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Executives

Doug Guarino – Director, Corporate Relations

Ron Zwanziger – Chairman and CEO

Dave Teitel – CFO

Analysts

Eric Snyder – UBS

John Putnam – Capstone Investments

Isaac Ro – Leerink Swann

Greg Simpson – Stifel Nicolaus

Ashim Anand – Natixis Bleichroeder

Constantine Davides – JMP

Peter Bye – Jefferies & Co.

Zarak Khurshid – Wedbush Securities

Jeff Frelick – ThinkEquity

Inverness Medical Innovations, Inc. (IMA) Q4 2009 Earnings Call Transcript February 17, 2010 10:00 AM ET

Operator

Good morning, my name is Julie Ann, and I will be your conference operator today. At this time, I would like to welcome to the Inverness Medical Innovations Fourth Quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions). Thank you.

I would now like to turn the call over to Mr. Doug Guarino. Please go ahead, sir.

Doug Guarino

Thank you, Julie Ann, and good morning, and welcome to the Inverness Medical Innovations Conference Call to discuss our results for the quarter and year-ended December 31, 2009. We’re 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 on this conference call will constitute forward-looking statements within the meaning of U.S. Securities Laws. These statements reflect our current views with respect to future events or financial performance and are based on management’s current assumptions and information currently available.

Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors, including without limitation of our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring a new business activity, the impact of the recent crises in global financial markets, including the credit market, on our plans and operations, and those of our suppliers and customers, our exposures to changes in interest rates, and foreign currency exchange rates, our ability to successfully develop and commercialize product, the market acceptance of our products, continued acceptance of Health Management services by payors, 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 benefit of the 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, the presentation of the most directly comparable GAAP 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 Web site at invernessmedical.com.

As a result of the sale of our nutritional business in Q1 2010, we have treated our Nutritional business as a discontinued operation for GAAP reporting purposes. Throughout the call in an effort to provide a discussion of our results consistent with our previously reported third quarter results, we will discuss our operating results as if the Nutritional business had not been classified as discontinued during the quarter.

A reconciliation of the financial results after the classification of the Nutritional business is discontinued to those which would have been reported had this classification not occurred is available on our Web site.

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. I’m pleased to report strong financial results for the quarter highlighted by record revenues of $582 million as well as our record cash adjusted operating income of approximately $137 million.

Our adjusted cash EPS for the quarter of $0.71 represents our 14th consecutive year-on-year improvement, overall 2009 results of $2.63 and adjusted cash EPS exceeds our minimum earnings targets for the year of $2.50.

2009 was a turbulent year for the business, characterized by severe challenges early in the year, such as rising unemployment levels, the weak flu season during the first quarter of the year, broad pricing pressure on the less differentiated portion of the Health Management unit, and general headwinds related to uncertainty about the global recession. This last factor affected consumer behaviors, reducing physician office visits and use of demand for professional diagnostics, while also slowing the pace of new contract wins on the Health Management side.

During the second half of the year we were additional burdened by the interest expense from cash on the balance sheet related to the uninvested portion of our second quarter and third quarter debt offering.

Despite these challenges strong performance in our Professional Diagnostics business combined with the unexpected benefit of the H1N1 related flu sales enabled us to achieve an excellent year of financial performance. Additionally, we’re able to significantly increase our market share in a number of key areas. The end result is that we exit 2009 not only stronger financially, but in a better strategic position than ever before.

During our third quarter call we mentioned that our new integrated Health Management platform called Apollo was nearing completion. On January 1st of this year, a few minutes past midnight, the system went live with two customers, and immediately began to make a positive impact on service levels. At this point we have five clients operational on the new system, more than 3.5 million lives under management.

Apollo is supporting more than 65,000 individuals actively participating in various programs, and over 2,000 others are reporting information via in-home devices on a daily basis. So far we trained more than a 1,000 of our nurses in health coaches on the new system.

Using a sophisticated data engine for acquiring and analyzing the information combined with the state-of-the-art touch engine for communicating with individuals and the help partners, Apollo will provide the technology backbone for many of our future service offering.

The seamless launch of this platform was a meaningful milestone towards our goal of combining proprietary and diagnostics with world-class service to create the most differentiated and effective Health Management programs possible. While the full value of the system will take several years to emerge, this was promising start to the year.

Throughout 2009, our Health Management business has been both a positive contributor as well as a negative contributor to overall organic growth. Highly differentiated areas such as congestive heart failure, women’s health regulation monitoring and smoking cessation, are generating good combined overall growth rates, while less differentiating offerings without the benefit of technology, have in some cases, underperformed as a result of lower employment levels and increasing pricing pressure and contract termination.

These issues are expected to persist in 2010. However, the drivers underpinning are very strong organic revenue growth on the Professional Diagnostics side of the business, are highly sustainable, and we expect to continue to generate strong financial results from our professional business for the next several years.

We also anticipate that during that time, our Health Management business will begin to make a positive overall contribution along with our new products, which will combine to drive additional earnings growth. .

Two products were launched in 2009 hold particular promise. NGAL, which was launched outside the U.S. in the first quarter on the Triage platform continue to generate orders from a small but growing number of repeat customers. As of last week, four studies have been published on NGAL, all showing favorable results, with more than a dozen additional studies currently underway.

As we stated on previous calls, a well-accepted point-of-care market for the early diagnostics of the management of the injury would have a broad market appeal. Early indications are that NGAL has the potential to be such marker.

Second, recently launched product that has us extremely excited is our portable CD foreign analyzer, which commenced commercial sale in sub-Saharan Africa during the fourth quarter and will be rolled out to additional markets throughout 2010. This point-of-care device provides lab quality results and will be used to determine patient therapy eligibility for HIV-positive individuals and to perform frequent monitoring the patients on Lifock [ph] therapy.

In sub-Saharan Africa alone, the addressable market is greater than 20 million individuals with significant pent-up demand from government and aged organizations that have been waiting for years for such a solution

We have already shipped several hundred thousand dollars worth of product and we’re rapidly scaling up our manufacturing operations to manage what we expect to be an unusual high level of demand for the first year of a new product launch.

Despite the reality that neither of these products are likely to have a meaningful positive influence on 2010 results, with each published or the order received we’re becoming more optimistic about their potential to become significant contributors to revenue and earnings over the next few 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. As noted earlier, that our results are consistent with those that we reported in prior periods, and with the basis on which analysts estimates have been prepared, all of the numbers that I’ll speak to on the call today treat the results of our Nutritional business as if it had not been discontinued.

Revenues of 582.1 million for the fourth quarter of 2009 compared to revenues of 459.3 million from Q4 2008 and 535.8 million in Q3 2009. The effects of foreign currency translation increased Q4 2009 revenues by 11.1 million compared to Q4 2008 and by 3.0 million compared to Q3 2009 Adjusted cash earnings per diluted share for Q4 2009 were $0.71 compared to $0.66 in Q4 2008.

By business segment, product and services revenue from our Professional Diagnostics segment were 362.0 million in Q4 2008 as compared to 266.9 million in Q4 2008. Acquisitions accounted for 41.4 million of this increase with the acquisitions of ACON, T-2, and Concateno contributing $38.1 million of the change.

Foreign currency translation effects added $10.9 million of incremental revenue compared to Q4 2008. Revenues from North American flu sales increased to $39.7 million in Q4 2009 from $8.4 million in Q4 2008 as a result of the H1N1 flu outbreak.

Q4 2009 currency adjusted organic growth in our Professional Diagnostics segment was 16.0%. Organic growth was helped in the quarter by the growth in North American flu sales, but hurt by a $7 million reduction in Triage-related inventory, helped by Fisher as a result of the anticipated termination of the DMT [ph] related distribution agreement at the end of Q2 2010.

Excluding both the growth of flu sales and the adjustment to the triage inventories at Fisher, currency adjusted organic growth for the quarter was 7.1%.

Net product revenues for Biosite, Cholestech and Hemosense, excluding the end time of the Fisher triage inventory grew by a combine 10.4% in the fourth quarter of 2009, compared to the same quarter a year ago, which includes a 36.7% year-over-year growth rate for the business outside of North America.

Adjusted gross margins from our Professional Diagnostics segment were 63.7% in Q4 2009 compared to 62.5% in Q3 2009. Revenues from our Health Management segment were 145.7 million in Q4 2009 compared to 131.3 million in Q3 2009, with the acquisitions of Free & Clear, along with the impact of the CVS relationship, contributing $15.9 million of incremental revenues compared to Q3.

Revenues from our QAS subsidiary were $12.3 million in Q4 2009, a 22% increase from Q4 2008. Additionally, our recently acquired Tapestry Medical subsidiary contributed revenues of 1.8 million during the quarter.

Adjusted gross margins from our Health Management segment were 53.3% in Q4 2009 compared to 55.1% in Q3 2009. The lower margins earned in Q4, reflecting increasingly competitive market for the Health Management segment, particularly in less differentiated services.

Products and services revenue from a consumer diagnostics business segment were $30.0 million in Q4 2009, compared to 30.6 million in Q4 2008. Q4 2009 revenues included $23.0 million of manufacturing and services revenue for products and services provided with the joint venture.

Looking at the results at the joint venture level, product revenues sold by the joint venture were $52.2 million in Q4 2009 compared to $46.9 million for the year-ago period.

Adjusted gross margins from our Consumer Diagnostics segment were 17.5% in Q4 2009 compared to 19.0% in Q4 2008. Revenues from our Nutritional business were 35.9 million for Q4 2009 compared to revenues of 26.8 million in Q4 2008.

Adjusted gross margin from our Nutritional segment were 21.5% in Q4 2009 compared to 2.0% in Q4 2008. As a result of the sales in nutritional businesses in 2010, this is the last quarter that we will break out the results for this segment for any comparative period.

Selling, general and administrative expenses increased to 160.5 million in Q4 2009 from 137.3 million in Q3 2009. Compared to Q3, Q4 spending increased by approximately $1 million as a result of foreign exchange rate changes and acquisitions accounted for $11.2 million.

Additional spending increases relate primarily to the $4.0 million of discretionary bonuses recorded in Q4, $2.0 million of bad debt provision taken during the quarter for specific items and $2.5 million of incremental health care costs occurred in Q4 as a result of worse than anticipated U.S. experience during the quarter.

Adjusted research and development expense of $29.1 million or approximately 5% of revenue compared to $22.9 million in Q4 2008 and $25.3 million in Q3 2009. Q4 2009 spending increased compared to Q3 2009, reflects increased clinical trial activity during the quarter. We expect total R&D expense to continue to approximately 5% to 6% of net revenues for 2010.

At a 136.5 million, our adjusted operating earnings reflect a $33.9 million increase over the fourth quarter of 2008. Adjusted EBITDA for the quarter was 143.2 million, which is net of deductions of $6.7 million for restructuring charges and $6.1 million of acquisitions and disposition related expense.

Free cash flow for the quarter was $16.1 million, reflecting cash flow from operations of $42.2 million for the quarter offset by capital expenditures of $26.1 million.

Cash flow from operations reflect use of cash during the fourth quarter of $26.7 million for income tax payment, including $18.8 million related to a tax payment associated with the 2007 formation of our consumer diagnostics joint venture as well as $32.8 million use of cash to reduce outstanding payables and other current liabilities.

Adjusted interest and other expense was 34.3 million in Q4 2009 compared to 19.1 million in 2008. Adjusted interest expense, net of interest income was 33.7 million in Q4 2009 compared to 21.3 million in Q4 2008.

Our Q3 2009 interest expense reflects incremental interest expense related to the 400 million, 9% senior subordinated notes, which we issued in May 2009 and a 250 million, 7.875% senior unsecured notes, which we issued in August and September 2009. In Q4, our tax rate was approximately 33.8% of pre-tax income compared to 29.2% before 2008.

And now let me turn the call back over to Ron

Ron Zwanziger

Thanks, Dave. Beginning in 2010 as the economy moves towards recovery on our new products in high growth businesses play a larger role, we expect to see a gradual acceleration in our flu adjusted organic growth rates moving into the low-to-mid-teens by 2012. The growth will be accompanied by gross margin expansion in the late years.

Despite the short-term uncertainties related to the relatively low level of North American flu activity seem thus far in 2010 and somewhat increasing competitive pressures on our Health Management business that I discussed earlier, we continue to believe that we will achieve our goal of $2.90 per share of diluted EPS for 2010.

Our CE mark test for the measurement of placental growth factors ready for commercial release later this quarter to (inaudible) in Europe. The blood-based test which runs on the triage platform will aid in the diagnosis of pre-eclampsia which occurred in nearly 5 to ten pregnancies and in the major cause of maternal and neonatal morbidity. The diagnosis of pre-eclampsia requires frequent monitoring in the diagnostic markets used today perform very poorly.

The Clondiag molecular platform remains on schedule with the successful pre-clinical trial having recently concluded and the continued expectation that we will commence clinical studies in select markets during 2010.

As we previously described this platform offers true multiplexing capability using a single drop of whole blood with numerous applications other than HIV viral load to be added over the next several years, designed specifically for future introduction to the physicians office, clinics, and ultimately to the home, this platform will help support our long-term strategy for the convergence of diagnostics and health management services.

Several transactions closed in the fourth quarter which I’ll comment on briefly. Our recent agreement with Epocal makes us the exclusive distribution of their point-of-care diagnostic system in the U.S. and other key market.

The epoc system combines high position with low manufacturing cost with the benefit of Inverness’s world-wide distribution capability. It has the opportunity to rapidly penetrate the critical med care market as an enterprise wide system.

Over time we expect that the platform will undergo significant menu expansion and will also be launched into both the POL and home settings, providing quantitative cost effective tests for multiple markets. Therefore, the epoc system expands our opportunity both today in a critical care setting as well as over time in a home or a physician monitoring setting.

Separately from the distribution agreement we signed a definitive agreement to acquire the business if certain financial milestones are achieved prior to October 2014.

During the fourth quarter, we also acquired Tapestry Medical, is one of the very successful companies specialized in-home coagulation monitoring. Tapestry has a business model similar to the anti-body rapidly growing QAS subsidiary and was undergoing same high growth rate that we were experiencing.

Tapestry core strength in medical care reimburse monitoring programs is an excellent compliment to accrete QAS’s waiting towards private insurance program. And then management team (inaudible). This acquisition has solidified our position as a market leader in-home monitoring for patients on anti-coagulation therapy and provides us with a stable platform for growth in a significantly under penetrated market.

Finally, we acquired three small distributors during the quarter in Argentina, Taiwan and Korea. The one in Korea is unrelated to our Q1 acquisition of 62% of Standard Diagnostics in Korea. These distributors further extend our global reach and our ability to maximize profits from our broad portfolio of diagnostics products

And now let me open the call up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question is from the line of Eric Snyder with UBS.

Eric Snyder – UBS

Hi, good morning.

Ron Zwanziger

Good morning.

Eric Snyder – UBS

With respect to gross margin progress, I think some folks will be disappointed about the business mix driving that margin down year-over-year on an adjusted basis. To what extent can you put a floor into that on the health management side? And with respect to those businesses or the sub segments of that business that you deal are limiting opportunities there, are those businesses that you need to be end to support customers? Are they ones where you can achieve higher margins over time or exit if you can?

Ron Zwanziger

Well, we don’t particularly need them except the Apollo craft platform gives us an edge and so we can start over time getting better performance even in those areas which are undifferentiated from technology, when you think about technology from a diagnostic perspective. But we’ll be able to apply the technology from health management perspective, so we do expect to begin to turning this thing around later this year and into next year.

Eric Snyder – UBS

And given the substantial flu revenues in third quarter and fourth quarter, I know you were talking specifically about pulling forward some expenses. Can you give us a sense of to what extent expenses were pulled forward and specifically, what those may have contributed to the operating expenditures in the fourth quarter?

Ron Zwanziger

I wouldn’t say the expenses were pulled forward, but Dave did go through a number of expenses, which we incurred in the quarter, including additional clinical studies that were performed and some bonus payments that were made. So there was somewhat unusual expenses in the quarter, which we went through.

Eric Snyder – UBS

Thank you.

Operator

Your next question is from the line of John Putnam with Capstone Investments.

John Putnam – Capstone Investments

Yes, thanks. Ron, you said that organic growth in the professional area was around 7%. How does that compare to the third quarter? And also I was wondering if you might give us some outlook, if you would on flu and what you see going on there?

Ron Zwanziger

Well, answering the second first, flu, there is no flu at the moment and this late in the season, you might have thought the seasonal flu would start up, and so it’s a bit odd, but there basically is no flu’s going around.

On your first question, I think the organic growth was slightly down from the first quarter, although the cardiology side, which, of course, is our important one, was still just into double digits and the slight reduction in the organic growth rate probably reflect some issues around flu and the fact that although we had a very significant flu sales that many other visits were slightly reduced, so that’s probably the reason is somewhere in there, but we’re not particularly concerned going forward. We have had a good start to the year so far in this quarter, except, of course, no flu sales.

Operator

Your next question is from the line of Isaac Ro with Leerink Swann.

Isaac Ro – Leerink Swann

Hey, thanks for taking the question, guys. Just wondering, Dave, if you could touch on perhaps the free cash flow for the quarter, I understand it’s pretty lumpy here. Just wanted to see if there were any unusual items on the working capital this quarter that we should be thinking about?

Dave Teitel

Well, the couple unusual items were the ones I called out in the script. An almost $19 million tax payment related to a 2007 transaction, which just became due this quarter, so we did pay that off. We also took down our payables fairly substantially. We took them down by about five days. Some of that was a bit intended. There is an excess cash sweep in our credit facility and the choice was either using the cash to pay down payables or repay debt. We just felt there was a better use of cash to pay down the debt around that.

So, overall, I think we did make some progress; we didn’t make, put as much progress in the quarter in receivables as we’d hoped. That’s a little artificial. There was a $11 million payment from a distributor that came in on January 4th, so would have further helped with those numbers, but we do continue to make progress, so there were some lumpy items in the quarter that did affect that free cash flow number.

Isaac Ro – Leerink Swann

Got it, thanks, and then just secondly, just to follow-up on kind of the SG&A number for the quarter. Could you maybe give us a little more color on incremental projects, beside from the compensation you mentioned, any incremental project in SG&A or R&D that were probably on the sense before the flu quarter really came together that you then subsequently green lit?

Dave Teitel

We did spend a little bit of money in the marketing area, in sales and marketing area, in particular that was reflective of the strong quarter.

Isaac Ro – Leerink Swann

Got it, thanks. I’ll jump back in the queue.

Operator

Your next question is from the line of Greg Simpson with Stifel Nicolaus.

Greg Simpson – Stifel Nicolaus

Hey, good morning, guys. Thank you. Ron, first of all, on organic growth just to follow-up on the previous question, in Professional Diagnostics, how should we think about the X-flu, so X the distortion as we go through 2010? Do you think that high single digit, you talked about a longer term through 2012, but its high single digits in Professional Diagnostics kind of the expectation…?

Ron Zwanziger

I think you’ll see the organic growth rise even during the year and I think it will be in the high single digits I’m sure by the end of the year.

Greg Simpson – Stifel Nicolaus

Okay. It sounds like it stepped up in Q1 is probably a logical expectation?

Ron Zwanziger

Sorry, what was the question?

Greg Simpson – Stifel Nicolaus

It sounds like it stepped up or it should step up in Q1 relative to –

Ron Zwanziger

We had a good start in terms of overall sales in relative to our expectations for Q1, as I mentioned earlier, but with the exception of literally, virtually, no flu sales.

Greg Simpson – Stifel Nicolaus

Okay. Dave, couple of questions on margins, first of all, cardiology gross margins. I know you don’t break them out specifically, but, as you combine the manufacturing, I know that will be a positive in 2010, did that favorably impact cardiology gross margins in Q4?

Dave Teitel

It did a bit. We saw the overall margins go up by a little over 1% in the professional space in the quarter and some of that was the start to the benefit of Cholestech, in particular, that closure, we’ll see more of that in Q1 as that facility was completely shut down and we’re largely (inaudible) the inventory that we built for that transition.

Greg Simpson – Stifel Nicolaus

Okay. And what kind of scale in terms of cardiology gross margins might we see on a full-year basis in 2010?

Dave Teitel

We don’t give out that number, Greg.

Greg Simpson – Stifel Nicolaus

Okay. Then can I ask a question about Apollo? The cost savings and M&A from Apollo, once you shut down the other systems, will we see those in the latter stages of 2010 or is the 2011 of that?

Ron Zwanziger

It’s for sure a 2011 event. It could be a 2010 event if we manage to accelerate the conversion of our client at a faster rate. The problem with the savings is when you have multiple platforms that you’re converting to one; you have to take all the customers off the legacy platform before you get the benefit. You only get the benefit when the last customer comes off. So there tends to be a bit of a delayed effect before you get the benefit, but having said that, we might get some of that later this year, towards the second half of this year.

Greg Simpson – Stifel Nicolaus

Got you. And just one last question. I know I’m violating the rules here on question and answering, but Dave, will you guys provide a quarterly reconciliation with respect to the impact of the divestiture of the Nutritionals?

Dave Teitel

Yes, we will help you with that.

Greg Simpson – Stifel Nicolaus

Okay. Will you throw that up on the Web site or send it out to us?

Dave Teitel

We will.

Greg Simpson – Stifel Nicolaus

Okay, great, thank you.

Dave Teitel

On a general sense, we have always disclosed the segment results for the Nutritional business, (inaudible) the information that we stood the top end of the operating income level was already out. So we’ll help you with the rest.

Operator

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

Ashim Anand – Natixis Bleichroeder

Thanks for taking the question, guys. I was wondering in terms of either the new acquisitions like Kroll or Standard Diagnostics or deal with Epocal or the new products, if you can give us some idea what would be the key contributor in terms of top line growth, considering you have a 290 bottom-line growth, at least 5% of the total revenue or 10% of the total revenue, if you can guide us through that?

Ron Zwanziger

You mean the impact of those acquisitions in 2010 of the revenues of those various ones?

Ashim Anand – Natixis Bleichroeder

Exactly. So what I’m asking is that you’ve given us a bottom-line guidance and in terms of considering the fact the vitamins is going away and then there is not going to be any swine flu, I’m trying to make up the top line number, and in that regard if you can help us understand what acquisitions would be the key growth drivers on what new products we should think of in terms of the biggest impact?

Ron Zwanziger

Crudely speaking, I don’t have a precise number for you, Ashim, but crudely speaking, those various ones you listed will probably add about $100 million in revenues.

Ashim Anand – Natixis Bleichroeder

Okay. Also if you can provide the exact amount or approximately, exact amount of payment you would have for Standard Diagnostics that would be very helpful.

Dave Teitel

For the 62% that we acquired it was about $167 million.

Ashim Anand – Natixis Bleichroeder

Okay, thank you, guys.

Operator

Your next question is from the line of Constantine Davides with JMP.

Constantine Davides – JMP

Thanks. Ron, within Health Management, you’ve made several acquisitions there that can sort of cloud some of the organic growth trends there. I’m just wondering, some of the headwinds you alluded to in your prepared remarks, how are they impacting the business or if you can quantify that and maybe tell us a little bit about what the organic growth rate expectations are for sort of that core Alere, Paradigm, Matria franchise?

Ron Zwanziger

It’s quite likely that if you exclude the growth part of our business, if you look at some of the less differentiated products, almost certainly, the revenues will be down again this year. Offset by obvious growth in the differentiated parts, which continues to grow, whether it’s in smoking cessation possibly congestive heart failure and the coagulation monitoring business, which we expect will continue to grow. Overall, I would say that we will be flattish, maybe up slightly or maybe down slightly. If you take the benefit of the positive side of our growth and take it against the less differentiated part, the growth rate will be marginally up or marginally down.

Constantine Davides – JMP

Okay. And is this just some of the pressure you’re alluding to, is this mostly on the health plan side, is it on the employer side? Just any color there?

Ron Zwanziger

Last year at the back end of last year, it was more on the employer side. This year it seems to be a little bit more on the health plan side.

Constantine Davides – JMP

And one follow-up on Health Management, any update on the CVS partnership you can provide now that we’re a couple of months into that, are there any components that you’ve rolled out and just any sort of early benefits, challenges, anything of that nature?

Ron Zwanziger

It seems to be going well. I think it’s really quite too soon to measure, there’s quite a lot of interaction, quite a number of programs getting underway. So, I think it’s due to, but so far so good.

Constantine Davides – JMP

All right, thank you.

Operator

Your next question is from the line of Peter Bye with Jefferies & Co.

Peter Bye – Jefferies & Co.

Hey, thanks, guys, appreciate that. Just one clarification on that, Ron, for the DM front, when you say, flattish, up a little bit, down a little bit, is that organically, or is that including the acquired revenues from Free & Clear and that sort of stuff?

Ron Zwanziger

Including the Free & Clear.

Peter Bye – Jefferies & Co.

Okay, great. And then just maybe a follow-up on the SG&A, you gave a lot of color here on granularity on the incremental cost in Q4. Is assumption on those that you delineated won’t occur again in 2010 or the majority of them won’t or is that just a succession of that, the Street kind of didn’t model some of the year-end things going on like the bonus payments and healthcare cost. Just trying to look forward to maybe getting a 2010 and the outlook for 2010 on the SG&A, maybe the percent of revenue?

Dave Teitel

It’s fair to assume the majority of those won’t recur.

Peter Bye – Jefferies & Co.

Okay, thanks. Maybe, sorry, last one too, obviously, forward spend on R&D is a great thing. We commented on some of the accelerations on the trials you had in the past. Any maybe color on when, where, how we might see some of the – maybe what we consider more of the key data studies like EVA [ph] or some of the NGAL studies, when, where, how we might see them run?

Ron Zwanziger

I think you will be see them steadily throughout the year. We already commented that we got the 12 studies going on, and NGAL alone, and the studies going on, so there will be data on the various products coming all the way through the year.

Peter Bye – Jefferies & Co.

Okay, thanks.

Operator

Your next question is from the line of Zarak Khurshid with Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Hi, good morning, guys. Thanks for taking the questions. Thanks for the color, so far. Just curious about the recent distributor acquisitions. Did they come with contracts that would be expiring in the future? What would be the timing of realizing the benefits of those?

Ron Zwanziger

I don’t know contracts from other suppliers you mean?

Zarak Khurshid – Wedbush Securities

Yes.

Ron Zwanziger

It’s a diversified mix. Obviously, there are a whole range of those. With no particular concentration.

Zarak Khurshid – Wedbush Securities

Okay, great.

Ron Zwanziger

We stand, by the way, they are all quite small.

Zarak Khurshid – Wedbush Securities

Got it. And then talking about Tapestry and some of the other acquisitions is Tapestry physically going to be combined with the QAS facilities and just generally, any other color around facility, consolidation would be helpful?

Ron Zwanziger

There would be some. The operation is actually being run out of Tapestry not out of QAS. It’s the management team of Tapestry that’s now running the business.

Zarak Khurshid – Wedbush Securities

Okay, thank you.

Operator

(Operator instructions). Your next question is from the line of Jeff Frelick with ThinkEquity.

Jeff Frelick – ThinkEquity

Hey, Ron, could you give us a sense of the patient volume trends in physician offices in the fourth quarter and also as we kind of enter into the first quarter, I know, on Q3, you said the trends were much more positive exiting Q3, just wanted to get an update on the last quarter in Q1.

Ron Zwanziger

I’m sorry; I actually should have followed that. I didn’t actually get any very recent data, but the earlier we had some data showing off the fall off in office visits was quite sharp, the ending of H1N1 precipitated a very sharp decline. Seemed to have a decline in other areas, possibly in strep as well. So, not just in the U.S., but elsewhere. For example, the strep is at a 15-year low in Japan and the incidence of it is quite extraordinary. And that’s clearly related to the fact that people were taking so much precautions for H1N1 that it had a knock-on effect. And so there was a sharp reduction because (inaudible) that’s going to stop down (inaudible).

Jeff Frelick – ThinkEquity

Okay and then in your opening remarks, you mentioned some market share gains in Professional Diagnostics, can you highlight which businesses realized the market share gains?

Ron Zwanziger

Well, quite a number, we had gains in flu, we had gains in patients self-testing for coagulation, we had gains in HIV testing, we had quite a few. We think we even had gains in women’s health and pregnancy. We had some pretty nice gains. We may have gained a little bit in strep. We’re gaining in a number of areas.

Jeff Frelick – ThinkEquity

Great, thank you.

Operator

Your next question is from the line of Isaac Ro with Leerink Swann.

Isaac Ro – Leerink Swann

Thanks for taking the follow-up. I just want to clarity a little bit more on flu, you mentioned, Ron, that not really seeing any activity at the moment, would you care to maybe offer an outlook for the second half of this year as it relates to, if I have my numbers right, I think maybe $15 million in the second half of '08 that scaled to about $80 million in revenues in the second half of '09. Should we expect more of a reversion back to those '08 levels later this year?

Ron Zwanziger

You have $80 million of flu in the second half of the year in your model?

Isaac Ro – Leerink Swann

No, I think you guys said $40 million this quarter and –

Ron Zwanziger

Oh, we had those, sure. No, we’ve assumed, in our own estimate, including in the estimate that we’ve given you for the year, we, ourselves, assumed a relatively weak flu season, which apart from being a cautious thing to do, often happens after a high flu season. So that’s what we’ve assumed, but, of course, up until now, it hasn’t just been weak as it’s been nonexistent. But, we, ourselves, have assumed in the numbers we’ve given you a weak flu season.

Isaac Ro – Leerink Swann

Right, that’s I’m just confirming that that’s the case. We’re looking sort of maybe a reversion to '08 versus what we saw last year.

Ron Zwanziger

Yes, right.

Isaac Ro – Leerink Swann

All right, thank you.

Operator

Your next question is from the line of Greg Simpson with Stifel Nicolaus.

Greg Simpson – Stifel Nicolaus

Yes, thanks. Hey, guys, just a follow-up question, I wanted to follow-up actually on Pete’s question on the Health Management business. Ron, I think that issue is still a little bit confused. If we just forget about organic growth rates for a minute, if we just talk about absolute reported revenues in Health Management, you got growth obviously coming from Free & Clear and QAS, and you got a decline in the Matria, Alere and Paradigm Health businesses, so, on an absolute reported revenue basis, won’t those revenues be up actually fairly nicely? You were talking about overall blended organic growth rates might be up or down a little bit, right?

Ron Zwanziger

Yes, if everything combined that’ll be up.

Greg Simpson – Stifel Nicolaus

Yes, but in terms of absolute reported revenues, we should see actually a nice step up because of the acquisitions, correct?

Ron Zwanziger

We will.

Greg Simpson – Stifel Nicolaus

Okay, all right, thank you. I think that was the confusion.

Ron Zwanziger

By the way, Greg, the way you described the issue in the Health Management, your words weren’t quite right. Within the Alere Health, Alere and Matria, you seem to imply that that was the part that was weak. Only a part of that is weak. Because some of those parts are actually performing quite well too.

Greg Simpson – Stifel Nicolaus

Right, okay, all right. Thanks, Ron, I appreciate that. I just think the original answer implied that the overall reported revenues will actually be down. Thanks for the clarification.

Ron Zwanziger

Thank you.

Operator

There are no further questions at this time.

Ron Zwanziger

Okay, well, thanks very much. I would just add that during a challenging year, we had a successful and not only posting strong financial results, but also continuing to expand market share in most areas of interest to us. On of our products and testing platforms are beginning to launch and have already jumped potential to generate meaningful profits going forward. Our ability to foresee and achieve financial operation targets has been clearly demonstrated to our shareholders over the past several years and has the quality of our earnings and improving cash flow.

As the global economy returns to strengthen our convergence strategy continues to create meaningful differentiation in our approach to the prevention and management of high cost chronic diseases, we expect to see an acceleration of our organic growth rate accompanied by our gross margin expansion.

Our entire global organization has mobilized and focused on delivering the highest level of product and service quality to our customers and significant growth in adjusted cash EPS to our investors for many years to come including achieving 2.90 per share in 2010. As always I would like to thank all of you for your continued support and interest. Thank you very much and have a good day.

Operator

Thank you all for participating in today’s conference call. You may now disconnect.

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Source: Inverness Medical Innovations, Inc. Q4 2009 Earnings Call Transcript
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