Inverness Medical Innovations, Inc. Q2 2009 Earnings Call Transcript

Inverness Medical Innovations, Inc. (IMA)

Q2 2009 Earnings Call Transcript

July 28, 2009 10:00 am ET

Executives

Doug Guarino - Director of Corporate Relations

Ron Zwanziger - Chairman and CEO

Dave Teitel - CFO

Analysts

Erik Schneider - UBS

Zarak Khurshid [ph]

Greg Simpson - Stifel Nicolaus

Bruce Cranna - Leerink Swann

Krisnen Vogen [ph] - MTB Investments

Ashim Anand - Natixis Bleichroeder

Jeff Frelick - Thinkequity

Daniel Owczarski - Avondale Partners

Wee Dieil [ph] - Stone Harper

Presentation

Operator

Good day. My name is Antaneil and I will be your conference operator. At this time, I would like to welcome everyone to the Q2 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-answer-session. (Operator instructions) Thank you. Mr. Guarino, you may begin your conference.

Doug Guarino

Thank you, Antaneil. And good morning, and welcome to the Inverness Medical Innovations conference call to discuss our results for the quarter end June 30, 2009. We are joined today by Ron Zwanziger, Chairman and CEO; and, Dave Teitel, CFO.

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

Actual results and 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 and to recognize the expected benefits of 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 and foreign currency exchange rates; our ability to successfully develop and commercialize products; the market acceptance of our products; continued acceptance of health management services by payers, providers, and patients; our ability to develop enhanced health management programs through the integrated use of innovative diagnostic and monitoring devices, and to recognize the expected benefits of this strategy; the content and timing of decisions by regulatory authorities, both in the United States and abroad; the effect of pending and future legal proceedings on our financial performance and the risks and uncertainties described in our periodic reports filed with the Securities and Exchange Commission, including our form 10-K for the year ended December 31, 2008, 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 measures discussed and the most directly comparable GAAP financial measure is available on the company’s website at invernessmedical.com.

Finally, applicable UK laws prohibit us from making further comment regarding our pending offer to acquire Concateno PLC. And we will not be taking questions regarding that potential transaction. 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 financial results highlighted by our overall, currency adjusted, organic growth revenue of 6.5% and adjusted cash basis earnings per share of $0.57. This puts us at cash EPS of $1.17 through the first half of 2009.

And based on the strength of the quality of our year-to-date results, as well as our future expectations, we feel that we are positioned to achieve our previously provided guidance in exceeding $2.50 a share, in adjusted cash basis earnings for the full year, despite carrying the interest burden of the recent debt offering.

Our second quarter results were strong, despite continued challenges posed by the ongoing recession, as well as the temporary gross margin pressures which I’ll touch on in a moment. These effects were offset by strong performance in our professional diagnostics division, further supported by stronger than average demand for flu tests during the quarter as a result of the H1N1 pandemic. Our reported results represent our twelfth consecutive quarter of year-on-year earnings improvement.

One of the most significant ongoing challenges facing our business remains the economic downturn, particularly as it relates to lower employment figures. While from an internal standpoint, we feel that our health management business has never been stronger or better positioned for future growth, reduced employment levels have resulted in flat quarterly revenues for this division, compared with the first quarter.

However, based on several factors, including new contract wins and renewals, and important existing contracts during the second quarter, as well as the development of new offerings and technology, we’re confident that we’re well positioned to benefit from future economic recovery and to win market share for many years to come.

Another area, which bears comment, was gross margin percentage, which was down sequentially from the first quarter, despite higher than expected flu sales. Our gross margin percentage in the second quarter was negatively affected by temporary unfavorable manufacturing variances in two facilities, as well as the $5.6 million sequential reduction in royalty revenues. Adjusted for these two items, gross margin percent would have come out slightly up compared to the first quarter. Based on our view that the manufacturing issues are being corrected, we continue to expect improved gross margin performance compared with 2008, for the balance of the year.

Our numerous previously announced cost reduction programs are progressing with the relocation of Cholestech manufacturing to our San Diego facility on schedule to be completed in the fourth quarter. Despite the challenges just outlined, overall results for the quarter were favorable by both the top and bottom lines, primarily driven by the strong momentum which we’ve built up in the professional diagnostics division. Due to our confidence that the professional business is positioned for sustainable growth, we expect to continue to perform well over the next several years.

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

Dave Teitel

Thanks, Ron, and good morning. Revenues of $460.4 million earned in the second quarter of 2009, compared to revenues of $401.1 million from Q2, 2008, and $443.9 million in Q1 2009. The effects of foreign currency translation reduced reported Q2 2009 revenues by $15.6 million, compared to Q2, 2008, and increased revenues by $5.0 million compared to Q1 2009. Adjusted cash earnings per diluted share for Q2 2009, were $0.57, compared to $0.37 in Q2, 2008.

By business segment, product and services revenues from our professional diagnostic segment were $280.5 million in Q2 2009, as compared to $250.4 million in Q2, 2008. Acquisitions accounted for $14.5 million of this change, offset by $13.8 million of adverse foreign currency translation effects. Revenues from North American flu sales increased to $14.6 million in Q2 2009, from $700,000 in Q2, 2008, as a result of the H1N1 flu outbreak. North American flu sales were $21.0 million in the first half of 2009, compared to $19.5 million in 2008.

Q2 2009 currency adjusted growth in our professional diagnostic segment was 11.7%, excluding the impact of the increase in Q2 2009 flu sales, compared to Q2, 2008. Our currency adjusted organic growth for professional diagnostic segment revenues was 6.2%. Net product revenues from Biosite, Cholestech, and HemoSense, grew by a combined 9.1%, during the second quarter of 2009, compared to the same quarter a year ago, which includes a 26.4% year-over-year growth rate for the business outside of North America.

Adjusted gross margins from our professional diagnostic segment were 61.9% in Q2 2009, compared to 63.0% in Q2, 2008, with the decrease principally related to unfavorable manufacturing variances in current and connection with production in two of our plants; and the lower-than-average gross margins earned on the sale from our recently completed ACON Territory Two acquisition, as we purchased product from ACON during the transitional period.

Revenues from our health management segment were $122.5 million in Q2 2009, compared to $122.1 million in Q1 2009. Revenues from legacy Alere and Paradigm grew by approximately 1%, compared to 2008. Legacy Matria’s revenue decreased slightly to $69.5 million in Q2 2009, from $70.6 million in Q1 2009. Revenues from our QAS subsidiary were $10.1 million in Q2 2009, a 42% increase from Q2, 2008. Adjusted gross margins for our health management segment were 55.5% in Q2 2009, compared to 56.3% in Q1 2009.

Product and services revenues from our consumer diagnostic business segment were $32.0 million in Q2 2009, compared to $33.5 million in Q2, 2008. The impact of foreign currency translation reduced reported revenues in this segment by $1.8 million. Q2 2009 revenues included $24.5 million of manufacturing and services revenues for product and services provided to the joint venture.

Looking at the results of the joint venture level, product revenue sold by the joint venture was $53.4 million in Q2 2009, compared to $54.5 million for the year-ago period. Approximately half of the joint venture revenues are derived from sales outside the US, and therefore, have been adversely impacted by foreign currency translation. Adjusted gross margin from our consumer diagnostic segment were 19.9% in Q2 2009, compared to 22.4% in Q2, 2008.

Revenues from our nutritional business were $21.7 million for Q2 2009, compared to revenues of $20.0 million in Q2, 2008. Adjusted gross margins from our nutritional segment were 4.7% in Q2 2009, compared to 10.3% in Q2, 2008, and up from a negative 1.2% in Q1 2009.

Selling, general and administrative expenses increased $129.4 million in Q2 2009, from $120.8 million in Q1 2009. Compared to Q1, Q2, spending increased by approximately $1.9 million as a result of foreign exchange rate changes, and by $2.9 million as a result of a charge taken at our QAS subsidiary, the reserve for certain bad debt exposures. Additional spending increases relate to our acquisition of ACON Territory Two, and to higher variable selling expenses as a result of revenue increases in our professional diagnostic segment.

Given the continuing economic uncertainties, we will continue to emphasize expense control throughout 2009. Adjusted research and development expense was $23.1 million, or approximately 5% of revenues, compared to $24.5 million in Q2, 2008. We expect total R&D expense to continue at approximately 5% to 6% of net revenues for 2009, pending any future decision to increase certain investments.

At $98.7 million, our adjusted operating income reflects a $21.8 million increase over second quarter of 2008. Overall, we expect improvements in adjusted operating profits against comparable prior year quarters, to continue throughout 2009. Adjusted interest and other expense was $20.8 million in Q2 2009, compared to $32.0 million in Q2, 2008.

Adjusted interest expense, net of interest income, was $23.0 million in Q2 2009, as compared to $21.6 million in Q2, 2008. Our Q2 2009 interest expense reflects incremental expense related to the $400 million, 9% senior subordinated debt, which we issued in May, 2009.

Q2, 2008 other income included a $13.8 million charge related to an arbitrator’s unfavorable award, partially offset by a $2.9 million favorable royalty settlement related to prior periods.

In Q2, our tax rate was approximately 34.1% of pre-tax income, compared to 31.9% in Q2, 2008, with the increase relating primarily to higher proportional domestic income in 2009 than in 2008, and to lower royalties earned during 2009. We expect our tax rate to range from 30% to 35% throughout 2009.

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

Ron Zwanziger

Thanks, Dave. During the second quarter, we continued to make substantial progress on new product development, as well as gaining momentum with products launched over the last 12 months. In terms of recent launches, NGAL, our novel marker -- bio-marker for cardio-renal diseases assessment was introduced commercially in Europe late in the first quarter, and in Asia-Pacific region during the second quarter.

Interest in this marker remains high from clinicians seeking improved tools for earlier diagnoses and improved management of renal injury. And we remain optimistic about NGAL’s potential. At this time, patient enrollment is continuing for several study to assess NGAL’s utility for a broad range of uses.

Our Determine HIV combo-test with p24 antigen, which began commercial sales in Africa earlier this year, sets a new standard care for HIV screening. The importance of HIV testing have specifically -- the significance of identifying individuals with recent infections in order to stem the tide of transmission, was a point in emphasis at the International AIDS Society meeting held last week in Cape Town.

Our product has recently been added to the USAID waiver list of approved HIV rapid tests, enabling funds from the President’s emergency plan for AIDS relief to apply to procure the test. Based on the important role our novel diagnostic can play in helping to control the spread of HIV, as well as the broad support we are receiving from key constituencies, we believe that this novel rapid diagnostic will capture significant global market share over the next 12 to 18 months.

Clearblue Digital, with a conception guide indicator, has continued to achieve outstanding share and distribution growth in several European countries since its July, 2008 launch in our joint venture with Procter and Gamble. Specifically in the UK, Clearblue has reached 50% market share for the first time since 2002. Germany achieved overall brand leadership for the first time ever. And similar market share gains have been experienced in Spain, France, and Italy.

We expect this highly differentiated product to help drive strong sales and profitability growth in our joint venture for many years to come. We do, however, expect regulatory issues to delay US launch.

Our portable CD analyzer has now concluded clinical trials in Uganda and Germany, and demonstrated performance in those trials equivalent to laboratory based referral methods. We anticipate CE marking of the platform before the end of September, with a phased commercial launch beginning in October. Designed specifically for future introduction to the US physicians’ office clinics, and ultimately to the home, this platform will support our long term strategy for the convergence of diagnostics and health management services. We believe that this device will be a major success story for us in 2010.

We are continuing to make progress on our Clondiag molecular platform with a pre-clinical trial for the point of care measurement of HIV viral load, expected to commence before the end of the year. This platform will offer true multiplexing capability using a single drop of whole blood, with numerous applications other than viral load, to be added over the next several years.

The first home clinical trial for our Sterling CHF platform is underway, our Sterling congestive heart failure platform, which is one calendar quarter ahead of the timing we described in our last earnings call. Additionally, we are currently working with the FDA to obtain regulatory clearance for professional use of the platform, and we anticipate initiating a study to support our application the fourth quarter.

Concurrently, we are working to initiate appropriate studies later this year in the EU to obtain a CE mark. This should enable to begin to commercialize the system in Europe in 2010. And there’s great interest in remote heart failure patient testing in this region. Designed specifically for patient self-testing, we believe that this is a unique device will become a key element of our strategy for combining home diagnostics and health management over the next few years.

In the fourth quarter, we are planning a European launch of a blood-based test for the measurement of placental growth factor to aid in the diagnosis of pre-eclampsia and to be run on the Triage platform. And tests for the aid in the diagnosis of pre-eclampsia can have important implications in the management of patients, especially those who have sustained hypertensions throughout the pregnancy, and for whom blood pressure is therefore not a good indicator.

From a technology standpoint, the combination of our multiple health management IT system into a single, integrated platform is running slightly ahead of schedule. And we have signed our first two contracts with clients to go live on the new platform during the first quarter of 2010. This state-of-the-art system will provide a technology backbone for all of our future service offerings and is designed to seamlessly integrate data from devices, as well as other sources, into a comprehensive system, which will improve the care of individuals.

Clearly our R&D programs are preceding well and we fully expect to meet our previously stated goal of multiple product launches in various disease categories every year for the next several years, helping to support a steady increase of organic growth. And with that, let me open up the call to questions. Antaneil, can we do the Q&A, please?

Operator? Doug and Dave, are you there?

Dave Teitel

We are.

Doug Guarino

Yes, Antaneil?

Question-and-Answer Session

Operator

(Operator instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Erik Schneider with UBS.

Ron Zwanziger

Erik.

Erik Schneider - UBS

All right. Good morning. Was the 6% number for the -- or since the organic core growth, can you describe which areas have caused that deceleration over the last few quarters and if that’s a product or economy-driven? And if it’s economy, are those sales necessarily permanently lost? Or is there some way that we can consider them deferred?

Ron Zwanziger

Well as you probably heard that the organic growth on the cardiology is actually well above that. And so, what you’re seeing is you are seeing, in the physician office, the same issues that you saw in the earlier quarter and which we actually commented in Q4 as well. So there is a reduction of people going and having testing in the doctor’s office. And so it’s clearly recession, clearly, clearly recession-related.

Erik Schneider - UBS

That’s just more of the same there in terms of--

Ron Zwanziger

Right, we haven’t seen any trends. I would say that I think we may -- we may just have seen a bottoming out. It’s sort of hard to be specific about this, but it does seem that there maybe a bottoming out going on.

Erik Schneider - UBS

And then, can you go a little bit more on the manufacturing (inaudible) that affected gross profit. You said there were two different facilities. Give us just a sense of when you determined there was a problem, how did you take to resolve it and if it’s all load through with all the product or affected inventory that’s closed door, really?

Ron Zwanziger

Well, the two, the larger of the two in our talks over the yields went down precipitously in the quarter and it took a little while to figure out what the problem was. And it was a change in one of the chemical and one of the key materials that go into the product that had been unnoted by the supplier for years. And we didn’t know about the change. And it affected yield, and it took a while to figure it out and to correct it. It’s been corrected and yields of that but it won’t flow into the income, not all of the benefits will flow into the income statement in Q3, but it should all be back by Q4. Actually, in a way most significant than the temporary decreases, the result of the yield was the fact that we actually lost some sales as well because we were back ordered for a period as well. But that’s behind us and while there’s still some impact in Q3, it will all be gone in Q4.

Erik Schneider - UBS

And what was the impact from ACON inventory, does that fully flowed through as well or is there going to be some impact on that in Q3?

Ron Zwanziger

No, that’s different. Dave, perhaps you should explain that.

Dave Teitel

Sure. So turning at a transitional period after the acquisition, we’re continuing to buy product from ACON as opposed to manufacturing it in our A-bond facility. The delay has to do with changing over product registrations on a global basis as they fill the product. So during this period, we’re paying ACON a markup against their actual manufacturing cost in order to compensate them for their additional services. We recorded about $8.7 million of revenue related to ACON territory during the quarter and in that margin of around 36% compared to the 50% margin that ACON was enjoying pre-acquisition, with the difference being the markup to compensate them for their services.

Erik Schneider - UBS

And then just on the mirror products, could you describe what the regulatory issues related to the conception guide indicator for the US for the consumer side than the other milestones we should be looking for in, say, the second half of this year related to your other -- the professional products?

Ron Zwanziger

You mean the impact of the gross margins for the balance of the year of the new products?

Erik Schneider - UBS

I’m sorry, but related to the regulatory progress or the future commercial progress of the new products. So you noted a regulatory issue bringing the concession guide indicator into the US?

Ron Zwanziger

Right, but don’t forget, Erik, the conception guide indicator is in our SPDJ.

Erik Schneider - UBS

The joint project, right.

Ron Zwanziger

So it doesn’t come through -- it doesn't come through our gross margin line, it just, of course, affects our net income because of the regulatory delay there. And as to gross margin impact of new products into the bounds of this year, well for all year while they’re beginning to sell, I think there’s not enough there that would dramatically improve the gross margin, but of course they are helping.

Erik Schneider - UBS

Thank you.

Operator

Your next question comes from the line of Zarak Khurshid [ph].

Zarak Khurshid

Questions. Dave, I apologize, I missed the Matria number for the quarter?

Dave Teitel

$69.5 million of revenue.

Zarak Khurshid

Okay. Great. I was curious if you guys could perhaps describe the flu-channel as you were exiting last quarter and then now with the emergence of swine flu, where -- how do you guys feel about the flu channel in front of the flu and cold season here?

Ron Zwanziger

You mean the channels prior to the H1N1? We had some products in the channel but not much, not much in the channel. And I would say today we have a little bit more in the channels as we continued to sell H1N1 even after the end of Q2. So I’d say at the moment there is slightly more in the channel, but not significant numbers either before or now.

Zarak Khurshid

Okay. Thank you. And then with regards to cash flow, Dave, can you give us a breakdown there, I haven’t have enough time to look at the Web Site but CapEx, DNA, free cash flow, et cetera?

Dave Teitel

EBITDA for the quarter was $110.4 million, $110.5 million and that includes the restructuring charges of $4.7 million in the quarter and the acquisition cost of $1.7 million. So those are already deducted and getting to that number. For free cash flow standpoint, it was a very strong quarter, the strongest quarter we’ve ever had with cash flow from operations of about $112 million in the quarter offset by CapEx of about $29 million. The CapEx is a little bit higher than traditionally it’s been and it reflects the investments principally down in the health management business with the development of the new system that Ron described here earlier in the call. So in the year-to-date basis, the cash flow from operations is about $180 million, CapEx of about $50 million, with a free cash flow of about $130 million.

Zarak Khurshid

Okay, that’s it. Thank you.

Operator

Your next question comes from the line of Greg Simpson with Stifel Nicholas.

Greg Simpson - Stifel Nicholas

Hey, good morning, guys. Running a follow-up on the flu question, if I could and maybe ask you from a little different perspective beyond the immediate situation with the channel and as the swine flu continues to roll out and expand, the implication over the next couple of quarters with also been some of the changes that appear to be taking place internationally, what are the longer-term implications of what’s happened here with respect to, maybe, changing behavior in some of the OUS [ph] markets?

Ron Zwanziger

Well, interesting. You asked a question around OUS where more people, more positions are being sensitized to the availability of rapid testing for flu in general which the overseas market for flu traditionally has been very strong in Japan, but that’s been outside except the US And so you are now seeing a pick-up in a number of countries around the world, although frankly, compared to the US, it’s still quite small. But I would say that the same question arises in the US.

And although the US market and the Japanese market are far more developed, we think there’s a notable increase in the awareness amongst our primary care position around the usefulness of our rapid diagnostic to help them in their practices, And so I think the last thing, I wouldn’t like to say benefit, but it’s clearly a last thing event would be that more positions around the world are sensitized to the utility. Over active playing, that was probably going to be a consequence of what’s going on at the moment.

Greg Simpson - Stifel Nicholas

And then maybe revenue impact during the next couple of quarters as a way to adjust--

Ron Zwanziger

I don’t know. It’s hard to say. Don’t forget that we’re coming up to the flu season anyway where you expect to see revenues anyhow. So, there might be, I suppose incremental revenues but we tend to be fairly diverse by driving to the incremental (inaudible). It’s kind of basically lost in the overall numbers that we have in general. One of the advances have been fairly diverse by (inaudible) and not with all the different diagnostics that we have.

Greg Simpson - Stifel Nicholas

Dave, a couple of few, going back to the whole situation with margins and how they’re impacted in the quarter. We talked about-- Ron talked about the plan in Tokyo but looking at the HemoSense and Cholestech moves, can go you into a little more detail there? But then as you get past the short term issues and the variances that affected margins in the quarter, just reiterate the timing on that move, and when will we start to see the positive impact on margins from that look?

Dave Teitel

Sure. So touching on a couple of those points, the impact that Ron talked about was in Japan as well as in Biosite, in our facility there. The total charge in the quarter from unfavorable variances in excess of last quarter was about $2.5 million. We expect improvement on that in the third quarter, and then to see that reverse itself in the fourth quarter as we get inventory impact and the July impact of the unfavorable variances behind us. From a consolidation standpoint, HemoSense is actively, is already consolidated into a Biosite facility, so that is behind us. The Cholestech manufacturing, the new line has been installed at Biosite. It’s being validated and the process is doing quite well. So we expect that at the end of the third quarter to be done with production in CholesTech and have that shifted down to Biosite as well and we will see favorable margin impact out of that as we better absorb the overheads from the Biosite facility.

Greg Simpson - Stifel Nicholas

And so we should be looking at from a modeling standpoint, we should see some impact in Q3, but will probably be over second quarter levels and then we’ll really start to see the benefit of everything in Q4?

Ron Zwanziger

Plus all that next year, Greg.

Greg Simpson - Stifel Nicholas

Right. But I’m just saying, I’m looking at the next couple of quarters.

Ron Zwanziger

Yes.

Greg Simpson - Stifel Nicholas

Okay. And then, Dave, another question on SG&A. Were there-- I wanted to ask you about the discretionary, you mentioned a couple of issues that affected SG&A spending, really discretionary investments?

Dave Teitel

We did increase our sales and marketing and issues, in particular, in the Asia-Pacific Region and the rest of the world territory where we’re seeing a most rapid growth. So we continue to make investments in the sales and marketing sides in those businesses.

Greg Simpson - Stifel Nicholas

Great. And then one last one, we’ll get back in Ron. Ron, you mentioned it briefly. It seems like we’re picking up a lot of increasingly positive anecdotal chatter, can you just talk about that a little more detail? And what you guys were thinking, you’ve always been careful about thinking too much. But can you give us a little more detail on what you guys were thinking and seeing?

Ron Zwanziger

Well, there have been more papers and not necessarily done by ourselves, which continue to shine a favorable light on angle [ph], but you’re right to say we’re cautious. We remain cautious. But it’s continuing to look better.

Greg Simpson - Stifel Nicholas

At what point do you-- You mentioned, you wouldn’t really think too much about it until you are sure. At what point, the timing was, you think you’ll--

Ron Zwanziger

Well I think, I’m hoping that some of our, the study that we are doing will have results before the end of this year or by the end of this year. But even that won’t be definitive it will just make us a lot more comfortable with it. Maybe it will stop pointing us for particular applications and how we’ll be able to help individuals with it in specific situations. So I hope we will have more of that this year. And if that continues to be favorable, then for sure then there’ll be more of it next year as well.

Greg Simpson - Stifel Nicholas

And if things go well, what--- could we see a noticeable revenue impact from the product?

Ron Zwanziger

We have started to sell, we are selling very small quantities in a couple of countries already. But really, those are test quantities. I think there might be better revenues in 2010 and should ramp in 2011.

Greg Simpson - Stifel Nicholas

Right. Thanks, guys.

Operator

Your next question comes from the line of Bruce Cranna from Leerink Swann.

Bruce Cranna - Leerink Swann

Good morning, guys.

Ron Zwanziger

Good morning.

Bruce Cranna - Leerink Swann

A couple of little things for me, too. Ron, this quarter, was the sales particularly strong in the geography, or did you not notice any impact like that?

Ron Zwanziger

Well, I mean, sales are particularly strong. I think we were particularly pleased with the performance of our sales in the US on the diagnostic side because not only did we do well with cardiac sales, we did in a way better than we were thinking given what's been what's been happening in reduction of office visits -- doctor's office visits. And so, we were actually really quite pleased with the way they held up towards the end of the -- particularly, towards the end of the quarter, with some signs that it might be continuing, so. We're actually really quite pleased with the way -- with what we're seeing.

Bruce Cranna - Leerink Swann

Let me ask you a question -- where I'm going with this is, I remember at one point when Biosite was a sustainable company. They had at least a quarter or two during flu season where BNP sales really got pushed up by, believe it or not, folks presenting what turned out to be flu, but it actually had an impact on BNP sales. Did you see anything in this quarter -- I know it's a little early, but anything to make you think that BNP sales also maybe affected by flu presentations?

Ron Zwanziger

Well, first of all, your observation's completely correct in that we have seen BNP peaks in -- primarily in Q4s in general -- Q4s back in time and a little bit in Q1 as well. So there is -- there is a correlation between flu presentations and BNP testing. I don't actually have an answer to your question as to whether we saw any in this quarter. I'm just guessing we didn't -- do you happen to know?

Dave Teitel

I'm not sure either.

Ron Zwanziger

Oh, that's a good question. We'll get you an answer. I actually don't think -- I actually don't think there was, particularly because our units hit the -- it didn't specifically hit their numbers. But we'll check to see.

Bruce Cranna - Leerink Swann

I think what a lot of people are trying to figure out, if my model's going to be as wrong, in the second half of the year as it was this quarter--

Ron Zwanziger

You mean because you relied on revenues, you mean?

Bruce Cranna - Leerink Swann

Yes. I know you don't want to get into -- talking about flu in the second half, and whether or not we're kind of early on the ramp or whether (inaudible). But maybe, Dave, I know you gave us some helpful year-ago numbers. Would you be potentially part -- or can I talk you into parting with the year-ago second half flu revenue number?

Dave Teitel

Yes. I'll just take a second to find.

Ron Zwanziger

We'll come back to you with that later in the call while Dave looks that up.

Bruce Cranna - Leerink Swann

Okay. And I just have one other -- little things, and Ron, you were talking about NGAL, just so I'm clear on the EU product. Is it in the triage format?

Ron Zwanziger

Yes.

Bruce Cranna - Leerink Swann

Okay. And when you think about pre-eclampsia in the US, I know you mentioned that EU launched -- any idea to get when you might be thinking about US for that marker?

Ron Zwanziger

Not at the moment, but we are planning to bring the marker in to the US. I mean it's a marker. It appears to be quite a good marker. There's mounting evidence for it. We're launching it now for on the creat [ph] platform. We do expect that to be worldwide. As you're probably aware, there is a -- there is a shortage of a good pre-eclampsia marker.

Bruce Cranna - Leerink Swann

Yes, indeed. And I guess the only other number I'd like to pry from you, Ron, I think it was last year -- it might have been this quarter last year, where you were talking about home INR and how your decision -- management business might help move the needle there. You gave us a prescription number on a per month basis that you were sort of -- we thought you were at a run rate at last year. Do you have any idea where that number might be currently?

Ron Zwanziger

Actually, I should have had the number before you. I don't have the number, but it's been continuing -- obviously, given the growth we're having, it's continuing to -- it's continuing to go up significantly. We'll get you the number next time.

Bruce Cranna - Leerink Swann

Greater than last year I guess would be your answer.

Ron Zwanziger

Yes, of course it is.

Bruce Cranna - Leerink Swann

I have one more for Dave, but if he's not around, I'll have to get back in queue.

Ron Zwanziger

No, he's there.

Dave Teitel

So to answer your first question, full revenues in the second half of the year in North America last year were about $15 million, which broke out $6.7 million in Q3 and $8.4 million in Q4.

Bruce Cranna - Leerink Swann

Yes, Dave, the last -- one other question I have was, I think you gave us the growth in Biosite (inaudible) in a sense. Can you give us the dollar amount there in those three businesses?

Dave Teitel

We haven't provided those breakouts in the past, so I don't really want to start setting that precedent.

Bruce Cranna - Leerink Swann

All right, then that's all. Thanks.

Operator

Your next question comes from the line of Krisnen Vogen [ph] of MTB Investments.

Krisnen Vogen - MTB Investments

Hi. Yes, thanks. Considering the fact that in the United States there have been a number of stories in the press regarding swine flu and how schools are preparing and ramping up for the coming flu season and stuff. Given the fact that there's little difference in the way that swine flu presents in symptoms, it's very likely that there'll be a lot more demand for testing. And I was just wondering in terms of your inventory positions and ramp up in terms of swine flue, how prepared you are, what you're expecting along those lines with regard -- are there any chances that you might actually run out, that kind of thing?

Ron Zwanziger

Well, that's a good question. We are making preparations, and we understand what all the various options are, and what all the potentials are. We also understand where all the pitfalls are. Flu has a habit of turning on a dime so you have to be a little careful. Fortunately, our flu has quite a long shelf life, so you can take some risk with inventory, which is what we're doing. We're beginning to -- we have been, for a while, building inventory in anticipation of the possibility. But we're being -- we can -- we're being prudent about it.

Krisnen Vogen - MTB Investments

Okay. Thanks. I mean I was just wondering, what are you expecting in terms of the order of magnitude? Is it like twice as many tests this coming season? I mean I know it's very difficult to do, but I'm just kind of trying to get inside--

Ron Zwanziger

It's impossible to -- it's impossible to know. What we have to do is to build a manufacturing system that's flexible. So have inventory around if there's a surge. And then if there's a surge, ramp up production at multiple facilities to deal with -- to deal with the surge, which is what we did with -- when H1N1 hit. And while we -- we're very low on inventory and for a few days we're out, we basically, for practical purposes, managed to -- to deal with the supply issue throughout. And I think we might have been the only company to basically not stock out for any length of -- for any period of time.

Krisnen Vogen - MTB Investments

Okay. Great, thanks.

Operator

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

Ashim Anand - Natixis Bleichroeder

Thanks. Ron, big picture question, and if you can give some highlights on what your costs are. So this is regarding healthcare reform. Everybody's talking about it. And diagnostics and health medical (inaudible) that you both get affected by it, and of course, there are conversions too. And also, you're aware that Alere was the (inaudible) is what their -- in Washington talking with regulators over there. Any talks on how healthcare reform would affect these two business and the conversions?

Ron Zwanziger

Well, I'll comment two ways. I mean if by healthcare reform you only mean expanded use of the universal coverage, which is what that means to a large number of politicians in Washington. And it's that -- ends up being the outcome, which I doubt, and that all you have is expanded coverage for more people with primary care, then we'll benefit.

If by healthcare reform you mean that -- that Washington to stand up to what they're elected to do and actually deal with controlling the rise in healthcare costs, then of course we'll benefit because so many of our services go to the heart of that issue. And if you're a total cynic and you think that Washington's going to completely mess it up and there won't be any healthcare reform, which means cost to healthcare will continue to explode, then more and more of the payers need our services to help them reduce costs.

So I think whichever -- whichever outcome ends up being, I think we'll do fine for, frankly, the simple reason that our products are designed to lower healthcare costs by enabling individuals to get treated away from expenses. And this is so -- I think whichever way healthcare reform goes, I think we should be fine.

Ashim Anand - Natixis Bleichroeder

Okay. Thanks. Another not bigger picture -- not bigger, but a little bit big picture question about -- this is about Clondiag molecular diagnostic platform. If you can kind of talk to us within some self-computed dynamic in terms of directly computing the molecular diagnostic guides or just bringing the molecular part to the point of care. And when do you expect to get some revenue up tick?

Ron Zwanziger

We should have revenues next year. But look, we're not trying to use the Clondiag platform to compete, in the sense, to elaborate against other platforms. I mean theoretically and in a practical sense, that's actually quite doable. I mean it is a technology that could be used in that way. But it's not the way we are applying it. We're expecting to use that technology in the form that you know our products to be, which are physician office-based tests or one or two at a time ultimately aimed at applications that individuals can do on their own. And so we're not planning to use the Clondiag platform in the central line.

Ashim Anand - Natixis Bleichroeder

And in terms of the joint -- the venture with Procter & Gamble, the top process (inaudible), and probably their delivering -- they will be able to sell more for less. In that regard and other respects, how has been the experience and how is it trending? I know the currency has been in effect, and all that. But other than that, just in terms of sellings and leverage that you were expecting, how's your experience with that?

Ron Zwanziger

Well, we are getting leverage, and do so for less, and you've seen it in a number -- and you've seen it and we've seen it in a number of countries. Of course, it's a bit hard to interpret given the impact -- the viciousness of the recession on branded products. Although I described gains before, significant gains in Europe, which are all branded gains -- significant branded gains, that's against the fact that our private label business is doing particularly well because we also have a significant private label business, so. It's a bit -- so it's a little masked by the recession. But I would say that we are seeing the -- we are seeing some benefits on the branded side.

Ashim Anand - Natixis Bleichroeder

Okay. And finally, you probably told us before, but I've forgotten. Pima is possibly for -- is that launched in Africa or it's going to be launched shortly?

Ron Zwanziger

We have shown it publicly at the Cape Town facility, and we're expecting to ship later in the year. And we expect to ship several hundred units before the end of the year. The performance on the product is strikingly good. I'm extremely pleased -- we're extremely pleased with the performance of the product.

Ashim Anand - Natixis Bleichroeder

Great. Thanks.

Operator

Your next question--

Ron Zwanziger

Operator, are there any more questions?

Operator

Yes. Your next question comes from the line of Jeff Frelick with Thinkequity.

Jeff Frelick - Thinkequity

Hey, Ron. So you commented on the position of (inaudible) being a little bit late summer to Q1. Can you give us a sense -- early read on 3Q? Is this trend continuing? Are you starting to see into the business a little up tick, or at least kind of stabilize, any comments there?

Ron Zwanziger

Well, I can tell you what we're seeing, but I would caution you against generalizing. I mean we do think that if it towards the end of the quarter that it has been through for early in July that -- there seems to be a bit of bottoming out. But if it's very hard to tell if the bottoming out is recession related or whether it's related to the fact that there are more visits because of H1N1 and it's causing other tests to be utilized.

And it's very hard to de-convolute what's actually going on. So at the practical level, we are seeing some stabilizing, but it's a little uncertain as to why we're seeing it. And it's very hard to get to the bottom of that. There is a bit of -- there is quite strong couple of things we're seeing the bottoming out. Personally, I'm skeptical.

Jeff Frelick - Thinkequity

And then, tell us how this relates to your relationship with physician distributors. You must be becoming a more important, larger portion of their business as you grow, as you add more products. Can you semi-quantify how that's improved over the last three years, either as percentage of revenues or are you a top 10 supplier, top five supplier for your distributor partners now?

Ron Zwanziger

Well I mean, I can't comment as to -- as to those numbers. But I will tell you that the relationship we have with the major physician office distributors has improved immensely over the last several years, and not for all of our products, but for most of our products. They're the market leader, and we're getting tremendous support from our distributor partners. And we continue to work with them. Our sales forces are working very well together. And generally speaking, that whole relationship has proven no end in the last few years.

Jeff Frelick - Thinkequity

And shall we expect -- or as we look for any programs with your partners here in the second half of the year, maybe to capture share or further penetrate accounts? Anything along those lines that really get them focused in the back half of the year.

Ron Zwanziger

Well, we're always into share gains.

Jeff Frelick - Thinkequity

Anything unusual?

Ron Zwanziger

No. I'm sure there'll be promotions of different kinds as we've done in previous years.

Jeff Frelick - Thinkequity

Okay. And then maybe last question for Dave, with respect to gross margin expansion plans, what's going to be the key driver or drivers over the next year or two? Is it mainly new product introductions?

Dave Teitel

Well, it's new product introductions for sure. But it's also completion of the manufacturing transitions that we've talked about. So finalization of the closure of HemoSense, the closure of our genopath facility right this year or next. So there are a number of continuing programs that will continue to drive gross margin expansion.

Jeff Frelick - Thinkequity

Okay. Thank you.

Operator

Your next question comes from the line of Daniel Owczarski with Avondale Partners.

Daniel Owczarski - Avondale Partners

Ron, can you talk a little bit about the cardiology segment, specifically the overseas where you're seeing strength? Is it geographically? Is it by product? Or is it just big growth rates because you didn't have much there to begin with?

Ron Zwanziger

Well, in our case is it's driven by the latter. I mean there just wasn't much there. But we're seeing growth -- we're seeing growth everywhere and we're seeing growth in our products. Where we're not seeing growth in some product is where we don't have them registered, but we've applied the registration for major markets. And we're getting registration. I think we may have mentioned last time or maybe it happened just after last -- to call we got the last deck approval in Japan.

And so we are expanding the regulatory applications. And it's really open -- it's really very much wide space for us. I mean we're expanding. I think Dave quoted you a number, an increase. And we expect to continue to see significant cardiology expansion around the world for a very long time.

Daniel Owczarski - Avondale Partners

Okay. And then just switching to health management, you had touched on this IT project, and Dave put some numbers to it. I mean what -- can you talk about that a little bit more? I mean what makes it so unique or what does that bring to the table that's going to give you a big competitive advantage.

Ron Zwanziger

Well I mean, as we've said, we've already picked up two orders for next year. I mean the issue is how you communicate effectively with patients, how to make sure that their positions are onboard with the information, and to make sure that the information is available to physicians, and to do it in a standardized form. And this platform we're developing does all of that. So it's all the way from helpers, and enters -- to find out information, to have the information stored, to have it accessed, to have it accessed by the professional and by the healthcare professional, by insurance companies, and so on.

It's a complete -- it's bringing all the tools that we've had in our different units and doing them into a standard form, which is on an IT platform, which is theoretically expandable to the population base. Looking at the US version, it's essentially expandable to the entire population. So we think this kind of standard is what's needed in healthcare in general and a large -- the large insurance companies very much on top of this.

Daniel Owczarski - Avondale Partners

And then so the ones that want to go live for next year, are these existing customers wanting to upgrade? Or are these new contracts for you?

Ron Zwanziger

Well, it's actually existing customers and existing customers who as a result of it expanding their services with us further.

Daniel Owczarski - Avondale Partners

Okay. Thank you.

Operator

Your next question comes from the line of Wee Dieil [ph] with Stone Harper.

Wee Dieil - Stone Harper

Just on note, any other cash used other than the CapEx that you showed a cash flow from offices over $100 million and $29 million of CapEx? It doesn't look like net debt has moved some last quarter.

Dave Teitel

Yes. That's a question of rather cash usage, primarily some of the payments for ACON. The ACON T2 acquisition, we've made about $105 million, so. We'll publish a full cash flow obviously in the Q.

Wee Dieil - Stone Harper

Okay. And with the restricted cash for--?

Dave Teitel

It's for the acquisition of Concateno.

Wee Dieil - Stone Harper

Okay. Good. Thank you.

Ron Zwanziger

Okay, operator, I think we'll wrap it up there. I'd just like to say that by providing our cutting edge health monitoring and support programs, which enable individuals to take charge of their health, we have an opportunity to offer compelling returns to payers and drive major change in the way healthcare is practiced over several years. Through this strategy, we believe that we have the opportunity to achieve outstanding results for both our customers and our investors. And with that, as always, I'd like to thank you all for your continued support and interest. Thanks very much, and have a good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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