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Alere (NYSE:ALR)

Q4 2013 Earnings Call

February 06, 2014 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

Jonathan P. Groberg - Macquarie Research

Daniel L. Leonard - Leerink Swann LLC, Research Division

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

Raj Denhoy - Jefferies LLC, Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Operator

Good morning, and welcome to the Alere Incorporated Conference Call to Discuss Fourth Quarter 2013 Results. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Mr. Doug Guarino, Director of Corporate Relations. Mr. Guarino, please go ahead.

Doug Guarino

Thank you, Amy. And good morning, and welcome to the Alere conference call to discuss our results for the quarter and year ended December 31, 2013. We're joined today by Ron Zwanziger, Chairman and CEO; Dave Teitel CFO; and Namal Nawana, COO.

Before we get to that discussion, though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of U.S. securities laws, 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 our restructuring and operational initiatives; the success of ongoing our potential product launches and product reintroduction; 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.

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. As posted in our earnings release earlier today, we delivered very strong results in the fourth quarter, reflecting a continuation of the improved financial performance we've achieved throughout 2013.

As we continue to execute against a 3-point plan, which we described to shareholders more than a year ago, our focus on operational excellence is yielding more consistent performance across multiple businesses and geographies, thus allowing us to identify and react more quickly to local challenges.

This capacity is, in turn, leading to improved earnings predictability and results.

Our full year organic revenue growth from our Professional Diagnostic unit of 5.1% compared to 4.8% in 2012 reflects a gradual shift from acquired growth to organic growth as a natural progression of our business. While we continued to experience quarterly fluctuations on organic growth rate, the trend remains, and I'll -- we'll spend more time during this call describing why we have such confidence about our prospects for expanding growth rates in the coming years.

One of the main contributors to our optimism about revenue growth is the anticipated recovery in Triage. Our manufacturing has continued to ramp up through improved deals. And with further automation planned for early 2014, we're now consistently supplying the market with all the products other than the 2 panels, shortness of breath and toxicology. Based on our progress over the past few months, we have become increasingly confident we will return one or both of these remaining Triage panels to the market during the first half of this year.

We made significant changes to the composition of our board of directors in 2013 in a process begun in 2012 to address the increasing size and complexity of our business. Throughout the second half of the year, our board members have been actively engaged in an objective top-down review of all facets of the business and have been providing actionable input on all aspects of the company's business and strategy. Their work has been invaluable in helping us further refine our mission and has improved -- and has provided increased confidence around the shareholder value that can be created through our approach.

Through active communications with our employees as well as through an incentive system that keeps key executives around the world mindful of our commitments, we remain internally focused on enhancing shareholder value through the 3-point plan to accelerate the company's organic growth rate, improve operational execution and deleverage our capital structure. Successful execution of this plan should drive higher operating margins, improve free cash flow generation and increase earnings growth in support of the commitments we have made to shareholders.

Financial and operational improvements already reflected over the recent quarters can be taken as an indication that our long-term value creation strategy is generating sustainable success. And from our vantage point, we're confident that our approach will continue to support improving financial performance and generate significant value for all our shareholders.

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. Net revenues through the quarter were $772.8 million compared to $756.5 million in Q4 2012. The effects of foreign currency translation decreased Q4 2013 adjusted revenues by $6 million compared to Q4 2012.

Revenues in Q4 2013 and Q4 2012 include $8.5 million in $11.0 million, respectively, of royalties associated with licenses of certain of our molecular intellectual property.

Adjusted earnings per diluted share for Q4 2013 were $0.68.

By business segment, adjusted net product and services revenues from our Professional Diagnostics segment were $601.1 million in Q4 2013 as compared to $584.9 million in Q4 2012. Acquisitions accounted for $27.2 million of this increase, offset by a decrease in revenue of $6.3 million associated with disposition. Revenues from our North American flu sales were $20.9 million in Q4 2013 compared to $23.0 million in Q4 2012. Sales of our meter-based Triage products in the United States totaled $17.7 million in Q4 2013 compared to $24.3 million in Q4 2012.

Excluding the change in U.S. flu sales and Triage product sales, the currency-adjusted organic growth rate for the quarter was 2.0% 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 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 5.2% for the remainder of our Professional Diagnostics segment.

Within our Professional Diagnostics segment, net product revenues for our cardiology business were $113.6 million in Q4 2013 compared to $116.7 million in Q4 2012. Included in these revenues were $4.1 million of U.S. cardiac panel sales in Q4 2013 compared to $4.5 million in Q4 2012. Q4 2013 also included $13.2 million of combined U.S. BNP and D-dimer sales compared to $18.5 million in Q4 2012.

Revenues from toxicology panel for the Triage platform were $0.4 million in Q4 2013 as compared to $1.3 million in Q4 2012.

Net product revenues for our Infectious Disease business were $202.9 million in Q4 2013 compared to $190.6 million in Q4 2012. The increase relates principally to growth in HIV and malaria revenues.

In total, U.S. flu sales were $39.1 million in the second half of 2013 compared to $32.8 million in the second half of 2012, a 19.3% increase, reflecting our strong positioning within the -- with distributors in both the hospital and physician's office market segment. However, based on the weekly CDC flu surveillance reports, 2013/2014 U.S. flu sales appear to be both relatively mild at its peak and rapidly declining.

Our toxicology revenues were $151.3 million in Q4 2013 as compared to $149.5 million in Q4 2012.

Diabetes net product revenues were $47.4 million in Q4 2013 compared to $43.8 million in Q4 2012. Included in Q4 2013 revenues were $29.8 million of mail order diabetes sales compared to $25.0 million in Q4 2012 and $34.3 million in Q3 2013.

Q4 2013 revenues were impacted by the CMS reimbursement reduction, which became effective in July 2013, offset by incremental sales related to our April 2013 acquisition of Liberty Medicare fee-for-service diabetes business and our November 2013 acquisition of Simplex.

The year-over-year impact of CMS reimbursement reductions persist through the second quarter 2014.

Adjusted gross margins from our Professional Diagnostics segment were 54.6% in Q4 2013 compared to 54.4% in Q4 2012.

Adjusted operating income in the Professional Diagnostics segment was $147.9 million, or 24.1% of adjusted net revenues in Q4 2013, compared to $144.2 million or 24.0% of adjusted net revenues in Q4 2012.

Net revenues from our Health Information segment were $130.0 million in Q4 2013 compared to $131.0 million in Q4 2012.

Adjusted gross margins from our Health Information segment were 47.2% in Q4 2013 compared to 44.2% in Q4 2012.

Adjusted operating income from our Health Information Solutions segment was $6.7 million in Q4 2013 compared to a loss of $2.6 million in Q4 2012.

As we indicated on the last earnings call, we had a challenging contracting season for this group in the second half of 2013. As a result, we expect weak Q1 2014 revenues and then resume sequential growth, adjusted for seasonality within the segment, through 2014 from the Q1 2014 base.

Net product and services revenues from our Consumer Diagnostics segment were $27.5 million in Q4 2013 compared to $23.4 million in Q4 2012, reflecting a successful launch by our joint venture with Procter & Gamble of the Clearblue Advanced Pregnancy Test with Weeks Indicate -- Estimator in the U.S.

Adjusted gross margin from our Consumer Diagnostics segment were 19.0% in Q4 2013 compared to 22.3% in Q4 2012.

Adjusted selling, general and administrative expenses were $227.8 million, or 29.5% of adjusted net revenues in Q4 2013, compared to $222.2 million or 29.4% of adjusted net revenues in Q4 2012.

Adjusted research and development expense was $35.7 million, or 4.6% of adjusted net revenues, compared to $39.9 million or 5.3% of adjusted net revenues in Q4 2012.

Combined SG&A and R&D expense was $263.5 million, or 34.1% of adjusted net revenue, compared to $262.2 million or 34.7% of adjusted net revenue in Q4 2012, a 60-basis-point decrease in operating expenses as a percentage of revenue compared to the year ago quarter. This was achieved despite a $2.0 million charge included in Q4 2013 related to the U.S. medical device tax.

Adjusted interest and other expense was $56.7 million in Q4 2013 compared to $59.7 million in Q4 2012.

Adjusted interest expense, net of interest income, was $51.2 million in Q4 2013 compared to $54.5 million in Q4 2012.

Other expense in Q4 2013 includes an incremental provision of $4.5 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.

In Q4 2012, other expense included a $3.9 million charge associated with the settlement of a prior year dispute with a former distributor.

Our adjusted tax rate was 27.8% of pretax income compared to 33.2% in Q4 2012. On a year-to-date basis, our adjusted tax rate was 30.7%.

Adjusted EBITDA for the quarter was $157.3 million, which includes deductions for restructuring charges of $7.1 million, $1.3 million of acquisition-related expenses and $6.1 million of costs associated with potential dispositions.

Cash flow from operations for the quarter was $85.7 million, and capital expenditures were $31.2 million.

As of the end of Q4, our net debt outstanding was $3.45 billion.

On an LTM basis, our adjusted EBITDA with restructuring, acquisition and other costs added back was $664.1 million.

As of the end of Q4, our net debt-to-adjusted-EBITDA ratio was 5.2x compared to the net-debt-to-EBITDA ratio of 5.7x at the end of Q1 2013, reflecting continued improvement towards our leverage target of 3.0x by the end of 2015.

I would like to turn the call over to Namal, who will review the progress we've made during the fourth quarter on key initiatives.

Namal Nawana

Thanks, Dave, and good morning. It's pleasing to report an excellent full year 2013 results and 4 consecutive quarters of solid financial performance.

As discussed on the Q3 call, the year was not without its challenges. And despite some considerable headwinds, we demonstrated that Alere can consistently deliver on its commitments. In particular, significant progress was made against all commitments in our 3-point plan.

A key part of this has been a focus on organic growth, which for our Professional Diagnostics business was 5.2%, adjusted for diabetes, flu and Triage in Q4, and 6.8% for full year 2013.

The geographic drivers of Q4 performance were growth in Africa at 22%, India at 26%, China at 8% and Latin America at 10%.

As we communicated on our Q3 call, we had some concerns on the prospects for Europe in Q4, and these concerns did in fact translate to a year-over-year contraction of 3.4% in the quarter.

As the New Year begins, we expect to return to low single-digit growth in Europe despite the known challenges of the region.

From a platform standpoint, our Infectious Disease business enjoyed double-digit organic growth, excluding flu, during Q4 largely through our substantial HIV screening and malaria portfolio, both delivering organic growth in the mid-teens, along with our CD4 platform delivering greater than 65% growth in the quarter.

Other business units and platforms also enjoyed considerable success, highlighted by over 50% year-over-year growth of our epoc blood gas and electrolyte platform in Q4, solid growth of our [indiscernible] platform and, within our Health Information Solutions business, solid growth in the quarter and the full year for our anticoagulation services unit. All of these platforms and regions featured prominently in our 2014 plans.

Growth in Q4 and throughout 2013 was delivered against the backdrop of substantial operating framework change and effectiveness initiatives. Total operating expenses were 34.1% of revenue in Q4 2013 compared to 34.4% in Q3 2013 and 34.7% in Q4 2012.

Importantly, 2013 was a year in which Alere also built important global and enterprise infrastructure and capability that will support future growth and effectiveness. There are numerous examples worth noting. Our creation and execution around the global shared services model delivered multimillion-dollar operational savings and achieved standardization in U.S. and European processes, which included a recent cut-over to a single ERP instance for these geographies as well as enhancements to the automation of numerous co-processes as a result. Our global sourcing initiative in the Philippines was effectively executed, enabling a cost-effective scaling of our mail order diabetes unit to serve over 700,000 patients and now allow us to expand our services for our Alere home monitoring unit, opening the door to further cost base improvements.

Extensive business unit consolidation was undertaken and completed in 2013, which we've previously reported. Additionally, we have initiated a substantive consolidation of our U.S. commercial organization as we start 2014, including a combination of our acute care and chronic care divisions to form a cardiometabolic business unit. We're confident that this change will support improved effectiveness with our customers and distributor partners, accelerate development of our focused technologies and facilitate the return to market of both shortness of breath and toxicology Triage panel products as the year progresses.

From a cost of goods standpoint, we had previously reported automated -- automation initiatives that were launched in 2013 and will continue into 2014.

The results to date demonstrate unit cost of good reductions in a majority of our portfolio, with the exception of Triage, where we've focused on product performance that will support our return to market. Once our full Triage portfolio becomes commercially available again, we should expect the stabilization and improvement of Triage cost of goods sold.

We also made progress on our information technology initiatives in 2013, which will continue into 2014, providing improved operational efficiency and collaboration while substantially reducing operating costs.

Finally, our business plan for 2014 continues to be built around delivery against the commitments in our 3-point plan. Our focused funding of growth technologies and geographic markets to continue to deliver solid organic growth, along with a portfolio of programs-based operational effectiveness initiatives, should enable us to exit 2014 at an SG&A rate of 28%, consistent with the plan.

Now let me hand back the call to Ron.

Ron Zwanziger

Thanks, Namal. When we think about 2014, we must recognize that our outlook is not without challenges, particularly early in the year. However, we remain confident about our prospects for organic revenue expansion for 2014 and beyond. Strong performance with a majority of our Professional Diagnostics driven by sales in a variety of infectious diseases and cardiology products in multiple geographies around the world highlights the breadth of earnings drivers as well as the technological strength of our diagnostics portfolio.

Furthermore, we're now in the midst of several new product launches, including chloride and creatinine on our Blood Gas electrolyte platform in the U.S. and elsewhere, HIV-1/2 combo in the U.S., Alere i in Europe and Alere Q in Africa, all of which were described in great detail on our last call.

Alere i, in particular, is one of the most important product launches we've had for a while. The first assay for this [indiscernible]-based system is a rapid flu test that delivers results in approximately 15 minutes with subsequent menu items to include Strep A, RSV, C. difficile and chlamydia.

We're pleased that we've commenced clinical trials for Strep A, and we'll report on progress of this additional test again in the future. By significantly raising the performance of rapid infectious disease tests, we anticipate that Alere i will expand the market considerably. We are currently awaiting clearance in the U.S. for the flu assay on this platform.

Our optimism around these products, combined with increasingly robust contribution we're seeing from previously launched products, such as our CD4 analyzer, which is becoming the standard of care for managing HIV in Africa, further supports our expectation long-term organic revenue growth will remain strong and will, in fact, expand to high -- higher single digits by 2015 and beyond.

In terms of our work to deleverage our debt ratio, EBITDA has continued to increase on an LTM basis through 2015. Additionally, we're making good progress on our divestiture plans around the non-core businesses that we have discussed on previous earnings calls.

And now with that, let me open the call up to questions. Amy, can take over, please?

Question-and-Answer Session

Operator

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

Jonathan P. Groberg - Macquarie Research

So Ron, maybe can you highlight a bit little more around the challenging contracting season that you mentioned, where you expect kind of big expectation you have for Q1? I think you mentioned maybe a little bit weaker for that unit. And then just any other detail from a guidance standpoint you're willing to provide for 2014 at a total company level?

Ron Zwanziger

Well, it was, Jon, a particularly challenging contract period for the older parts of our Health Information Solutions. But despite -- and the decrease was quite substantial. But probably overall for that segment, probably we'll be down 5% overall for the year with some actually units, the one that we focus on, actually being up within that segment. There'll be a noticeable decrease in that unit in Q1.

Jonathan P. Groberg - Macquarie Research

And for the total company, any other guidance that you want -- that you're kind of willing to provide for 2014?

Ron Zwanziger

Well, Jon, we've provided a lot of -- we -- as you know, we're not giving guidance per se, but we've provided a lot of information about the elements that go into figuring out our revenues. So we've sort of told you about -- we've reminded you about the issues we had around the cut in reimbursement, which applies in the Diabetes segment, applies in the first 2 quarters of the year. Obviously, the flu season came and it will -- is still around but very modestly at the moment. So that has an impact. But we've consistently said that we expect our organic growth revenues for the overall business to continue to rise. It rose in '13. And all indications, and we went through a whole number of them in the prepared remarks, give us confidence that the business is obviously, will, in Q4 across a range of products and geographies will continue to improve. And so we do expect that the number that we focus on the most, which is the organic growth for the core diagnostics business, but will, in fact, continue to grow x the diabetes issue, which [indiscernible] separately highlighted.

Jonathan P. Groberg - Macquarie Research

Okay, I just want to be clear because I think, again, you mentioned by '15 you thought you'd be back to high single digits. So do you still expect kind of consistent organic growth, excluding these items, in 2014 versus 2013? That's just -- you kind of went to 2015, so I just want to make sure on '14.

Ron Zwanziger

I think we -- we're not expecting a bump down or anything. I think that if you look -- if you just go through -- that's why we spent some time in the remarks. If you look at the geographic spread that -- where we're going -- we highlighted, and if you look at the various products, particularly several of the infectious diseases and the cardiology product, we're seeing sustained growth and expect that to accelerate. So yes, we do expect the organic growth rate of the core business to accelerate, offset by the information solutions that -- which I commented a bit earlier and the issues around flu and diabetes.

Jonathan P. Groberg - Macquarie Research

Okay, that's helpful. And if I could just one more, Ron. For a while, obviously you've been talking about divestitures, but we haven't really seen anything materialize. Can you maybe just talk about kind of what -- in general terms what the challenges are in terms of getting a deal done and kind of maybe who it is that you're speaking to? I guess I'm just trying to understand why it's taking so long to see something done here.

Ron Zwanziger

Yes. Well, we had a -- we've got active processes on a number of aspects going on, and they do take a little time, but we're quite positive about fairly good outcomes around those. One asset is the -- which is more to do with issues associated with the JV with Procter & Gamble, that's more complicated. But other than that one, the processes are in place, the level of interest we're getting is basically good and we anticipate -- we did sell one asset a little while ago, and we do expect to sell additional ones.

Operator

Our next question is from Dan Leonard with Leerink.

Daniel L. Leonard - Leerink Swann LLC, Research Division

As we think about putting together a cash flow outlook for 2014, are there any meaningful cash restructuring charges expected? Or any other items we should be aware of?

David A. Teitel

Well, if it's so meaningful, no huge charges. But we are in an ongoing process, which Namal is helping us drive, to better integrate the businesses and to take costs out on a regular basis. So there'll always be some element of charges, but no massive charges expected over the course of next year.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And my follow-up, David, the IP licensee in the fourth quarter for your molecular diagnostics business or assets, is that something we should expect on an annual basis now that you've had a big fee 2 years in a row in the fourth quarter?

David A. Teitel

Well, so the initial licenses are somewhat onetime events specific to the molecular business, but they do each carry with them ongoing royalties. So there will obviously be recurring royalty streams coming from those licenses. And I think more broadly, you should think about our past history. In our practice, we do look at our portfolio of technologies that we're developing primarily for ourselves, but there are ancillary applications for those technologies which are outside of our core businesses and have value to others. So as we've done in the past, we'll likely do in the future in terms of licenses of the technologies we're developing to others for purposes other than what we're intending.

Operator

Our next question is from Bill Bonello with Craig-Hallum.

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

I was hoping I can just ask 2 quick ones. You were very helpful on sort of giving us parameters around the organic growth outlook. I know you're not giving guidance. But in the past, you've at least been willing to comment on sort of where do you expect overall growth or not. And I guess I'm just trying to understand if we should look for operating income growth in 2014 when we factor in the nonrecurring things like the diabetes price cuts, the flu and the price pressure you mentioned on Health Information. Still look for operating income to go up?

Ron Zwanziger

Yes, we do. Before I answer your question, I just wanted to add a comment to Dan, the previous question on the molecular licenses. They do actually carry annual minimums. So we do expect to get a continuing benefit near term as well. Yes, Bill, I mean, I think we gave you the -- plenty of information about our confidence around -- despite some of these headwinds, around the growth, and it's hard to see why our operating income won't increase in 2014. And basically, things are coming together. Costs are coming down. We're becoming more effective. You saw some of the benefits of some of the programs Namal had put in last year as many of those are actually ongoing. There are new ones under way as well. And fundamentally, the products are doing well. We've given some new information around some of the new products that we launched a while ago. We have a number that are just getting under way now. Even some of the old -- some products that have been on sale before, such as the Determine HIV-2 (sic) [1/2] Combo, which is -- we've now we brought it in -- to the States, should pick up. And so all of these go into, obviously, operating income. And so we do think that the operating income will, in fact, increase and all points to it. And then as an organization, perhaps more importantly, we're very committed to doing so, and so we have a tremendous focus around doing that, even though there are challenges, as we indicated. There's obviously not much we can do with the absence of -- or the seeming reduction in flu in Q1, which, obviously, will affect us. Only so much you can compensate, and we, obviously, can't compensate for all the decrease in the absence of flu, particularly since in Q1 of last year there was a lot of, it. But anyway, setting aside the sort of the issues that are completely out of control, including the cut in the reimbursement rate in diabetes, we're very focused around the commitments we've made, and we do think that our operating income will actually go up again in 2014.

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

Excellent, that's helpful. And just a follow-up maybe for Dave and Namal has to do with the free cash flow. By my math, I think it was down about 30% year-over-year, not in the quarter but for the full year. Can you just give us some sense of when you would expect the improvements in the non-GAAP operating profit to translate into year-over-year growth in free cash flow and sort of what needs to happen for that to -- improvement to occur?

David A. Teitel

Yes. So it was a bit weaker over year -- this year than last. Last was particularly strong this year, particularly in the first half and the second quarter specifically. We were a bit weaker than we've historically been. We did have a good close in the fourth quarter with $85 million coming out of operation -- operational cash flow in the fourth quarter. So we're focused on it. We're working with our leadership across the businesses to understand the level of working capital required for their businesses and kind of provide greater visibility and incentive for them to help sort of manage that effectively. So I hope we'd do better in 2014, and it continues to be a focus of the leadership here.

Operator

Our next question is from Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies LLC, Research Division

I wonder I could ask about a couple of the longer term strategic plans. I guess you reiterated a couple of them, so-- actually all 3 of them. But in terms of the SG&A targets getting down to 28% by the end of 2014, this quarter we saw a modest pickup in the absolute dollar spending on your SG&A. It was relatively flat on a percentage basis from last quarter. I know there's a lot of kind of going on in terms of your plans and the systems you're putting in place, but perhaps you could just describe how that number declines 150 basis points over the next year. What are the some of the specific things in particular we can look to that are going to drive that number down?

Namal Nawana

Well, thanks, Raj. And I have commented on some of the things that contributed during the course of last year. But we have had a lot of change during the course of 2013. And as I always say, what we're trying to do is have an overall high-quality earnings driven by organic growth to begin with. So we funded growth in select geographies and select technologies. And so, yes, there is some variation between the quarters on SG&A, but we have put in a number of programs during the course of last year. Probably the biggest one overall is just the integration of the various units, which has been a substantial program during the course of last year and will continue into this year. So I would say that, that has been a big driver. And workforce optimization is a big driver. So again, when you look at some of the challenges we had in our Health Information Solutions business, our operating income expansion was driven through our workforce optimization. And so, I think we're very conscious of how we manage the overall cost base. We also have a large initiative in our information technology and how we operate globally on an IT basis. And again, the first part is actually having systems which support a global enterprise. And I mentioned having an ERP system and a single instance between Europe and the U.S. I think everyone realizes it's not a small thing to get done. We've completed that cutover. And behind that, we expect good opportunities to further reduce our cost to serve. And equally, we've completed multiple renegotiations with a number of our vendors, and that's more on the cost side but -- so distribution and non-stock [ph]. So a lot of programs there. And then just overall how we've budgeted for 2014 and what we expect of each of our units to continue to ramp down our SG&A spend during the course of the year. So I don't want to take up the whole Q&A on it, but I feel confident that we have what it takes to continue in the right direction and get to that 28% exit in Q4.

Ron Zwanziger

Raj, the biggest buckets are around the service function that Namal has mentioned. He mentioned the IT and the U.S. integration. Now if you're looking to sort of the biggest buckets, I think those are the 3 largest. But there's obviously all the others as well.

Raj Denhoy - Jefferies LLC, Research Division

But generally speaking, I mean, this $228 million, roughly, spend here in the fourth quarter, I mean, this should be -- should we look at this as the high watermark in terms of dollars so that over the next 4 quarters, that number trends down or at least by the fourth quarter of next year is relatively flat to where we are now?

David A. Teitel

Yes. It was a bit higher than the third quarter. There were some specific drivers in the quarter, including $1 million of that is linked to FX. And then there's a piece of it, our strong sales in Africa. There were some distribution commissions that relate to that. So there's a variable element to it that comes with increasing sales. But overall, we do expect to be able to maintain or decrease the number over the course of 2014. As Namal pointed out, it is a bit lumpy from a quarter-to-quarter perspective. But overall, we feel like we're moving in the right direction.

Raj Denhoy - Jefferies LLC, Research Division

Okay. And then maybe I could just segue to the other longer term target, the 3x debt-to-EBITDA target. There's lots of moving parts there, and I guess the fundamental question, though, is your appetite for dilutive divestitures, how much you're willing to take in order to get to that number. And realizing that it becomes a bit circular as you start to sell off perhaps some assets to drive down your EBITDA over time, you're going to have to sell even more. And so I guess as we think about how this all plays out over the next couple of years and what it ultimately does to earnings as we move into '15 and beyond, is there any kind of broader parameters you can offer us as you've kind of thought more about these plans?

Ron Zwanziger

Well, I mean, your observation, of course, is right. To get to 3x, we do have to sell, which -- and we're in the process of doing. And some of that, though, would be dilutive. We're taking -- we're being very careful to try and minimize that and also to do it absolutely gently over the 2 years to achieve that commitment. But the reality is that the actual divestiture to -- done will be dilutive. We're going to try and minimize the amount of dilution to around $0.20, but it may be a little more than that. So it is tricky. And you're absolutely right to point out that it is a tricky balance. But that is the process that we're under way. We want to make sure that while we accept some dilution in the divestiture, we do it in a reasonable manner and make sure that we don't effect at least -- or minimize any effect on the organic growth rate in a manner in which we do it in order to raise the probability that we will have multiple expansion on our earnings at Alere.

Operator

Our next question is from Jeff Frelick with Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

So Ron, I know it's a little bit early, but the Alere i introduction in Europe, any comments there around the initial interest? And how are you pricing that versus some competitive molecular platforms?

Ron Zwanziger

Well, I mean, it's literally too early, Jeff. I mean, we literally only just got clearance the other day. I mean, when we did issue -- you're obviously referring to the press release. I mean, literally, that was at the moment at which we introduced the product. So it's early. So all I can say is that there's a tremendous enthusiasm in the organization, which arises because of, obviously, conversations with a variety of customers. And in the case of Europe, most of those customers are new because, as you're aware, in the case of a rapid flu test, there is very little in Europe that's reimbursed but -- on the conventional product, but molecular is. So no, I'm afraid it's too early to say. But the enthusiasm is very good.

Jeffrey Frelick - Canaccord Genuity, Research Division

And how are you pricing the flu test, Ron?

Ron Zwanziger

It varies somewhat, and that will become apparent in the next few weeks.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And a question for Dave. The tox business was a little bit lower estimate. Just any changes there? What's a right way to think about the growth rate for tox as we kind of get into '14?

David A. Teitel

So a piece of the tox business that's slowed a little bit was the pain management business, which has grown very well over the past few years. We're working on some national contracting alternatives that we think can help drive growth back into that business in the near term. So tox business continues to be a solid performer for the business despite the slowing growth rate in the quarter.

Ron Zwanziger

Yes, the slow -- the slowing growth rate was primarily around price and not volume.

Operator

The next question is from Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just to follow up on the Alere i comments you made just in context of the flu. It sounds like we shouldn't expect too much in the way of revenue from that platform in the first couple of quarters of the year. But as it ramps, just -- is it fair to say that, that will start to move the needle on organic growth towards the end of this year and into next year?

Ron Zwanziger

Well, yes. That is our own -- that is actually our own thinking. But of course, it relates primarily to getting U.S. clearance on the product. We're reasonably optimistic around it. We've had relatively like comments but -- from the agencies So we -- we're reasonably optimistic we're going to get it as a clearance. And if we do, yes, is the answer. And if that happens, yes, that we're quite optimistic that we'll get significant placements in the second half of this year.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. And then on -- just for the Drugs of Abuse testing business, having spent a lot of time on that the last couple of quarters, employment trends seem to be getting a little better in the U.S. but really is a function of lower participation. So I'm just wondering if you can give us some mark-to-market on kind of ongoing growth trends in that business.

Ron Zwanziger

Well, actually, I didn't check on that very issue about the correlation between our sales for that segment. It's not a particularly large segment of ours, although when the recession hit, it really was one of the few areas in our business which -- in '08, '09 which took a real bath because it -- there was -- it was so abrupt. So actually, we haven't looked to see whether that piece, which is a relatively small component, is responding to trends [indiscernible].

Isaac Ro - Goldman Sachs Group Inc., Research Division

Fair enough, okay. And then last one on housekeeping, if I could. Just for flu, that was pretty strong this quarter in North America sequentially just given how strong your stocking was in the third quarter. So just given your earlier comments on the call here, is it pretty fair to say we should assume a sequential decline in first quarter given seasonality?

Ron Zwanziger

I think -- I mean, I think you should assume a fairly significant decline.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Yes, okay. And last one is just on license and royalty, also a pretty big sequential uptick. Is it fair to say it's not the new run rate here and that it'll all remain pretty lumpy?

David A. Teitel

Yes, it will remain pretty lumpy. And we specifically called out an $8.5 million fee in the quarter compared to $11 million 1 year ago in the fourth quarter. So when those things hit, yes, it does get lumpy.

Operator

Our next question is from Zarak Khurshid with Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

So in terms of the growth acceleration plans, how contingent is that on U.S. and EU accelerating? Or could the rest of the world somehow get you to your growth goals?

Ron Zwanziger

Well, you -- that's a really good question. You probably noticed that we've been securing mid-digit growth, and we did pretty well. Actually, we're pretty happy with the sort of the growth rate in '14 overall for the Professional Diagnostics unit. Bear in mind that Europe was down and the U.S. was anemic. So despite the fact that, that sort of -- Europe and the U.S. is a very large percentage of our business, the fact that we were able to achieve north of 5% overall growth is a reflection both of the -- some of our newer products being still sold in Europe and the U.S., which helped mitigate it, to some extent, within those geographies. But the reality is that the new products and -- as well as the older products around the world are growing dramatically, and there's no sign that, that's going to tail off. So yes, despite sort of the issues in Europe and the U.S., we anticipate that -- the growth continuing, and we're seeing it in a variety of product and a variety of geographies.

Zarak Khurshid - Wedbush Securities Inc., Research Division

And I guess on that theme, I mean, can you walk us through sort of -- it sounds like Africa was very strong. Can you just kind of walk us through this year with HIV and malaria? Have there been any kind of things to really drive an inflection there? Or could -- should we think about continued or acceleration in the growth profile in Africa for whatever reason?

Ron Zwanziger

Well, that's tough to say whether there'll be an acceleration. I will say that the -- and since you're asking specifically about Africa, there is a feeling amongst a lot of people involved in malaria that they can actually see light at the end of the tunnel in terms of getting on top of the problem. And as a result, one of the ways that some of the payers for dealing with malaria, they're thinking about screening populations in a large area. And as a result -- and I think success is when you can sort of get on top of a whole area, and that requires screening of the population in general. And so the sort of unit growth that we've been seeing has been at the order of 30%, and the reason for that is exactly the changed approach of having been on top of it. And that will probably continue. But of course, there's a lot of pricing pressure as well. So don't assume that, that 30% unit will translate into price as well. But that is one of the reasons why that's growing. And by the way, I'm not referring just to -- although you asked me about Africa, I'm actually referring to malaria. And that's obviously in other places as well, same attitudes. So there are fundamental reasons. Same with HIV. People around HIV, they're seeing successes in the programs. And as they see successes, again it comes down to more effective screening. And, obviously, we have a number of products around the world, including the market-leading Determine. And so, that's another reason for our optimism. And again, the comment is while we sell a huge amount in Africa, that's also a comment about elsewhere.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Sounds good. And then a last question. I just wanted to circle back on the molecular royalties you mentioned. Can you just describe kind of in more detail the nature of those royalties? Are there commercial products out there that actually incorporate this IP? And should we think about those royalties as being mostly a fourth quarter contributor going forward?

David A. Teitel

Well, so there are commercial products that are very near launch that will drive those royalties. But as Ron alluded to, there are minimums for the year for each of the licenses that we've granted that kick in, in 2014. So the minimums will spread across the year.

Ron Zwanziger

Okay. Operator, since I haven't heard from you, I assume there's probably no further questions. So I would like to just close by saying that our fourth quarter results were extremely encouraging, and we're excited about the progress we've made against our plan that we presented to shareholders in 2012 and our prospects for consistently improving performance moving forward. We believe that our unique position to capitalize on the evolution of global health care, combined with a sustained focus on organic growth, revenue growth, operational efficiency and debt reduction, will enable us to deliver long-term value to -- for all our shareholders for many years to come. As always, I'd like to thank you for your continued support and interest. Thanks very much, and have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation, and please disconnect your lines.

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