Executives
Doug Guarino - Director of Corporate Communications & Corporate Relations
David Teitel - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer
Ron Zwanziger - Chairman of the Board, Chief Executive Officer and President
Analysts
Bruce Cranna - Jefferies & Company, Inc.
Ashim Anand - Natixis Bleichroeder Inc.
Erik Schneider - UBS Investment Bank
Bill Bonello - RBC Capital Markets Corporation
Jonathan Groberg - Macquarie Research
Jeff Ares
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Mark Afrasiabi - PIMCO
John Putnam - Capstone Investments
Zarak Khurshid - Caris & Company
Constantine Davides - JMP Securities LLC
Daniel Owczarski - Avondale Partners LLC
Inverness Medical Innovations (IMA) Q1 2010 Earnings Call April 28, 2010 10:00 AM ET
Operator
Good morning, and welcome to the First Quarter Earnings Conference Call. My name is Suzette, and I will be facilitating the audio portion of today's interactive broadcast. [Operator Instructions] At this time, I would like to turn the event over to Doug Guarino, Director of Corporate Relations. Sir, you may begin your conference.
Doug Guarino
Well, thank you, Suzette, and good morning, and welcome to the Inverness Medical Innovations Conference Call to discuss our results for the quarter and year ended March 31, 2010. We are joined today by Ron Zwanziger, Chairman and CEO; and Dave Teitel, our CFO.
Before we get to that discussion though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of U.S. securities laws. These statements reflect our current views with respect to future events of financial performance and are based on management’s current assumptions and information currently available.
Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors, including without limitation, our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring and new business activities; our exposures to changes in interest rates and foreign currency exchange rates; our ability to successfully develop and commercialize products; 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 benefits of this strategy; the impact of the recently approved healthcare reform legislation, as well as future reform initiatives; 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, 2009, 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 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 invernessmedical.com.
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. Despite a number of key challenges, which were laid out during our last call in February. I'm pleased to report that our first quarter reflected strong performance, characterized by year-over-year earnings growth, continued new product launches, meaningful progress with our new technology initiatives and the completion of a number of important acquisitions and business agreements.
Beginning with the financial performance for the quarter, revenue and earnings were solid at $515 million and $0.64 a share. Several factors, which we have previously described, impacted our results unfavorably. First, overall weakness in worldwide respiratory sales had the effect of materially reducing both revenues and margins. As an example, U.S. flu sales and worldwide Strep A sales alone accounted for more than $9 million of lower revenues in the first quarter to compare to the prior year. Additionally, continued pressures in our Health Management unit resulted in a further decline in gross margin percentage for that business. Although overall, Health Management revenues increased primarily due to strong growth in the differentiated part of the business.
Despite these challenges, broad favorable trends in our other business units combined with expense controls enabled us to deliver healthy earnings in the quarter. In fact, Q1, was one of the strongest operational quarters we've had in some time, as the organization responded to the sudden ending of H1N1 and no seasonal flu. We were able to achieve our financial results under these challenging conditions, while continuing to advance key initiatives such as assuming responsibility for global distribution of the Epocal system, finalizing the shutdown of the Cholestech facility, continuing to roll out Apollo, successfully integrating Tapestry and QAS business, soon to be renamed Alere Home Monitoring, as well as a number of other milestones, which I'll touch on later in the call.
Taking into consideration the anticipated impact of recent acquisitions combined with acceleration in the growth rates of some of our core businesses, such as drugs of abuse and HIV-related diagnostics, we continue to feel confident in our ability to achieve our goal of $2.90 per share of diluted EPS for 2010. And now let me turn the call over to Dave for a discussion of our reported financial results for the quarter.
David Teitel
Thanks, Ron, and good morning. Revenues of $515.3 million for the first quarter of 2010 compared to revenues of $425.2 million from Q1 2009 and $546.2 million in Q4 2009. The effects of foreign currency translation increased reported Q1 2010 results by $9.2 million compared to Q1 2009, and decreased revenues by $5 million compared to Q4 of 2009. Adjusted cash earnings per diluted share from continuing operations for Q1 2010 were $0.64 compared to $0.62 in Q1 2009.
By business segments. Product and service revenues from our Professional Diagnostics segment were $336.2 million in Q1 2010, as compared to $261.4 million in Q1 2009. Acquisitions accounted for $54.1 million of this increase. With the acquisition of Acon T-2, Concateno and Standard Diagnostics combined contributing $42.2 million of the change.
Foreign currency translation effects added $8.9 million of incremental revenue compared to Q1 2009. Revenues from North American flu sales decreased to $2.3 million in Q1 2010 from $6.4 million in Q1 2009, as a result of an unusually weak 2010 seasonal flu season. Q1 2010 currency adjusted both in our Professional Diagnostics segment was 25.2%. Excluding the change in flu sales, currency-adjusted organic growth for the quarter was 6.2%, with weak worldwide respiratory activity adversely impacting physician office traffic.
Net product revenues for Biosite, Cholestech and HemoSense grew by a combined 11.2% in the first quarter of 2010 compared to the same quarter a year ago, which includes a 47.8% year-over-year growth rate for the business outside of North America. Adjusted gross margins from our Professional Diagnostics segment were 62.0% in Q1 2010 compared to 63.4% in Q1 2009. Reduced flu sales, which contribute a higher-than-average gross margin, contributed to the decreased gross margin in the quarter. Additionally, lower gross margin earned on our Lab Services business, which consists of Redwood, Concateno and Alere Toxicology, which was the Kroll business, contributed to the decreased gross margin. Combined, these businesses added revenues of $39.9 million in Q1 2010 at a combined adjusted gross margin of 42.1%.
Revenues from our Health Management segment were $148.5 million in Q1 2010, compared to $122.2 million in Q1 2009 and $145.7 million in Q4 2009. Revenues from our Patient Self Testing business, which consist of QAS and Tapestry were $21.4 million in Q1 2010 compared to $12.2 million in Q1 2009, with Tapestry included on a pro forma basis.
Adjusted gross margins from our Health Management segment were 50.0% in Q1 2010, compared to 56.3% in Q1 2009 and 53.3% in Q4 2009. The lower gross margins earned in Q1 reflect the increased competitive environment for Health Management segment, particularly in the less differentiated services, and increased percentage of overall sales in the segment from our Patient Self Testing business.
Product and services revenues from our Consumer Diagnostic business segment were $24.7 million in Q1 2010, compared to $32.5 million in Q1 2009. Q1 2010 revenues included $18.4 million of manufacturing and services revenues for product and services provided to the joint venture. Looking at the results at the joint venture level, product revenues sold by the joint venture were $55.9 million in Q1 2010, compared to $48.6 million for the year-ago period. Adjusted gross margins from our Consumer Diagnostics segment were 22.8% in Q1 2010 compared to 14.2% in Q1 2009.
Selling, general and administrative expenses decreased to $147.2 million in Q1 2010 from $158.6 million in Q4 2009. Compared to Q4, the approximately $8 million of one-time items included in our Q4 results, which we discussed in our last earnings call, did not recur in Q1. Additionally, Q1 spending decreased by approximately $1.7 million, as a result of exchange rate changes. And acquisitions accounted for $4.6 million of incremental expenses. We will continue to maintain focus on expense control for the remainder of the year.
Adjusted research and development expense was $27.5 million or approximately 5% of revenues, compared to $24.6 million in Q1 2009 and $29.2 million in Q4 2009. We expect R&D expenses to continue at approximately 5% to 6% of net revenues for 2010.
At $118.8 million, our adjusted operating income reflects a $15.4 million increase over the first quarter of 2009. Adjusted EBITDA from our continuing operations for the quarter was $129.2 million, which is net of deductions of $7.7 million of restructuring charges and $3.9 million of acquisition and disposition-related expenses.
Free cash flow for the quarter was $52.8 million, reflecting cash flow from operations of $70.1 million, offset by capital expenditures of $17.3 million. Adjusted interest expense and other expense was $29.9 million in Q1 2010, compared to $20.5 million in Q1 2009. Adjusted interest expense, net of interest income was $32.9 million in Q1 2010 compared to $17.7 million in Q1 2009. Included in other income in Q1 2010 was a net gain of $3.1 million associated with the gain on a settlement of certain pre-acquisition contingencies in our Health Management business, offset by a charge related to bad debt on prior year sales.
In Q1, our tax rate was approximately 31.7% of pretax income compared to 33.7% in Q1 2009, with the lower 2010 effective rate in part reflecting a higher percentage of pretax earnings for our businesses located outside the U.S.
And now let me turn the call back over to Ron.
Ron Zwanziger
Thanks, Dave. A number of important agreements were reached during the first quarter, including the acquisition of 75% of Standard Diagnostics in South Korea, as well as the Marsh and McLennan's laboratory business in the U.S, which was formerly known as Kroll Laboratory Specialists and is now known as Alere Toxicology Services. Standard Diagnostics expanded our sales and distribution reach into Asia and other emerging markets, and provide us with high-quality at lower-cost research and development capabilities.
Alere Toxicology Services enables us to offer full solutions to the regulated drug testing market, as well as extended product and service offerings to our current customers in the unregulated markets. Additional capacity, along with certified lab capabilities should allow us to take better advantage of the high growth rates that should emerge in drugs of abuse testing as the global recession comes to an end.
During the first quarter, we also acquired RMD Networks, which stands for Reach My Doctor, a developer of web-based, collaborative clinical care software focused on enhancing the interaction between patients and physicians. Their web-based offerings will be combined with Apollo to provide a highly-differentiated communications portal tailored specifically to the needs of physicians.
We also signed several notable licensing and development contracts, including one with Monica Healthcare, maker of a wireless, wearable fetal-maternal monitor. Pending FDA clearance, this device will make realtime patient data accessible to both Alere nurse care managers and attending physicians through a connection to the Apollo system.
Before going on to questions, I'd like to provide an update on our R&D programs and recently launched technologies, all of which are progressing well.
Our early work on selling the Epocal systems has been very positive, with orders already beginning to come in. Despite the relatively long selling cycle for the systems, early signs are that this will be successful not only in the U.S. but in other developed markets as well. We expect to provide additional updates throughout the year as orders and revenues begin to build.
NGAL, our novel biomarker for the early diagnosis and management of renal injury, continues to generate favorable academic results, with the most recent being a study just published in the journal, Annals of Emergency Medicine. Like those before it, this study supports NGAL as a promising new biomarker for acute kidney injury. With five papers now published, all of them favorable, our confidence in the potential for this marker continues to increase.
PLGF, our test for the measurement of placental growth factor, has now been launched to key opinion leaders in Europe, with more investigators being added each month. This test, which will aid in the diagnosis of pre-eclampsia, will initially be used as a high-acuity marker in the emergency room. However, we believe that the marker will ultimately prove useful for monitoring, which will further expand our capabilities for the management of high-risk pregnancy.
Stirling congestive heart failure, our handheld BNP measurement device is nearing launch, with our study to support its use in a home setting is proceeding well. We expect to obtain CE marking for the device during the third quarter of this year. And U.S. 510(k) trials are also set to resume during the second half of the year. We expect a he fingerstick-based BNP device to make an early impact in the professional setting, where BNP's role in both the evaluation and monitoring of heart failures is becoming increasingly recognized. Over time, however, we expect this device to transfer to the home, similar to the shift that INR monitoring is currently undergoing. While home BMP monitoring will take several more years to become established, the overall potential for this market is much greater, we believe, than that of INR monitoring.
As reported on our last call, the PIMA CD4 analyzer commenced sales in Africa in late 2009, and shipments of the device have continued to increase through the first quarter. The system is a small point-of-care platform providing lab quality results, which are used to determine therapy eligibility and to perform frequent monitoring for HIV-positive individuals. We're continuing to expand our manufacturing operations and to respond to high demand for this groundbreaking device.
The CLONDIAG molecular platform will be the second device from the same team which developed the PIMA analyzer, and it remains on schedule to begin clinical studies in select geographies later this year.
Finally, the rollout of our Apollo platform is moving forward quickly, with more patients being transitioned onto the system. Although for commercial reasons, this will be the last call in which we give specific figures on overall progress. Less than four months after launch, we have more than 25 clients operational on the new system, approximately 5.5 million lives under management, nearly 400,000 active participants in various programs and approximately 40,000 individuals reporting via in-home devices on a daily basis. These figures should give a sense of how favorably Apollo has been received by payors and individuals alike. We will continue migrating new and existing customers to the Apollo solution throughout the year, as we move towards a single platform that provides a longitudinal view of each participant, further differentiating our offerings across the full spectrum of health management services.
What I hope you have detected through my remarks so far, is that the evolution of technology-driven programs for the management of chronic conditions in the home is moving much more quickly than many people may realize. Apollo is already providing opportunities as a critical hub for connecting biometric devices, not just for those developed by us but new technology developed by others. The addition of RMD Networks has added a physician portal, which will accelerate provider adoption of our services. Our current home monitoring offerings, such as INR, are experiencing high growth, reflecting of an increasing acceptance of the use of technology in the home by payors and providers.
New diagnostic devices and biomarkers, which are being developed specifically for the home, will help ensure that the overall value of home monitoring will continue to expand for many years to come.
Finally, the increasing adoption of healthcare IT initiatives and the expanded use of wireless devices in the professional setting, such as the epoc system currently available in the hospital, will continue to move the healthcare industry towards a distributed care model.
Inverness' earnings growth over the next few years will continue to be primarily driven by newly developed professional diagnostic technologies and higher revenue growth in emerging markets. In addition, recognition of the value of our technology-driven, patient-sensitive approach to chronic disease management and its potential contribution to our earnings growth is now beginning to emerge. And now let me open the call to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And the first question is from Erik Schneider with UBS.
Erik Schneider - UBS Investment Bank
Just a couple of questions on the margin side. So within Professional Diagnostics, can you remind folks of what basically the inventory layers should pass through, so that we can see the next step-ups in gross margins on the PD side? And within Health Management, can you give a sense of how much of the repricing that you think is necessary in the less differentiated business is done? And where you'd expect those margins to asymptote as those contracts flow through and anniversary?
David Teitel
So on the inventory side, I think what you're asking is things like Cholestech and the closure of the facility. How much of that is already in the P&L versus...
Erik Schneider - UBS Investment Bank
Versus how much is to come, correct.
David Teitel
So in the quarter, much of what we sold was actually manufactured in the old facility. Much of what -- as we transition into the second quarter, there is incremental benefit to be seen as we start to sell the lower-cost product. On the Health Management side, on the differentiated services, there will continue to be pressure on that business from a margin perspective, as we continue to be aggressive in both defending and securing new business. The next step though is as Apollo continues to rollout, we are able to close down some of the legacy systems late in this year and into next year. We get better utilization of the nursing staff, which will affect margins, as well as -- lower costs in supporting all the other systems, which will help reduce the G&A expense in that business. So overall, we expect the net profit in the business to continue to increase, although the gross margins will continue to be a bit pressured.
Erik Schneider - UBS Investment Bank
And with respect to the constant-currency organic growth in Professional Diagnostics, just give us a sense of when you expect to see that reaccelerate? And to what extent Epocal is helping in that realm?
Ron Zwanziger
Well, I think that the organic growth in the Professional is obviously been depressed by the sort of a knock-on effect from flu and other products, such as Strep, major impact in Japan in the quarter, other places as well, RSP and sort of related. So in some respects, the rest of the business, as we said in cardiology, which was over 11% in the quarter, it actually remained healthy. So in some respects, we saw a temporary depression there on the growth rate. So I think it will naturally respond, it will naturally return anyway. Look, the question you asked about the contribution of Epocal, we have a number of products that are beginning to sell Epocal, the CD4, we didn't actually mention the combo on the call as one of the many new products we have. But that one's beginning to pick up. So we have a number of products that are coming through that should help accelerate the growth rate.
Erik Schneider - UBS Investment Bank
Epocal, the expected timing of that, of actually closing that eventual acquisition, is that late next year? Is that still...
Ron Zwanziger
I think there hasn't really been any change since we announced the transaction. We have quite a number of years that we have, in which to impact the acquisition. From our perspective of course, the earlier, the better. Because it's an incentive-based system. And obviously, if we have the opportunity to buy it earlier, it means sales and profitability are rising at a faster rate.
Operator
Your next question comes from Zarak Khurshid with Wedbush Securities.
Zarak Khurshid - Caris & Company
Can you talk a little bit about just the overall profitability of Professional Diagnostics versus disease management? Of the $2.90 EPS guidance, how much of that is from disease management?
Ron Zwanziger
Well, I don't think we've ever particularly differentiated. But obviously, the huge majority is coming from the Diagnostics side of the business.
Zarak Khurshid - Caris & Company
Can you maybe talk about some pockets of strength in the disease management or the Professional Diagnostics business? Specifically what's happening with your C. DIFF franchise?
Ron Zwanziger
C. DIFF is fine. I don't have the exact numbers at my fingertips, but I think the quarter went quite well, actually. Look, when you say pockets of strength, I mean in our Diagnostics business, I mean, the whole Cardiology business which to a large part has done well. And the growth outside of the United States, particularly in Asia and other emerging markets is growing tremendously. So we have large chunks of the business that are doing very well. In fact, the business overall is doing very well.
Operator
The next question comes from John Putnam with Capstone Investments.
John Putnam - Capstone Investments
I was wondering if you could give us an update of what's going on in China, with the Triage products? And how you think that will be resolved?
Ron Zwanziger
Well, John, that's really a very minor issue on a relative small amount of revenues. And it will get resolved in the courts in due course.
Operator
And the next question is from Ashim Anand with Natix.
Ashim Anand - Natixis Bleichroeder Inc.
Ashim Anand from Natixis Bleichroeder. Ron, I was wondering if you can kind of give us an update on coagulation testing, considering ITC [International Technidyne Corporation] was recently sold at a relatively low valuation in my opinion. And also Roche's CoaguChek's entry and how the competitive dynamic is shaping up? And how do you see this going forward?
Ron Zwanziger
Well, I mean, I think we're very well positioned. Our products are selling well, both through our Health Management unit. Dave gave the numbers earlier. I'm sure you noticed that the increase in the quarter was on a pro forma basis. It rose from $12 million to $21 million in that segment. In other words, that is coagulation monitoring, but most of the earlier home monitoring is coagulation monitoring. So we're seeing strong growth. And we anticipate continuing to see strong growth as the acceptance from both the physicians and the insurance companies continues to come together. I doubt that the changes that you referred to in the competitive landscape is going to affect us. We continue to expect to be very aggressive in the marketplace and to see significant growth, which we're clearly seeing.
Ashim Anand - Natixis Bleichroeder Inc.
In terms of [indiscernible] at a marker that you recently signed, if you can give us some guideline. And also more importantly, in terms of utility, how this compares to the present markers? And what does the addition to prenatal [ph] or accepted [ph] Tests?
Ron Zwanziger
Well, it's to be seen how effective the marker will be. And its utility, obviously it's very early days for the marker. And we'll probably present it eventually in both formats that you asked about. And I don't have a particular timeframe, but it won't be this year.
Operator
Your next question comes from Constantine Davides with JMP.
Constantine Davides - JMP Securities LLC
But was the Research My Doctor acquisition the only acquisition you guys have in the quarter?
Ron Zwanziger
Well, you did miss it. I mean, we obviously bought Standard Diagnostics and Kroll.
Constantine Davides - JMP Securities LLC
And so how much total did you guys actually end up spending in the quarter?
David Teitel
The total cash on acquisitions was $337 million in the quarter. We did sell the Nutritional business and raised $64 million in that sale, you can think of those numbers in that.
Constantine Davides - JMP Securities LLC
And then just on, I guess, the free cash flow front, it looks like that snapped back pretty strongly in the quarter. And at the same time, DSOs looked like they picked up a little bit sequentially. So how should we sort of think about those metrics trending through the course of 2010?
David Teitel
Yes, DSOs were roughly flat in the quarter. The impact of acquisitions, you don't get a full quarter of revenue, but you get the fold-out receivable balance. And when you adjust for that, they were relatively flat in the quarter. And we actually had cash positive from receivables, adjusting out the acquisitions. We are making progress on cash flow and monitoring our balance sheet. We expect what you saw in Q1 to continue throughout the year and to accelerate a bit as we move into the back half. But some of the inventory, as an example, has been a little bit unpredictable in terms of managing things like full inventory levels with the dramatic change in demand.
Constantine Davides - JMP Securities LLC
And then just on the debt side, are you comfortable with where you are now? I mean would you look to start delevering at all this year? Is it your preference to build up that cash balance again this year, just to keep some dry powder available?
Ron Zwanziger
Well, we're not really deleveraging because our profitability is going up. And we expect it to continue to go up. But if you are asking specifically, are we going to actively pay down debt, we will not.
Operator
The next question comes from Daniel Owczarski with Avondale Partners.
Daniel Owczarski - Avondale Partners LLC
Ron, can you talk a little bit more about the rollout of the PIMA? Are users still in that validation stage? Or are they past that? Are they using it day-to-day now?
Ron Zwanziger
Very good question, Dan. The early users, we're seeing repeat orders already from the early users. And we're seeing a lot more people are trying it. Early results, not only from people testing it, but people from taking it out into the community have been very good. And so results have been coming in. So the early results of actual usage in the field are very encouraging. Frankly, the issues are internal. I think that we're scrambling to get production of both of the instruments and the disposables.
Daniel Owczarski - Avondale Partners LLC
Moving back to Health Management, is there any other growth rates or commentary you can provide about differentiated products? You gave us some of the QAS metrics as far as how that's growing. Any other differentiated products that are growing that you can share?
Ron Zwanziger
Well, clearly, with the passage of healthcare reform, one area which we expect to see some relatively near-term advantages revolve around smoking cessation. So that, we anticipate. And there is some additional funds available to some states on this, and since we have over half of the states as customers, we anticipate that, that -- not only did it have really good growth, but we anticipate that the growth, if anything, will accelerate. So that's one area. Another area that could come in, that could look as if it's not only doing fine at the moment but might accelerate is in the women's health area, particularly on the Medicaid side, where there is more attention being paid through the healthcare reform. And so that part of the business, which is of course a big chunk of our Health Management business, that could well accelerate.
Operator
Your next question comes from Greg Simpson with Stifel, Nicolaus.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Ron, if we look at Professional Diagnostics and kind of zero it on Cardiology, the growth rates there continue to accelerate. Is that all organic, and is that specifically driven by the acceleration of growth internationally? Or is it market share gains? Or can you give some kind of color on how that business has been progressing?
Ron Zwanziger
A lot of the growth has come internationally, but it is all organic. And some of the early indicators on it are quite positive. So we expect that, that business will continue to grow, including some potentially new products, maybe early next year. So that business is very solid. Of course, it's the bedrock of our earnings and cash flow. And it's looking very strong, and we expect it to do even better.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Can I zero in on that a little bit? When you bought Biosite and Cholestech, they had barely scratched the surface internationally. I mean, so that seems to be playing out. Can you -- prying out a number you can put your finger on, but any sense of how much progress maybe has been made in penetrating that international markets? Is it still wide open and you're still...
Ron Zwanziger
But despite increasingly large numbers coming in from outside the U.S., the reality is we barely scratched the surface outside the U.S. So I think we have this tremendous mileage in these products, both for the risk assessment in Cardiology and both for more critical situations, such as congestive heart failure. So I think the markets are -- when I say wide open, I'm talking sort of north of five years, maybe 10 years of sustained growth now.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Dave, on Health Management if I could, on the consolidation and transfer of clients over to the Apollo platform, you mentioned the savings as you shut down the other platforms. That has always been, at least in my numbers, I think in your guidance, that's always been thought of as a start-of-2011 event. But obviously, the possibility of maybe having that happen sometime in the latter part of 2010 is in the reiteration of 2010 guidance. Is there anything in there for assumed savings from the shutdown of those three old IT systems? Or are they still thought of as 2011 events?
David Teitel
You should still think of them in 2011. We'd love to get some of them done earlier. But it would be late in 2010, at best.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
And Ron or Dave, has the transition of clients over to Apollo gone smoothly, gone as well as you expected, better than expected? Can you characterize that at all?
Ron Zwanziger
Well, it's gone really quite well. I mean, the amount of teething trouble, and there has been some, has been relatively minimal. And that has been addressed. I don't know if it's related, it's probably not related to Apollo. But since healthcare reform was signed, we've seen a definite change in attitude amongst -- particularly on the insurance side, the health plans, with a lot more interactions, a lot more discussion about new programs, increase in requests for proposals and, also, less of that sort of need and pressure to take some business in-house, which has been an issue for quite some time. So we're thinking on the revenue side, we may be seeing the first signs of a sort of a turnaround in the business.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Obviously, with everything happening in flu and infectious disease in the quarter and we saw some companies miss numbers, there was concern that you guys might miss. And I'm curious about physician office trends, which are to sort out what the sustainable trends are and what's temporary. And can you talk about maybe physician office visits as you move into the second quarter? And I know the question was asked about organic growth as it plays out through the rest of the year, but can you maybe talk about, specifically, physician office visits and kind of what you anticipate as we go forward?
Ron Zwanziger
The point is we're coming out of the period. And Q2 is the period in which, historically, there hasn't been any flu or very little of it, some residual from Q1. And so the knock-on effect, which we experienced around the world as a result of flu, particularly in Japan as we already mentioned and I think we also mentioned in the call, in the previous call, I think those would diminish. And so it seems to us that the probability is that those issues will not be showing up this quarter, and I don't think have shown up this quarter so far, but it's too early in the quarter to tell. So I think those issues are diminishing. We recognized that the impact of the diminishing of the H1N1 in Q4 would have on Q1 at the time, because we didn't anticipate there wouldn't be a seasonal flu at all. But we did think there was a possibility that, that might happen, particularly if the epidemic was more similar to the one that took place in 1918, which does seem to have more similar characteristics to that one. And in that one, there was little follow-on through. So we were worried about -- that we thought there was a small probability of that. And as a result, your comment about people expecting to miss our quarter, we were worried that there was a probability that a 1918 effect could affect Q1 back in the middle of Q4. And so we put in expense construct. So we started having increased expenses significantly in the middle of the year, because the earnings were going well. Last year, when it happened, when flu ended the way it did, we put in expense controls in middle towards the end of Q4. And that's why we were able to deliver the quarter.
Operator
The next question is from Bruce Cranna with Jefferies & Company.
Bruce Cranna - Jefferies & Company, Inc.
Can we just spend a second on Consumer? I think of all the three segments you guys broke out, it was the part that surprised me a little bit to the downside. I don't know if I missed a comment there, Dave, but it seemed like that tailed off substantially. What was going on with Consumer in the quarter?
David Teitel
It is, the biggest piece of the drop-off from the fourth quarter was in our shipments to the joint venture. We are, as I'm sure you're aware, closing the Unipath facility, the joint venture bought a little bit ahead to make sure that they have supply in the channel in preparation for that. So the number to sale to the joint venture came down by about $5 million from the fourth quarter, and that's really what drove the overall decrease in that business.
Bruce Cranna - Jefferies & Company, Inc.
Then, look to see that snap back next quarter?
David Teitel
Yes.
Bruce Cranna - Jefferies & Company, Inc.
And then I know you probably don't want to put too a fine of a point on this, but just thinking about the delta in gross margins year-over-year, can you comment perhaps -- and I know you mentioned, obviously, lower flu sales in the Lab Services business side, and like maybe GMs were down there. But can you maybe just give us some sense as to that 100 basis point change year-over-year? What was the largest component and whether or not, I'm getting at is whether or not it was disease management?
David Teitel
Yes, the change in disease management probably was the biggest individual contributor, from 56.3% to 50.8%. It had the biggest overall impact on the overall margin. We were also down from a royalty standpoint. We had a $5 million royalty in the first quarter of last year, related to an animal health relations that wasn't in this quarter, and that has a pretty big impact on margins as well.
Operator
Your next question comes from Jeff Ares with Leerink Swann.
Jeff Ares
Not to harp too much on your Health Management side of the business, but given some of the things that you guys have talked about and the management changes recently, what do you guys see there as having particular opportunities, not only to improve margins but also working capital going forward?
Ron Zwanziger
Well, I mean, the point about Health Management business is its long-term nature. And as we discussed in the call, the purpose about of the business is to help us get closer to individuals with all the new technologies. And we went through and discussed how many of the new technologies are coming through, particularly around the INR, how monitoring there is coming together. So we anticipated to get significant growth from using diagnostic technology in the Health Management business over time.
Jeff Ares
I guess what I was getting at is there anything on the cost side of the structure of the business where you guys can improve margins? Or is it more of a volume story?
Ron Zwanziger
Well, the cost side is, as Dave explained, we're taking out a whole bunch of legacy IT systems and consolidating into one, and so that will happen. But as Dave also said, we suggest let's not take it into account this year but next year.
Operator
Your next question comes from Mark Afrasiabi with PIMCO.
Mark Afrasiabi - PIMCO
I was just wondering on capital structure, if you could give us your most updated thoughts here? There's been a lot of change in the high-yield market. And looking at debt levels, et cetera, I'm sure you guys follow it daily. But I mean in terms of sort of how you think about your optimal capital structure, you had indicated before a sort of comfort level going to sort of 5x leverage, I believe. I just wanted to get your up-to-date thoughts on cap structure over time?
Ron Zwanziger
Well, just to be clear, we've given a guidance of much higher than 5x. We had said that on situation, we'd go to 5½, and if the market allowed it, we'd even go to 6, total leverage I'm talking about. But obviously, we're a long way from that at the moment. And we won't particularly incur an additional debt per se, unless we anticipate being able to utilize the debt within a relatively short period, a few months after issuing it. And that's probably -- it's probably you're asking, why haven't we issued debt given how strong the markets have been. We won't issue debt for the second period, unless we anticipate using the debt in the few months following it, which clearly hasn't been the case. But that's not to say that we won't do it in the future.
Mark Afrasiabi - PIMCO
It sounds like at the right time for the right acquisition, that's when you go there. Otherwise, you'll just proceed along with this capital structure. Is that basically it?
Ron Zwanziger
That's reasonable, but one thing you should be aware of as you ask about debt levels, senior debt which was unavailable for a long time or it was unavailable at sensible prices has come down too. So there's more options for us, if we wanted to incur more debt for acquisitions. There are more options now available. We don't necessarily have to do it through high yield. We could do it by issuing senior securities.
Mark Afrasiabi - PIMCO
Think [ph] bank debt?
Ron Zwanziger
Bank debt, yes.
Operator
Your next question comes from Jon Groberg with Macquarie Capital.
Jonathan Groberg - Macquarie Research
If you just look at kind of your guidance for the year and if you look at the trend, I'm just trying to understand. Flu, it's going to continue to be a tough comp, but it doesn't sound like Disease Management gross margins are going to get much better. And if I just look at -- I'm trying to understand, given where you're in the kind of the first quarter and you get to that $2.90 assuming kind of similar revenue trends, and maybe you can correct me if I'm wrong in terms of what you're expecting, but it seemed like a lot of that needs to be driven by gross margins in order to get that operating margin expansion. So can you just maybe talk through about kind of how you're thinking the year would play out in terms of reaching that guidance?
Ron Zwanziger
There's many months left between now and the end of the year. We think that the revenue growth, the underlying revenue growth is there. So that's one way of doing it. You're right that we're very focused on gross margin, and it's an ability to get there through that. And then there's, of course, expense controls in addition to that. And so we juggle them as the year progresses, and we will keep a handle on it as we do on a very regular basis. So there's a number of different ways that these numbers are kind of direct to yield, to make sure that we achieve the $2.90, which we're very committed to doing, as you know.
Jonathan Groberg - Macquarie Research
And then if we just drill in a little bit in some of the specific things that have been going on. And so in cardiology, a competitor with troponin is having some issues. Do you think that's having any impact in terms of maybe some of your sales?
Ron Zwanziger
Possibly. I don't know if you're aware, but that hasn't particular impacted the market too much yet, because some of those products are actually still available. So it hasn't had an impact, but it might have some impact. I wouldn't sort of bet on that particularly.
Jonathan Groberg - Macquarie Research
And the Biosite transition, is that going kind of according to plan? Or what's the update on there in terms of taking that going direct, taking that out of Fisher?
Ron Zwanziger
It's going on track. We did work out some issues with them to make sure that it was done in an orderly way, both for them and for us. And then, it's going fine.
Operator
Your next question comes from Bill Bonello with RBC Capital.
Bill Bonello - RBC Capital Markets Corporation
Just a follow-up question on the expense control, you've talked about it a few times. Can you guys shed a little light on what kinds of leverage you can pull? Which expenses are most discretionary? And then just how we should think about the difference between what you're doing that sort of the sustainable efforts to take out cost, and what might be more temporary response to weakness in the environment?
Ron Zwanziger
We generally adjust the variable marketing costs. It's most of the savings. We have not, at all, impacted sales organizations. Obviously, that's because those are the crucial to us. So, essentially, it's variable marketing costs that we control is one element of what we do.
Bill Bonello - RBC Capital Markets Corporation
Can you just give a little more color on what that is? What are some of the marketing things that you sort of turn on and off or up and down?
Ron Zwanziger
I mean, it's the usual marketing costs this year that you can imagine, media and all kinds of other variable costs associated with marketing.
Operator
And the next question is a follow-up question from Bruce Cranna with Jefferies Company(sic) [Jefferies & Company].
Bruce Cranna - Jefferies & Company, Inc.
What I wanted to ask you, Dave, was -- and I'm sorry if I missed this too, but did you a give a separate number for Free & Clear in the quarter?
David Teitel
I did not give a separate number. It was around $18 million.
Bruce Cranna - Jefferies & Company, Inc.
I know you gave us the Apollo, the lives. But what percent of your total lives are now have been moved over to Apollo?
Ron Zwanziger
That's sort of an odd question, Bruce, because some contracts are with covered lives and some are not. So the more important question is really how many customers are we moving over. And as we said, it's over 25. And not every week or not every month, I mean not every week or every two weeks, we move more over. But that is -- the conversion is going quite well. And we anticipate that the vast majority to be done by the end of the year. I don't know if you caught it when we commented on this, but we did say in the call that we're not going to give further updates on this, because our competitors are watching this too much. And we decided we're not going to feed them useful information through these quarterly calls. So we're not going to be commenting on it.
Bruce Cranna - Jefferies & Company, Inc.
And Dave, on the interest and other line, you mentioned a gain in the quarter. And I sort of like to revisit that, and if you could perhaps tell us what impact, if there was an impact, from Standard Diagnostics in that line item in the quarter?
David Teitel
There's no impact from Standard Diagnostics in that line item. The $3.1 million in that number, we had some litigation around some IP in the Health Management area that we ultimately settled at an amount less than our reserves.
Operator
Next question is a follow-up question from Greg Simpson with Stifel, Nicolaus.
Gregory Simpson - Stifel, Nicolaus & Co., Inc.
Any further thought to, say, a joint venture in Health Management business? And then the other side of that, the whole Procter & Gamble relationship, any thoughts to where that progresses to? And any thoughts on would you sell the other half of that business to P&G?
Ron Zwanziger
Well, I mean both your questions, you never say no to anything in business for a reasonable business transactions. And first of all, on the notion of doing something with the Health Management business, of course, now that -- we, obviously, have problems with one narrow piece of the Health Management unit, but we think we're getting on top of that. The rest of the Health Management business is doing well. So one could take the view that why do it now. But at the same time, people who are interested in, and of course now that it's doing better and that we're beginning to see signs of turning the corner, are more likely to want to do it now. But that may mean that we're less wiling to do it now. So that said, we are actually keeping an open mind on it. On the second issue you raised about the relationship with P&G and the JV, we have them. Look, the business is doing really quite well, and Dave gave the numbers. And obviously at the right time, all assets at the right price are available for sale. But I should say, but having asked the question, completely off, sort of from tangentially, it's not as if we're sitting here trying to figure out a way of immediately doing something at JV or that we're having active discussions about selling it, right, we're not. We don't have either of those, but the topics do come up from time to time.
Operator
There are no further questions in queue.
Ron Zwanziger
Well, to sum up, we remain on track to deliver strong financial results for many years to come. We expect, over the next several years, to continue to have steadily-increasing organic revenue growth, which will be accompanied by steady gross margin expansion. Throughout the time period, investors should expect significant annual growth in adjusted cash EPS.
Our goal remains to become the leading company in the world, focused on enabling individuals to take charge of their health under medical supervision at home, through the merging of diagnostics and health management. And we expect success in this approach to have a major impact on our financial performance for many years to come.
As always, I'd like to thank you for your continued support and interest. Thank you very much, and have a good day.
Operator
Thank you. This concludes today's conference call. You may now disconnect.
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!