Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Alere (NYSE:ALR)

Q3 2013 Earnings Call

October 29, 2013 8:30 am ET

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

Daniel L. Leonard - Leerink Swann LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Anthony Petrone - Jefferies LLC, Research Division

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

Operator

Good morning, and welcome to Alere Third Quarter Earnings Conference Call. [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

Thank you. Good morning, and welcome to the Alere conference call to discuss our results for the quarter ended September 30, 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 the U.S. securities laws, including statements about future organic growth, potential divestitures and anticipated reductions in costs. 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 complete planned divestitures, integrate our acquisitions and recognize the expected benefits of restructuring and operational initiatives; 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 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.

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. I'm pleased to report another excellent quarter, which represents a continuation of the progress we've been making for some time and is in keeping with the commitments we've make to our shareholders. It's an exciting time at Alere, as the strategic initiatives announced during our third quarter call last year are yielding more consistent performance across multiple businesses and geographies, while augmenting our capacity to react more quickly to local challenges.

These efforts are collectively leading to improved earnings predictability. We remain keenly focused on enhancing shareholder value through our 3-point plan to accelerate the company's organic growth rate, improve operational execution, deleverage our capital structure. Successful execution of this plan should drive higher operating margins and improve free cash flow generation and increase earnings growth, which again aligns with the commitments we made to our shareholders.

The first point of the plan is improvement in our organic growth rate, and in Q3 results reflect good progress in this area, which Dave will discuss in some detail in a moment. Broadly speaking, however, the strong performance of the majority of our Professional Diagnostics, driven by sales of a variety of infectious disease and cardiology products in a number of countries around the world, highlights the breadth and the technological strength of our diagnostics portfolio.

The second point of our plan is a commitment to drive higher operating margins, improve free cash flow generation and increase earnings growth. We made good progress with respect to these objectives during the third quarter, as you will have seen from our results today already. Namal, our Chief Financial Officer will provide further details later in the call.

And the third point of our plan originally involved deleveraging to at least 4x debt-to-EBITDA by the end of 2015 through the use of excess cash flow from operations and divestitures among core operations. During the third quarter, we revised this goal to 3x debt-to-EBITDA in the same period, and we remain very confident about our ability to achieve this target. Dave, our Chief Financial Officer will provide an update on progress in the quarter and the status of divestitures and debt reductions in a moment.

Our optimism around the power and value of a technology-driven solution to Chronic Care continues to increase. Alere is well positioned to benefit from the increasing global incidence of chronic disease, coupled with the financial burden that these health care costs place on national budgets, both in the U.S. and elsewhere. Although Health Information Solutions had a challenging contracting season overall, the wins we are achieving in the HIS segment generally reflect an emerging type of customers, such as an ACO or forward thinking managed care entity, that recognizes the savings potential of an integrated diagnostics-driven approach to patient management.

Our recent agreement with Leeds in the U.K. reflects a new reality in which health care organizations, as well as governments, are looking for new ways to improve outcomes and reduce costs through better integration between information technology and chronic care management.

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

David A. Teitel

Thanks, Ron, and good morning. Adjusted net revenues for the quarter were $754.4 million, compared to $692.3 million in Q3 2012. The effect of foreign currency translation decreased Q3 2013 adjusted net revenues by $4.6 million compared to Q3 2012. Adjusted earnings per diluted share for Q3 2013 were $0.59.

By business segment, adjusted net revenues and service revenues from our Professional Diagnostics segment were $587.8 million in Q3 2013, as compared with $529.7 million in Q3 2012. Acquisitions accounted for $30.6 million of this increase, offset by a decrease in revenues of $2.3 million associated with disposition. Revenues from our North American flu sales were $18.3 million in Q3 2012, compared to $9.9 million in Q3 2012. Sales of our meter-based Triage products in the U.S. totaled $17.7 million in Q3 2013 compared to $34.9 million in Q3 2012.

Excluding the change in U.S. flu sales and Triage product sales, the currency adjusted organic growth rate for the quarter was 9.1% for our Professional Diagnostics segment. This growth rate was adversely impacted by the change in reimbursement rates, which became effective on July 1 for our U.S. mail-order Diabetes business. Excluding revenues from our U.S. mail-order Diabetes business, and considering the flu and Triage adjustments, the currency adjusted organic growth rate for the quarter was 12.8% for the remainder of our Professional Diagnostics segment.

Within our Professional Diagnostics segment, net product revenues for our Cardiology business were $116.3 million in Q3 2013, compared to $122.4 million in Q3 2012. Included in these revenues were $4.3 million of the U.S. cardiac panel sales in Q3 2013, compared to $7.1 million in Q3 2012. Q3 2013 also included $13.0 million of U.S. BNP and D-dimer sales, compared to $20.2 million in Q3 2012. Revenue from our toxicology panels for the Triage platform were $300,000 in Q3 2013, as compared to $7.6 million in Q3 2012.

The Triage segment is taking longer to recover than we would like as a result of several factors. Previous supply constraints have caused some of our customers to change their testing protocols, while our products were unavailable. Some customers are locked into supply contracts with competitors, making it difficult to change their procedures in the near term. Others are simply waiting for our full test panel to become available again.

Based upon initial efforts to regain business, we now expect that the ramp to recapture lost accounts will take longer than anticipated. Due to the combination of slower-than-expected progress and improved product yields, and in keeping with our focus on improved operational execution, we have effected a substantial reduction in force during the third quarter within our San Diego facility. Despite these challenges, we are confident in our ability to recapture a good portion of lost revenues and view these opportunities as a future long-term tailwind to our overall growth rate.

For all Triage products other than the toxicology and shortness-of-breadth panel, we now have adequate supply and continue to work with former customers of the Triage platform to switch back their testing from other alternatives. We also continue to work to develop product alternatives for our former toxicology and shortness-of-breadth panel customers, and hope to have additional alternatives available for these customers in the first half of 2014.

Net product revenues in our Infectious Disease business were $172.7 million in Q3 2013, compared to $136.6 million in Q3 2012. The increase relates principally to growth in HIV, flu and malaria revenues. Toxicology revenues were $166.5 million in Q3 2013, compared to $156.1 million in Q3 2012. Diabetes net product revenues were $53.2 million in Q3 2013, compared to $35.7 million in Q3 2012. Included in Q3 2013 revenues were $34.3 million of mail-order Diabetes sales, compared to $22.8 million in Q3 2012 and $56.2 million in Q3 -- Q2 2013. Compared to Q2 2013, the decrease in revenues reflect the impact of the CMS reimbursement reduction that we described in our last earnings call, offset by incremental sales related to our April 2013 acquisition of the Liberty Medicare fee-for-service diabetes business.

Adjusted gross margins for our Professional Diagnostics segment were 54.6% in Q3 2013, compared to 55.8% in Q3 2012 and 55.4% in Q2 2013. The decrease from Q2 2013 principally relates to the impact of Diabetes reimbursement reduction that I discussed earlier. Adjusted operating income in the Professional Diagnostics segment was $138.2 million or 23.4% of adjusted net revenues in Q3 2013, compared to $117.7 million or 22.1% of net revenues in Q3 2012.

Net revenues from our Health Information Solutions segment were $134.2 million in Q3 2013, compared to $135.1 million in Q3 2012. Adjusted gross margins from our Health Information Solutions segment were 47.0% in Q3 2013 compared to 46.2% in Q3 2012. Adjusted operating income from our Health Information Solutions segment was $7.5 million in Q3 2013, compared to $2.9 million in Q3 2012. Given the challenging contracting season, we expect weak Q4 2013 and Q1 2014 sales, and we expect to resume sequential growth, adjusted for seasonality within the segment through 2014 from the Q1 2014 base.

Product and services revenues from our Consumer Diagnostic business segment were $28.8 million in Q3 2013, compared to $24.9 million in Q3 2012, with product and services revenues related to our consumer joint venture of $21.6 million in Q3 2013, compared to $16.1 million in Q3 2012. Adjusted gross margins from our Consumer Diagnostics segment were 19.9% in Q3 2013, compared to 24.6% in Q3 2012.

Adjusted selling, general and administrative expenses were $222.5 million, or 29.5% of net revenues in Q3 2013, compared to $212.9 million or 30.8% of adjusted net revenues in Q3 2012. Adjusted research and development expense was $37.1 million or 4.9% of adjusted net revenues compared to $38.5 million or 5.6% of adjusted net revenues in Q3 2012. Combined SG&A and R&D expense was $259.5 million, or 34.4% of adjusted net revenues, compared to $251.4 million, or 36.3% of adjusted net revenues in Q3 2012, a 190 basis point decrease in operating expenses as a percentage of revenue compared to the year-ago quarter. This was achieved despite a $1.7 million charge included in Q3 2013 related to the U.S. medical device tax.

Adjusted interest and other expense was $61.7 million in Q3 2013, compared to $54.6 million in Q3 2012. Adjusted interest expense, net of interest income, was $52.0 million in Q3 2013 compared to $53.1 million in Q3 2012. Other expense in Q3 2013 includes a provision of $5.0 million to reflect an estimate of the settlement or litigation costs which we may incur associated with an ongoing dispute with a customer in our U.S. toxicology business.

Our adjusted tax rate was 27.2% of pretax income compared to 35.3% in Q3 2012. On a year-to-date basis, our adjusted tax rate was 31.8%. We believe for Q4 2014, our adjusted tax rate will be approximately 30%.

Adjusted EBITDA for the quarter was $144.9 million, which includes deductions for restructuring charges of $7.7 million, $0.5 million of acquisition-related expenses and $5.5 million of costs associated with the proxy contest. Cash flow from operations for the quarter was $60.3 million and capital expenditures were $26.3 million.

As of the end of Q3, our net outstanding debt was $3.48 billion, which reflects a $27.5 million repayment of our outstanding revolving debt made during the quarter from the proceeds of our divestiture of Spinreact. On an LTM basis, our adjusted EBITDA with restructuring, acquisition and other costs added back, was $653.5 million. As of the end of Q3, our net debt-to-EBITDA ratio was 5.3x compared with net debt-to-EBITDA ratio of 5.7x at the end of Q1 2013, reflecting continued progress towards our leverage target of 3.0x by the end of 2015.

We continue to progress in our divestiture plans around the non-core businesses that we discussed on our last earnings call. Particularly related to the reagent supply business, the preparation of carved [ph] out financial statements and audits are expected to be completed during the fourth quarter. Completion of this work is a necessary step in our preparation for a transaction.

I would now like to turn the call over to Namal, who will review progress we've made during the third quarter and provide an update on initiatives to improve our operating expense leverage and overall performance.

Namal Nawana

Thanks, Dave, and good morning. The third quarter was particularly satisfying in that it demonstrated our ability as an organization to absorb headwinds that arise and still execute at a high level and deliver against our commitments. Our focus on strong organic growth and operational effectiveness has set a platform from us to be able to deliver quality earnings on a consistent basis.

Despite pricing challenges in our Diabetes business, organic growth of 9.1% was achieved in our Professional Diagnostics business. This was achieved through strong focus and growth in key geographies and technology platforms. Notably, in the third quarter, organic growth in Africa was 45% and India grew organically by 32%, compared to the third quarter of last year. As in the second quarter, China and Latin America both continued to record excellent double-digit growth as well.

While our comprehensive Infectious Disease portfolio continues to be a key driver outside the U.S., new products, such as Afinion and epoc, are also beginning to contribute meaningfully on a global basis.

Europe has also performed very well over the last several quarters with a combination of stable revenues and improvements in the cost base. However, we remain cautious on our revenue outlook for the fourth quarter based on past behaviors of public health systems that reached their budgeted expense limits prior to the end of the year, which we saw towards the end of Q3 and are seeing in Q4. We've taken the appropriate measures to maintain our earnings outlook from Europe in light of this.

Ron and Dave have both made reference to the recovery in our U.S. Triage sales falling behind our original expectations. We have, however, made substantial improvement in product yields for the products which are now fully available, and this will continue as automation initiatives go live in Q2 of next year. We've also fully established our safety stock levels for global demand of these products. With yield improvements achieved, safety stock on hand and further automation in sight, we reduced our workforce at our San Diego facility, which manufactures Triage by 450 people in the third quarter.

On a forward basis, should demand for any of our products and services around the world fail to reach planned levels, we'll continue to dynamically review our cost structure in this manner and take appropriate steps promptly, to keep our costs aligned to revenues.

The major cost saving initiatives, which we discussed in our second quarter call, are proceeding as planned and delivered 190 basis points of improvement to total operating expenses as a percentage of revenue in Q3. These include continued implementation of global shared services with key initiatives in distribution and IT, as well as implementation and expansion of services from our global in-sourcing facility in the Philippines.

Business unit consolidations and workforce reductions in multiple units, notably Health Information Solutions, have also contributed and allowed us to reorient resources to support growth initiatives. Equally, our cost basis improvements remain well on track with respect to our stated commitments and have been achieved whilst continuing to build necessary infrastructure to accelerate further effectiveness of our global operations in the future.

An ongoing rationalization of our legal entity structure should also be mentioned as, along with other tax planning measures, this has helped reduce our tax rate to 27.2% in Q3 and an anticipated 30% in Q4 and beyond. Despite good progress in R&D, overall expense in this area is tracking well to our stated guidance $155 million annually. Ron will cover progress on our product innovations shortly.

Timely execution in our efforts to bring new products to market and expand markets for our existing products is a key imperative for our continued delivery of a strong top line. Strong organic growth of 9.1% in Q3, coupled with a 190 basis point improvement in our total operating expense and improvements in our effective tax rate to 27.2% in the quarter, have contributed to earnings per share of $0.59 as compared to $0.43 in the third quarter of 2012.

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

Ron Zwanziger

Thanks, Namal. Our confidence around our ability to achieve accelerating organic growth is particularly strong. Namal has just highlighted the performance in our key international geographies, which are expected to increasingly contribute to our top line moving forward. This momentum, combined with a recovery in Triage, plus increased contributions from our new products, such as epoc and CD4 platforms, the HIV combo launch in the U.S., along with our 2 new molecular platforms, set us up extremely well for meeting our stated objective of expanding our current mid-single digit organic revenue growth for 2013 to higher single-digit organic growth by 2015.

As announced previously in the third quarter, we will receive FDA clearance on our pre-market application to market Alere Determine HIV-1/2 Antigen/Antibody Combo in the United States. This is the first and only FDA-cleared rapid point of care test that detects both HIV-1/2 antibodies and the HIV-1 p24 antigen, which can appear days after infection and prior to HIV-1/2 antibodies become detectable. This product has just become available in the U.S. market.

On the product development front, we're excited to now be in the final stages before launch of our 2 novel rapid molecular platforms. Our first near-patient molecular platform, Alere i, which is focused on a broad range of infectious disease targets, delivers molecular performance in minutes. As mentioned last quarter, the first assay of this cartridge-based platform is a rapid flu test that delivers results in approximately 15 minutes. U.S. FDA 510(k) submission was made in September, and CLIA waiver submission was made recently. We plan to introduce this platform in select European countries during the coming respiratory season, with launch in the United States following regulatory clearance.

Two posters evaluating Alere i Flu were presented at this year's Clinical Virology Symposium, demonstrating outstanding performance that exceeds FDA criteria under the proposed reclassification scheme. We plan to build further menu content for the Alere i platform in Minutes -- the Molecular in Minutes platform. Subsequent menu items will include Strep A, RSV, C. difficile and Chlamydia. We also plan to initiate clinical trials for the Alere i Strep A assay in the U.S. this coming respiratory season.

Our second near-patient molecular platform, Alere Q, which offers quantitative result, is nearing rollout for the first product target, a combined HIV-1/2 detection and viral load monitoring test. This platform will be made available in the market in a limited fashion prior to CE regulatory approval, which is expected in the first half of 2014.

With recently updated World Health Organization HIV treatment guidelines, highlighting the need for HIV viral load testing as a standard of care, we believe that Alere Q platform is ideally placed to meet the diagnostic needs of the HIV community and improve patient outcomes.

Over time, the menu of Alere Q will be expanded to address additional therapeutic areas, such as HCV and TB. You may recall that Alere has received a significant funding from the Bill & Melinda Gates Foundation to support the development and scale up of a molecular point-of-care TB assay for the platform.

The financial and operation improvement reflected over the recent quarters can be taken as an indication that our long-term value creation strategy is beginning to generate sustainable success, and we are confident that our approach will continue to support improving financial performance and generate significant value for all Alere shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Dan Leonard from Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

You touched on this briefly, but could you spend a little more time talking about the growth drivers in Infectious Disease in geographies, product lines, whether it's sustainable or whether you're gaining share or if this performance reflects market growth rates?

Ron Zwanziger

Well, as you may -- you probably noticed that we're being cautious. Our growth rate, overall growth rate, this year through 9 quarters, I think, was 6.4%.

David A. Teitel

Through 9 months.

Ron Zwanziger

Through 9 months. It was 6.4%. And it was driven by geographies, a variety of geographies and a variety of products. We're probably gaining share in some of the markets that were gaining share -- market data is harder to get in HIV and malaria, but it's highly likely that we are gaining share. We think that our strength in distribution, our availability of a broad product will probably allow us to continue to be aggressive in the marketplace. And so we're actually quite confident about our Infectious Disease portfolio. And of course, it's going to be supplemented by the 2 molecular platforms that we're about to launch.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And then my follow-up question, can you talk about the variance in your mail-order Diabetes business? I think, last quarter, you had expected you'd do $25 million in revenue and you just did $34 million. So what were the upside surprises there?

David A. Teitel

Yes. So it was difficult going into the quarter to fully understand what potential impacts of the change would be on an overall business. That, coupled with the Liberty transaction and the timing of that, a little uncertain as to how that would convert and what the active patient base would look like. All of that came together very well in the quarter. The business performed very well. The transition for the Liberty business went particularly well. So we just saw a higher customer base than we anticipated buying in the quarter, coupled with the impact of the ability to, every 5-years place -- sell meters to that customer base was helpful.

Operator

Our next question is from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Thanks for putting up the timeline on the molecular technology. Just wondering if you could put a little more color around the go-to-market strategy, how you plan to differentiate it versus some of the entrenched players?

Ron Zwanziger

Well, I mean, it's quite easy to differentiate ourselves against the entrenched players because nobody have a true point-of-care system for either platform. So in the case of flu, we, of course, have a very good distribution system for point-of-care systems. And there are many locations that would benefit from a true point-of-care rapid test. And recall that nobody has a point-of-care system that produces results, what we are referring to as molecular in minutes. And so if you really need a result, if you've got high throughput, if you've got concerns in a medical establishment, there really is, really, no alternative but to -- for a rapid molecular test. The same argument applies, of course, for HIV. So we're quite confident in the platform. The platform will get strengthened. As we said, we're bringing out more analytes on them, which will strengthen it further. And I think molecular in minutes will, frankly, revolutionize the way infectious disease is treated over the next several years.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Fair enough. And then the second one had to do more with the -- some of the initiatives you have in the U.K., I think, with the health information exchanges going on there. And wondering if you could put a little more color around your strategy there to start of establish a standard for the NHS. It seems like that's the kind of market that has a lot of long-term potential, but maybe in the short-term, some of the standards are lacking. So I'd be curious if you have, I guess, you could argue first-mover advantage, and I'm wondering how you think that'll translate into revenue down the road?

Ron Zwanziger

Well, we're obviously very excited about it. I mean, if you think about our overall approach, which is using diagnostics to change behavior around the management of chronic conditions, having an opportunity in the U.K. to work with parts of the National Health Service there, which is acutely aware of these issues, gives us a tremendous advantage. And we're actually quite confident in being able to demonstrate the program we're doing successfully that will yield to better outcomes. And we expect that, that will give us a really good head start around the U.K. I should also mention that, as a result of that, we're seeing significant international interest since our announcement of putting in this demonstration in Leeds [ph] in the U.K. as a result of, basically, most of the world recognizing that the NHS is one of the most sophisticated, if not the most sophisticated buyer, of health care in the world, and they are acutely focused on outcomes-driven medicine, which is the way the world is moving and when -- and lead here. So we are quite confident that what we're doing will drive our diagnostic revenues growth over time significantly.

Operator

Our next question is from Jeffrey Frelick from Canaccord Genuity.

Jeffrey Frelick - Canaccord Genuity, Research Division

What should we be paying attention to for gross margin improvement? Is this more automation in the manufacturing across the country, across the world? Is it a pickup in the Cardio business? Just maybe, what should we be focusing on there?

Namal Nawana

A combination of things are going to contribute towards gross margin. Obviously, we have a broad mix of products, and so that's one element. And in this quarter, Dave talked about the effective diabetes mix in that gross margin. But for -- specifically, the questions you talked about, we have an ongoing global operations plan, which really is about effectiveness in all of our manufacturing facilities. Part of that plan includes automation, which is one supporting factor. And as we also bring Triage fully back to market over the coming couple of years, we'll see that contribute strongly as well because that's such a large volume product for us. So it's a combination of efforts in our manufacturing, operations, as well as the mix of our business.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then just a follow-up. Dave, did you just mention something on just timing of some future divestitures or can you give us an update on timing?

David A. Teitel

Well, I didn't mention, I think, specifically on timing, other than we continue to make progress. Getting audits done through the 9/30 numbers, puts us in position to work with a number of potential solutions around those divestitures. So we continue to make good progress on it. The exact timing in any transaction is always hard to predict.

Operator

We have a question from Bill Bonello from Craig-Hallum.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Great. Just a couple of clarifying questions. You made a comment about -- on the Diabetes being better-than-expected. The ability to sell meters into the customer base every 5 years. Just as we think about the revenue on that business going forward, was there anything that we should think of as sort of nonrecurring as you tap into that opportunity? Or would you expect the business to continue at kind of this level in the quarters going forward? And then I have one other, if I can.

David A. Teitel

So there was a bit of a benefit in the quarter from that meter business, which will come down a little bit in the fourth quarter and as we move forward through that process. But again, the overall customer base is firmed up very well, and we see continued opportunity around patients dislocated in the process as a number of former suppliers have sort of faded away from the business. So the business will stabilize and there are growth opportunities in it as we move forward.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

So certainly think of a run rate north of that $20 million -- quite a bit north of that $25 million that you had given us last quarter?

David A. Teitel

Yes. Maybe slightly higher than that $25 million.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

And then the only other question is just on cash flow. You give the high-level metrics but not the detail. And I'm just wondering if you can sort of help us reconcile the kind of big difference between the non-GAAP income performance and the operating cash flow performance. The non-GAAP income up, obviously, really, really nicely, and then the cash flow down pretty significantly for both the 3 months and the 9 month period. What are that big components of that difference?

David A. Teitel

Well, so a couple things. I think we had a strong close to the quarter. And therefore, our receivables are a bit higher at the end of the third quarter. Our use of working capital in the quarter was about $20 million in total, and that impacted cash flow in the quarter. And I guess, the other 2 things are both the restructuring charges in the quarter, as well as the proxy costs in the quarter combined were about $12 million in this quarter. And while they're added back for earnings perspective from a cash flow perspective, we do pay those costs. So those did impact cash generation in the quarter as well.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Of course. Okay. And then just to be perfectly clear, you included the charge, the $5 million toxicology charge, so your reported non-GAAP EPS would have been even better, right? If you had excluded that? I just want to make sure I've got that right.

David A. Teitel

That is correct. The $5 million charge was not added back in an way.

Operator

We have a question from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

So flu looked pretty strong year-over-year. Can you just comment on what drove that, whether it was due to more promotional activity or disease incidence or something else?

Ron Zwanziger

That's a really good question. We sold it, as you probably noticed, which is obviously the reason for your question, we sold a lot of flu in Q3. Virtually, all of it was stocking much higher than last year, that will clearly have an impact on Q4. And I think it's no more than customers stocking up heavily -- much more heavily than in prior years, but there was very little actual flu activity. So you can assume that all that sales are all -- is all on the shelf. And that will clearly have an impact in Q4.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Understood. Any reason why there was so much stocking activity versus the last year at this time?

Ron Zwanziger

Not particularly.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. Okay. And then just kind of on that theme, any thoughts on pricing for the Alere flu cartridge? And can you give us a sense for when we might see the Strep and RSV test and other menu rollout on the platform?

Ron Zwanziger

Well, we're not going to go into pricing until we're ready to launch. I mean, clearly, it's a premium product with significant value. And we're -- and as to the Strep, we should catch -- we should be able to catch the next season. But of course, that's all subject to the data being collected and obviously, subject to regulatory clearance. But as to your first question around pricing, it has to be said that the reimbursement is particularly attractive in the space which, obviously, gives us flexibility on pricing.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Yes. I guess, that was the nature of my question. So would the economics for the doc or the GP be as good if not better than with the rapids?

Ron Zwanziger

Sure. That's a way to look at it, but if you step back for a moment and think about it, around the world, there are many locations that don't reimburse at all for the current product, for the antibody version. Many countries in Europe, in particular, for a number of these tests, don't reimburse. But they do reimburse for molecular. And so it will also open up -- the availability will open us up in significant markets -- significant additional markets.

Operator

We have a question from Anthony Petrone from Jefferies.

Anthony Petrone - Jefferies LLC, Research Division

Just a couple of margin questions. In terms of this quarter, most of the organic growth was from emerging markets, so I'm wondering how this plays out from a price margin standpoint over time. And assuming this would be a headwind due to lower pricing, what would be the offsets as we look forward, assuming emerging market growth continues?

Ron Zwanziger

Well, I mean, as Namal already answered on the previous question about gross margin, clearly, mix comes into the picture. And if that sort of growth continues and inevitably, it has to moderate given the sort of surges that we've been seeing recently. But obviously, if it continues, our overall gross margin will come down. But of course, our profits will -- our net income, of course, will go up significantly. So of course, it will have an impact.

Anthony Petrone - Jefferies LLC, Research Division

Sure. And maybe a follow-up there. If we look at molecular testing and viral load. I mean, when you look at those launches, how much of a driver will those be in 2014 and maybe beyond that in terms of the margin?

Ron Zwanziger

Well, in 2014, actually, it will probably be a drag on margins because units -- because if we have a whole new factory built and the actual units sold when you initially ship, of course, your margins are adversely affected. But clearly, with time, as has happened actually with CD4, we have the same issue with that, but now it's contributing, you can expect that the margins will be significantly above our current average gross margin from our Professional Diagnostics business.

Anthony Petrone - Jefferies LLC, Research Division

Great. And then last one maybe for Namal. Can you maybe just review where we are in terms of SG&A leverage? There was some improvement sequentially in total OpEx as a percent of revenue, but a little bit of a step back in SG&A leverage. So what are the main areas of SG&A leverage as you move and stride toward that 28% goal at the end of 2014?

Namal Nawana

Yes. So there are slight variances quarter-on-quarter. And as I alluded to, very, very pleased with the programs that are contributing to the actual cost base improvements. And those include full implementation of our global shared services, particularly distribution and IT initiatives there. We've taken steps throughout our units in terms of consolidation of our prior acquisitions and workforce reductions that are appropriate, and those have contributed well during the course of this year. So you will see quarter-on-quarter variation, but we feel very, very good about our ability to deliver next year exiting Q4 at a 28% SG&A rate. And again, the team is executing well.

Operator

We have a question from Nicholas Jansen from Raymond James.

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

You mentioned in the Health Information Solutions segment kind of a challenging contract year, and I think some of your peers have kind of discussed that as well. But maybe can you help frame the size of the potential reset sequentially as we kind of think about 4Q and 2014 numbers?

Ron Zwanziger

Well, we historically haven't gone into wins and losses. And I think Dave pointed out that the implication for that would be that we would have a weak Q4 and a weak Q1, and then building up from that Q1 of next year. We do -- we have actually secured some new contracts, including one quite large one. But when you lose a contract, you lose them suddenly. And then when you win a big one, it builds up slowly. So that's why we've given you that information.

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

Okay. And then kind of thinking about the tax rate, I thought there was more going to be kind of an evolution versus a revolution in terms of the tax savings benefits that you guys were expecting over time as you implemented some of Namal's strategy. So what was the sudden change in this quarter and in going forward relative to comments a couple of months ago?

David A. Teitel

Yes. So I guess, a couple of things. Last quarter was about 34%. There were some onetime items, including our reserve against NOL that drove up that rate to a higher number. This quarter, there were some benefits associated with filing tax returns and truing up some estimates as part of that process, which is why we've guided towards the 30% number forward, rather than the more favorable rate in the quarter. That 30% number does reflect the changes that Namal has been discussing, and the fact that we are becoming more efficient in our international operations in terms of those being more established and getting more benefit out of the Irish entity we put in place a couple of years ago. So it feels more revolutionary just looking quarter-to-quarter, but it actually is a little bit more gradual when you look at the bits and pieces.

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

Okay. And then maybe just lastly, I saw the Journal article this morning, clearly, some interesting -- your test with -- the clear advantage. So maybe just kind of your thoughts and how that's progressing relative to expectation? I know it's very early in the launch, but how should we think about that as being a driver to the Consumer Diagnostic division longer term?

Ron Zwanziger

Well, the reaction of the U.S. public was, I suppose, as might be expected, very similar to the reaction in the European countries, where the product started moving off the shelf before the advertising kicked in. There's been a several point improvement in market share already. Even though the distribution is not complete, mass distribution is better than drugstore distribution, but distribution itself is still expanding. So I think it's gone off to, I would say, a very good start, but one that we expected.

Operator

[Operator Instructions] Our next question is from James Terwilliger from Wunderlich Securities. My apologies, he took himself out of the queue.

We have a question from Zarak Khurshid from Wedbush Securities..

Zarak Khurshid - Wedbush Securities Inc., Research Division

My question has been answered.

Ron Zwanziger

Operator? Okay. Well, assuming there are no further questions, I would like to end by saying that our third quarter results were extremely encouraging, and we're excited about the progress we've made against the plan, which we presented to shareholders and our prospects for consistently improving performance moving forward.

We obviously have turned our attention and are very focused on growth, and organic growth for 2014. We're expecting that we're comfortable with the consensus for 2013 prior to this call, and our attention is very much focused on 2014 and growth for 2014. We believe that our unique position to capitalize on the evolution of global health care, combined with a sustained focus on organic revenue growth, operation efficiency and debt reduction, will enable us to deliver long-term value for all Alere shareholders for many years to come. With your support, we'll ensure that our excellent outlook for earnings growth and value appreciation will be fully realized.

As always, I'd like thank you for your continued support and interest. Thank you very much, and have a great day.

Operator

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

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

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

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alere Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts