some significant numbers there.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Okay. I'll get back in line. But Dave, real quick, new product revenues?

David A. Teitel

You pushed the one question thing further than anyone.

Operator

And our next question is from Jeff Frelick from Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

So Ron, you talked about Cardio start returning to growth here. I guess, question really is as that starts growing -- the business starts growing, when do you taking some costs out of the system? When could we see some margin improvement in the Cardio franchise?

Ron Zwanziger

I think you'll see the improvement in profitability almost immediately as we sell the additional products, obviously. But is your question more about when we take additional expense out?

Jeffrey Frelick - Canaccord Genuity, Research Division

Correct.

Ron Zwanziger

Namal, do you want to comment?

Namal Nawana

I think the main thing with that business as we move forward on Triage coming back online, in particular, will be yields from our manufacturing lines. And I think Dave alluded to the numbers of starts we have in March, which has been a substantial increase. But we are seeing improved yields across a number of our products. And as that progresses, I think that the margins will improve.

Ron Zwanziger

It's sort of peculiar. Our ability to get back after a year of such a sharp period to being out of the market, our ability to go back in relates to the greater availability of product, which goes to the improvement in yield that we've been experiencing, not just the increased number -- the gross number that we're making. So the combination of the 2 implies that, not only are we going to sell more, but it'll be at a better margin.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then just a follow-up for Namal. Appreciate the commentary and you kind of talked about some of your goals, one being organic growth targets. Just curious, what will be the target, not necessarily this year, but what you're shooting for over the next couple of years to get that organic growth for Professional Diagnostics?

Namal Nawana

So we'll be -- again, we're not talking about forward-specific numbers at this point in time, but I would say that we see an acceleration through 2 main means: one, first of all, we've reorganized ourselves into specific business units and each of those business units have got key product platforms that they're going to focus on; and also key geographies, so we have some geographies that we have really good performance already, but that we're going to accelerate through further resource allocation. Places like China that you would expect, but more broadly, you've seen us have a couple of quarters of slower growth in Europe. We think that we can really impact that going forward. And then within the specific product drivers, we talked about closing Epocal in February. That's a strong platform for us. CD4 is a great platform for us to really see accelerated growth in the future. Dave talked about Toxicology services and all about where we were in Q1, but what we believe that business can do going forward. And I guess, I could continue down the line of our various business units, but we're very much got the teams focused on the key products as well as the key geographies that will make a difference.

David A. Teitel

Just briefly, to come back to Greg's question on new product revenues. They were $13.5 million in the quarter which included $4.7 million from Epocal and $3.1 million for CD4.

Operator

Our next question is from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

So on the infectious disease side of things, one of your competitors appears to have made significant traction with their objective rapid test reader platform. Just thinking -- just was curious how you're thinking about that potential threat? And then as a quick follow-up, could you give us just a quick update on Heart Check and kind of the long-term strategy there?

Ron Zwanziger

So on the first question, we have been very careful over the last several years to make sure that we ended up with the right technology in molecular. We're -- as we've said a number of times, we're late entering the molecular market deliberately because we couldn't find or internally develop, for that matter, technology that gave the kind of characteristics you need to win in this marketplace. But we did a few years ago finally get hold of 2 of them, which we think are the right ones. And as we said earlier in the call, already in the prepared remarks, that the flu is the first of many that's coming out. And so we think we have the sort of the right platform, which gives the right -- not only the right performance, but significantly superior performance than our current systems and will also allow us to enter into more locations and more countries. So we're quite -- so we're very optimistic about the fact that we have the right technology with the right products coming through and are very confident about it. And as we commented in our -- again in our prepared remarks, we've got good clinical results and expect a submission this year on flu and others thereafter. As to your comment on Heart Check, you may have seen that there was a publication showing the need for frequent testing. Heart Check is the only product available today in a true rapid format for monitoring of CHF. It is proving particularly useful in the connected health as we are getting deep -- more deeply involved in a complete solution for chronic care linking the patient back to the doctor electronically, being able to see what's happening in the life of the individual at home. And that's helping us tremendously in some of the -- in many of the discussions we're now having with both existing and potential customers. Heart Check is not approved in the U.S. so this applies to my comments that are applying at the moment mainly -- obviously outside of the U.S. And we're seeing tremendous interest in it and so are increasingly optimistic. Obviously, Heart Check is taking much more longer to develop and the whole concept is taking longer, but now there are published papers on it. We're seeing continued buildup of interest both from the medical side, but also from the payer side.

Operator

Our next question is from Anthony Petrone from Jefferies.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Ron, a couple on some of the Professional Diagnostics segments, one on Cardio, one on Diabetes. For Triage, you mentioned several quarters ago that a 50% recapture rate on lost accounts was possible. I'm just wondering, it seems that's a little bit behind schedule. Is that a still reasonable goal and how long will that take?

Ron Zwanziger

Well, I think that the delays have obviously made the recovery more difficult, but -- and that's true. The advantage we have is that it's a product that's very much liked and in many ways it's the only one of its kind. I mean, if you want a rapid panel product in a true point-of-care setting in the version that we have, of course it's really the only one in a single product. And so we remain very optimistic that we can battle back in the U.S. and the organization is very eager to restart selling. As we said, we expect to do that towards the end -- to start that process towards the end of this quarter. I should also say that the product has continued to do well outside the U.S., but because of the supply issue situation, we had curtailed expansion plans a year ago to deal with the problems, and we're now lifting that as well and so the overseas units are very excited about Triage. Now what was your question about Diabetes?

Anthony Petrone - Jefferies & Company, Inc., Research Division

Yes, Diabetes, it's outperformed where we have been for the past several quarters, so I'm wondering how much of the performance is still revenue synergy gains with Axis-Shield now that that's included in Alere's infrastructure. And what is the longer-term strategy in Diabetes? Does there still need to be assets added? Will there be some assets pruned from Axis-Shield? Just an update there will be helpful.

Ron Zwanziger

Well, I think that the Diabetes platform has been helped by our re-entering into the space and the fact that we chose to do it by getting closer to the patient and getting involved in the mail order business, which as you're probably aware, is going through a significant shakeup due to a pricing change through Medicare coming in July 1. But we're very well positioned to take advantage of that because we are, or we think we are or we're fairly sure we are, the low-cost provider and have set up systems to do that. We're already up to 650,000-or-so direct customers in the space as a result of buying some of the diabetes assets from Liberty recently -- buying the business from them -- a part of the business. So it's clearly going to be part of our future. Now, more specifically since you asked about Axis-Shield, ever since we took over, and we bought Axis-Shield specifically to get our hands on Afinion. It's been doing well overseas. It's going to continue to do well overseas. There's tremendous demand. In the U.S., there were some contracts, restrictive contracts which we inherited, limiting distribution, but now we've dealt with that. And just in the very recent past, we've expanded distribution and continue to expand distribution. So in a sense, although we bought Axis-Shield a while back as far as the U.S. is concerned, that restrictive contract is only just lifted. So the kind of growth that we saw and have been seeing overseas we now expect to see a significant pickup in the U.S. as well.

Anthony Petrone - Jefferies & Company, Inc., Research Division

That's very helpful. And one last one for Namal while we have you here. Namal, can you just bucket the margin expansion opportunities among the various activities? How much will come from product and service margin expansion? How much from acquisition integration and other?

Namal Nawana

It's a great question. There are multiple things that we are looking at in terms of margin expansion. What I noted earlier was our specific focus on service lines. And so we're looking very much at, first of all, being very clear on our value proposition to our customers and not compromising that. But beyond that, looking at the cost to serve, and specifically, we were just talking about diabetes. So we have initiated a global in-sourcing center in the Philippines, which we have started to upscale in the last month or so and will continue to do so going forward. And that will support us being that low-cost provider that Ron talked about. And we're exploring opportunities to broaden that initiative to some of our other business units. In terms of our control of our business, we exercise excellent control in Q1. And we don't -- not only do we believe that's repeatable, but we think we can build on that going forward on a broad basis in our businesses. With respect to our global operations, so much at the moment really depends on our yields from our Triage business, but we're looking at our global operations. As you know, we've got a very diverse set of manufacturing facilities around the world. And we believe there are further opportunities for us to, one, automate; and two, to continue our cost improvement programs in those businesses. So there are quite a number of initiatives we have in play. I talked a little bit about the global shared services initiatives. It's a very new initiative where we've created that team. And so again, over time, we expect that to deliver efficiency to our business, improved service, but also some levels of leverage. So quite a long shopping list and that's why we think over time we can have quite a substantial impact.

Operator

Our next question is from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

I wanted to ask a follow-up on technology, one regarding Diabetes and then also on the molecular technology. On Diabetes, there's obviously been -- you touched on some reimbursement pressure there. At the same time, you guys are building up the business. And I'd be curious to know sort of in the context of the reimbursement picture, what do you think the right long-term growth potential is for that end market as it relates to your technology? And then secondly, on the isothermal, am I right in understanding that, that technology is pretty differentiated and unique relative to conventional PCR? And the reason I ask is, having said that, what types of investments are you making to build up the supply chains for all the reagents as you launch the product?

Ron Zwanziger

Well, so on the first part of the question, we obviously anticipated the reimbursement change. But the question you asked about growth prospect is pretty hard. We think that it's clear that the reimbursement level cut was so high that numerous, including, by far, the majority of the companies that were in the space are going to go out of business. And so in anticipation, what we've done is we prepared ourselves to make sure that we were the low-cost supplier from the service side. We have our systems working and Namal touched on the Philippines. So we think that we're ready and so we think we'll be well positioned to absorb those -- the individual with diabetes who prefer the convenience of mail order. And so we think we're very well positioned in that space. Your question on the molecular, so the performance of our isothermal technology is to be able to provide laboratory quality results in -- in the end of point-of-care setting whether it's in the doctor's office, in clinics -- in remote clinics or in the home. And the best way to describe it from a technology standpoint is that we are extremely encouraged by the clinical results done on the flu test, which is the first one that's coming in on the isothermal platform. We're extremely encouraged by those results and we expect an application to the FDA this year.

Operator

Our next question is from Peter Lawson from Mizuho.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

This is Eric filling in for Peter. Just historically, have you -- has Alere ever had to respond to an activist investor before?

Ron Zwanziger

Alere, itself, hasn't. We dealt with one at the previous company.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Okay, so you've had some experience with that?

Ron Zwanziger

Yes.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

And then on the impacts from health care reform, we're kind of moving more into it now and has anything significantly surprised you either to the upside or the downside, either in pricing or how you deal with government contracts or anything -- any color that kind of shows us where maybe things are heading in 2 or 3 years?

Ron Zwanziger

So I suspect when you said health care reform, you were really referring to U.S. health care reform, I suspect, right? But you know there's health care reform going on everywhere in the world. And so my comment is everywhere in the world, including the U.S. What's happening in health care reform is that some large organizations, whether they are sophisticated hospital systems or health plans, are thinking through the consequences. And as they think through the strategic consequences to them, they're looking for solutions. And so we have seen -- and those solutions generally revolve around being able to understand the data so that you can take risk at some level under the accountable care model. And I don't mean accountable care as defined under the Medicare definition. I mean accountable care in the lay use of the words, accountable care per se. And so what we're seeing in the U.S. and in Europe and elsewhere, a sharp rise in interest in our connected health strategy, the way of linking data together to make sure that physicians have the best data at their fingertips, making sure that the data is properly analyzed, making sure that the diagnostic data when it's available is available accurately with the right information, that it's available on a timely basis, the decisions -- medical decisions are made on a timely basis, correct, with all the data and therefore the probability that a decision that a physician or a nurse practitioner makes are correct. And so what we're seeing is a tremendous interest in our business. And you might have noticed that we are seeing organic growth rate again in that part of the business. And although it's small at this stage, the increases we're seeing are directly related to the pressure that our customers are under, that the health care -- the entire health care business is under. And so what we're seeing is a high level of interest directly now and we're seeing increased business. And the forward-looking position is looking very, very good as a result of general health care cost pressure around the world.

Operator

Our final question is from Nicholas Jansen from Raymond James & Associates.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

How do you guys think about R&D leverage over time? Certainly, you guys have been building up new products with the Alere Q, the i and I'm just trying to think about as these products launch later this year and into next how we think about expense leverage on the R&D side longer term?

Ron Zwanziger

Well, I think that's why Dave commented that we don't expect that it to go above $40 million so inherently as a percentage of sale, it's coming down. And so much of the heavy lifting has been done. It's much harder to launch the Alere Q system because you have to develop all the technology in the first one. Same with the Alere i for the flu, you develop the entire system. And so we don't feel that there's a need to increase the expenses, but we can take advantage at the same cost level by working on the next products that come out of the platform don't cost us anywhere near as much to develop. So the way we're taking advantage of the fact that we've already had these investments is by essentially freezing the expenses at current levels. So that's how you'll see the benefit.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Yes, that's helpful. And then thinking about kind of the ACO opportunity kind of going on some of your prior comments, how do the economics work when you sign these hospital systems, these doctor partners up? How does the economics flow through your Health Information Solutions business from a revenue and a profitability standpoint over time?

Ron Zwanziger

So while in the short term, depending on the nature, in the very short term, there may or may not be profits and there aren't because we're investing so much, but the individual contracts can be profitable. What we found, and we've been doing this for a while now, is that as the customers pick up part of the piece, they realize that they need the complete picture and they're gradually acquiring more of it. And so we commented on one of the earlier ones in the call in which you're seeing the customer not only want the data exchange, they want the analytics and they want the diagnostic devices that feed into it over time. And we're finding that, that cascade event of working with a customer, helping them become more efficient so that they can become an ACO and then providing them the data as well as the diagnostic input so they can make efficient decisions, build over time. And so we're actually seeing that process now beginning to happen.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

And then one quick one for Dave. Any way you can size the headwind year-over-year from Triage from an operating income standpoint? Just trying get a sense of what growth would have been. I know you gave the revenue, but I'm sure there's expenses built in there to build up the manufacturing lines. So any operating income assumption you could say in terms of the year-over-year headwind on Triage in the quarter?

David A. Teitel

Yes, I'd rather not get all that specific on it, other than to say clearly the historical margins were significantly above our average in the Professional Diagnostics space, or they continue to be above average margins. They're down from where they were a year ago, in part because of the increased costs associated with getting the right number of units out. As I said earlier, that trend won't [ph] be in the second half of the year as we continue to make progress from a yield perspective as we expect to over the course of the balance of the year.

Ron Zwanziger

We gave you the revenues at a very high margin. The impact, I mean, is obviously -- there's been a very significant impact. And that's one of the reasons around the optimism is now that we're getting the volume, we expect to start significantly narrowing that gap and start getting some growth again.

Well, folks, the broad changes, which really relates to one of the last questions we had is the broad changes in the health care system in most of the major markets are driving the increased opportunities for our integrated offering. And as we continue to combine our new diagnostic platforms and services into an integrated technology-based solution focused on the most expensive chronic conditions, we expect to benefit from these persistent and predictable global trends. Our unique position to capitalize on the evolution of global health care, combined with a sustained focus on organic revenue growth, operating expense leverage and debt reduction over the next several quarters, we expect to deliver long-term value for all of our shareholders. As always, I'd like to thank you for your continued support and interest. And thank you very much, and have a wonderful day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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