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Alere, Inc. (NYSE:ALR)

Q1 2014 Results Earnings Conference Call

April 29, 2014 8:30 AM ET

Executives

Doug Guarino – Director of Corporate Relations

Ron Zwanziger – Chairman, President & CEO

David Teitel – CFO, VP & Treasurer

Namal Nawana – COO

Analysts

Dan Leonard – Leerink Partners LLC

Anthony Petrone – Jefferies

Zarak Khurshid – Wedbush Securities

Jeffrey Frelick – Canaccord Genuity

Nicholas Jansen – Raymond James & Associates

Isaac Ro – Goldman Sachs

Operator

Welcome to the Alere, Inc. First Quarter 2014 Results Conference Call. All participants will be in listen-only mode. After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Doug Guarino.

Doug Guarino

Welcome to the Alere conference call to discuss our results for the quarter ended March 31, 2014. We are joined today by Ron Zwanziger, Chairman and CEO; Dave Teitel, CFO; and Namal Nawana, COO. Before we get to that discussion though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of the US 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 or potential product launches and product reintroductions, our ability to develop enhanced health information solutions through the integrated use through innovative diagnostic and monitoring devices, and to recognize the expected benefits of this strategy, the impact of healthcare reform legislation, our ability to comply with regulatory requirements, 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 & Exchange Commission including our Form 10K for the year ended December 31, 2013 as well as in our quarterly reports on Form 10Q.

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 www.Alere.com.

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

Ron Zwanziger

As communicated on the fourth quarter call, we anticipated lower revenues in Q1 due to several factors including the US flu season having essentially concluded by the end of Q4, as well as a challenging contracting season for our health information solution business. However, also contributing to lower Q1 revenues was a larger than expected reduction in US healthcare utilization particularly, physician office visits, resulting in lower testing volume principally in the infectious disease segment. The revenue challenges we recently experienced in the US have been reported by others in the industry and we expect that many investors are already aware of general trends. Aside from the US, our diagnostic business around the world performed well and demonstrated continuing organic growth.

As a result of our focus on global market development as well as our diverse product portfolio, we are well positioned to perform well even in a challenging quarter such as Q1. A key focus for us must be to continue to maximize this potential. However, before returning to a discussion on this topic in more detail, I’d like to point out the progress we did make during the quarter in other key initiatives.

A primary area of attention for us for several years now has been improving earnings predictability by strengthening our ability to respond rapidly to unexpected business challenges. In Q1 we achieved that goal delivering cash basis EPS of $0.55 a share. This was achieved through strong cost control measures which were further tightened as the quarter progressed. On an adjusted cash basis, R&D expense was flat with the fourth quarter and SG&A was reduced by approximately $4 million in non-variable expenses compared to Q4.

Based on the complex near term revenue outlook in the US, we have very recently initiative a significant additional range of programs to improve effectiveness which will help us in Q2 and will more fully support our results during the second half of the year. Namal will discuss these measures in further detail in just a moment.

We remain fully committed to our objectives laid out in the three-point plan to investors including the achievement of 28% SG&A as a percentage of revenue by the end of the year, and holding steady at that level for all of 2015. In the first quarter we continued our recent trend of very strong cash flow which is in part the result of the increasing focus on operational excellence over the past year.

Another important achievement in the quarter was finalization of a key element in our plan to deleverage the balance sheet over the next few years. Today, we announced our intention to pursue an initial public offering in the UK of a new entity which will include several of our non-core businesses. After considering multiple options for the last year, we believe this is the most tax effective and least dilutive method for us to unlock value from these assets and the structure should provide us with ample flexibility in the future to delever with favorable terms and appropriate timing. Based on rules behind the IPO process our comments at this time must remain limited beyond what appears in the release itself.

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

David Teitel

Adjusted net revenues for the quarter were $717 million compared to $739.9 million in Q1 2013. The effects of foreign currency translation decreased Q1 2014 adjusted net revenues by $2.6 million compared to Q1 2013. Adjusted net product and services revenues from our professional diagnostic segment were $561.8 million in Q1 2014 as compared to $579.3 million in Q1 2013. The decrease in segment revenues relates principally to lower US flu revenues which declined from $34.3 million in Q1 2013 to $7.3 million in Q1 2014 as a result of the shorter and less intense flu season experienced this year as compared to last.

Excluding the impact of the change in US influenza revenues and the impact on revenues from the US meter based triage product sales, currency adjusted organic growth rate in our professional diagnostic segment was -1%. This growth rate was adversely impacted by the decrease in reimbursement rates that became effective on July 1, 2013 for our US mail order diabetes business. Excluding revenues from our US mail order diabetes business and considering the flu and triage adjustment, the currency adjusted organic growth rate for the first quarter of 2014 was 4% for the remainder of our professional diagnostic segment reflecting a 2% decrease in US revenues compared to the first quarter of 2013 offset by an 8% increase in our international business. The 2% decrease in US business principally relates to lower infectious disease revenues reflecting lower utilization levels in 2014 than in 2013.

New product revenues contributed favorably to overall adjusted growth rate with sales of CD4 products increasing from $3.1 million in Q1 2013 to $6.7 million in Q1 2014 and epoc sales increasing from $4.7 million to $6.8 million for the same period. Net revenues from our Health Information Solutions segment were $123.7 million in Q1 2014 compared to $134.2 million in Q1 2013 reflecting growth in our patient self-testing business from $24.7 million in Q1 2013 to $27.2 million in Q1 2014 offset by decreases in all other areas of this segment as a result of the challenging contracting season for this group in the second half of 2013.

Net product and services revenue from our consumer diagnostic business segment were $26.4 million in Q1 2014 compared to $22.3 million in Q1 2013 reflecting continuing success from our joint venture with Proctor & Gamble driven particularly by the Clearblue Advanced Pregnancy Test with weeks estimator in the US.

Adjusted gross margin was 51.5% of adjusted net revenues in the first quarter of 2014 compared to 52.1% in the first quarter of 2013. The lower gross margin in the current period principally reflects the lower US influenza sales and reduced mail order diabetes reimbursement rates noted previously. Adjusted selling, general, and administrative expenses were $219.1 million or 30.6% of adjusted net revenues in Q1 2014 compared to $217.9 million or 29.4% of adjusted net revenues in Q1 2013. While disappointing as a percentage of revenue, adjusted SG&A decreased sequentially by $8.7 million from Q4 2013 as a result of $3.7 million of decreases in variable commissions and compensation on lower sales levels and $5.0 million of other savings from expense control measures.

Adjusted research and development expenses was $36.3 million or 5% of net revenues compared to $39.4 million or 5.3% of adjusted net revenues in Q1 2013.

Adjusted interest and other expense was $46.7 million in Q1 2014 compared to $56.7 million in Q1 2013. Adjusted interest expense net of interest income was $51.1 million in Q1 2014 compared to $55.2 million in Q1 2013. Our adjusted tax rate was 27.7% of pre-tax income compared to 34% in Q1 2013. We expect the tax rate for the balance of the year to be approximately 30%.

EBITDA for the quarter was $144.5 million which includes deductions for restructuring charges of $7.2 million, $300,000 of acquisition related expenses, and $3 million of costs associated with potential dispositions. Cash flow from operations for the quarter was $105.9 million and capital expenditures were $27.5 million. As of the end of Q1 our net outstanding debt was $3.37 billion, a reduction of $81.4 million from our net debt level at the end of 2013. Strong cash flows from operations coupled with principle payments of just over $15 million contributed to this reduction.

On LTM basis, our adjusted EBITDA with restructuring acquisitions and other costs added back was $661.1 million resulting in a net debt to adjusted EBITDA ratio of 5.1 times compared with a net debt to adjusted EBITDA ratio of 5.7 times at the end of Q1 2013.

I’ll now turn the call over to Namal.

Namal Nawana

Despite the challenges experienced in the US market which Ron and Dave have already described, we’re pleased to report another quarter of strong earnings per share for Alere. Our adjusted international organic growth rate of over 8% was driven by continued success in key geographies. We’re pleased to report outstanding organic growth of 32.5% in Africa driven by 116% growth of our CD4 platform and 63.5% growth in malaria products. Our China business enjoyed organic growth of 15.6% and India grew 48%. We see continued rapid growth of these geographies for the remainder of 2014 and beyond.

Latin America had a challenging quarter with only 1.5% growth but this is largely due to an unfavorable diabetes comparable in Brazil that will not repeat beyond the quarter and also the lack of a dengue season this year which was a key feature of strong growth in 2013. We anticipate a return to double digit growth in Latin America as the year progresses. In line with our previous comments on the fourth quarter call, we saw a return to growth in our European business in Q1 at 1.8% and we anticipate continued growth throughout the year.

In the Q4 earnings call we highlighted some technology platforms that we indicated with feature strongly in our growth in 2014. Global sales of our epoc product grew 45% in the quarter and we project accelerating demand as this product as the year progresses. We saw many new major customers for our Afinion product in the quarter with strong global growth of 17.6%. In addition to the growth of our CD4 platform in Africa, we’ve commenced a limited launch of this product in other Asian geographies including China which will help contribute to continued accelerated growth.

We’ve seen a meaningful increase in the sales of our INRatio product in recent quarters as well as in our Alere home monitoring business. However, this slowed in Q1 as global INR sales were down slightly compared with the prior year. Additionally, although not within Q1, in April we initiated a voluntary recall of our Alere INRatio2 PT/INR professional test strip in the US due to an observed increase in the frequency of certain adverse events reported in associated with discrepant readings with the device. We are replacing the INRatio 2 test strips with an earlier version of the strip which has continued to sell in certain segments of our US markets and which was not affected by the recall.

Our global professional INR revenues were $60 million in 2013 and $13.2 million in Q1 2014 of which $39.9 million and $8.2 million related to US professional revenues. Included in our Q1 results were US revenues of $6.5 million related to sales of INRatio2 test strip which is net of a $1 million reserve for product that may be returned as a result of the recall. We’ve begun working with our customers to supply them with the earlier version of the strip and thus far this has progressed well. Nevertheless, we anticipate an immediate impact of potentially several million in revenue per quarter for the next few quarters.

Triage global sales in Q1 were up 8.3% with US sales slightly up. This marks our first quarter of growth for triage in the US since we encountered supply issues in early 2012. It also comes ahead of a full return to the market of our toxicology and SOB panel to the US. On the fourth quarter call we expressed optimism that at least one of these products would return in the first half of 2014. We were in fact, able to bring back our toxicology panel in March and saw initial sales of $600,000 in the quarter. We anticipate a full return to the market starting in Q2 and further accelerating as the year goes on as our manufacturing output has substantially increased with stable yields.

For our SOB cardiac panel product we now anticipate a substantial return to the market in Q3 with potentially a limited return in June. Our Alere i platform with flu A/B analyze work was launched in Europe at the tail end of the flu seasons. Customer feedback has been excellent and we anticipate commercial success of the platform starting in Q3 of this year. Regulatory approval for the US is still in process but progressing well. Upon completion of the 510K clearance process we’ll turn to the clear waiver process which we hope to complete in time for the 2014/15 season. Additionally, our clinical trials for strep a test running on the same platform have also gone well which leaves us optimistic of both launching the product in the US and delivering additional content in the near term.

Moving to our operational effectiveness initiative, we continue to closely control expenses to deliver against our earnings plans. With a softening of the underlying sales volume in the US in Q1 we have proactively taken substantial measures to reduce op ex in Q2 including headcount reductions at several units throughout the company. These proactive measures will help solidify our anticipated Q2 result and moreover contribute to our confidence around strong financial performance for the remainder of the year. We remain on track to deliver our commitment of 28% SG&A rate in Q4 of this year even with an assumption of lower than originally anticipated US sales.

Now, let me hand the call back to Ron.

Ron Zwanziger

While the Q1 results did not fully reach our expectations, I hope it is clear that our cost reduction programs are progressing well and our predominate issue in the quarter was healthcare [inaudible] in the US rather than cost management or other issues. Unfortunately, some of the low [inaudible] rates that we’re experiencing may persist and as you’ve heard we’re taking appropriate steps in response. The path for us to meet our commitments for 2014 and beyond is to continue the progress we’re making in cost management and debt reduction while intensifying our focus on those drivers of revenue that are under our control.

We expect the second half of 2014 will bring several tailwinds to our organic revenue growth rate will receive the first anniversary of the impact of CMS reimbursement reduction on our diabetes in the third quarter and we’ll also expect to launch or introduce several major products in the US at approximately the same time including the continued reintroduction of additional triage cartridges and the launch of our Alere i molecular platform. Finally, we’re expanding manufacturing capacity to remove a supply constraint created by strong demand for the new markets we introduced on our blood gas and electrolyte analyzer over the year. All of these elements should contribute to an acceleration of US revenues as the year progresses.

Our unique global positioning and [inaudible] patient diagnostics and chronic condition management programs which continue to allow us to benefit from rapidly expanding markets outside the US and underpin our accelerated revenue growth over the long term. Alere has traditionally enjoyed strong organic growth in our diagnostic business as a result of our focus on the high growth areas such as cardiology, infectious disease, and toxicology, and we expect to continue to benefit from this position globally.

We remain focused on the targets we have laid out to our shareholders and expect to deliver higher operating margins, improve free cash flow, and increase earnings per share in a sustainable and predictable manner as a result. Now, let me open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dan Leonard at Leerink.

Dan Leonard – Leerink Partners LLC

My first question on the divestiture of BBI, is it still your plan to try to cap the dilution at about $0.20? I’m coming up with a number much bigger than that but I’m not sure my math is right.

Ron Zwanziger

I think we are in that neighborhood. The answer is about that.

Dan Leonard – Leerink Partners LLC

My follow up, given the new restructuring actions you’re taking what is your new projected restructuring expense in 2014?

David Teitel

We’re still working through a number of measures so it’s a little premature to give out a final number.

Operator

Your next question comes from Anthony Petrone at Jefferies.

Anthony Petrone – Jefferies

I’m just wondering maybe if you can walk through toxicology in the quarter? That line jumped out at me as being a little bit weak so maybe a little bit more detail on toxicology? Then a follow up on flu, I know Namal you mentioned fourth quarter this year into first quarter will have molecular up and running in the US potentially, can you give us an idea of what beyond influenza we’ll see in the 2015 timeframe? Then, one follow up question.

David Teitel

On the toxicology business, most of the business has performed reasonably well during the quarter including the reagent supply business and that business that continues to grow very nicely. Our challenge has been around the pain business over the past couple of quarters. We think we’ve gotten to a place where that is stabilized and through contracting will begin to grow over the balance of the year, but that was the area of the business that was a little bit weaker than it had been a year ago and does reflect a continuation of the trend you saw over the past couple of quarters.

Ron Zwanziger

Namal, do you want to comment on the molecular?

Namal Nawana

First of all, we have had some good customer feedback from our initial placements and sales into Europe which happened in the first quarter and so we’re encouraged by that. The additional content that we’re going to start with beyond flu will be strep A and there we have pretty much wrapped up the clinical trials and pulling the data together from that. That has progressed very well and we’re confident that is going to proceed well. Then beyond that, we will have other content such as RSV and chlamydia. Again, these content additions also speak to our desire to really get into the physician’s office through the CLIA waiver process in the US. We expect an acceleration of the product once we achieve that initial CLIA waiver and the further analysis should be easier and faster once that first regulatory approval has been achieved. So again, we’re hopeful to get the initial launch in the US in the 2014/15 season.

Anthony Petrone – Jefferies

Then the follow up would be just on the 28% SG&A goal, how does that play in with the BBI sale here? It seemed to me that’s a highly profitable business so should we expect the remainder of the progress to be from some of the internal initiatives ongoing in the company or will we see additional divestitures play into that number into the fourth quarter?

David Teitel

Specifically on BBI, just the way the accounting works because we’ll sell 25% interest, we’ll continue to consolidate that entity and will record a minority interest in the earnings below the operating income line so that transaction itself won’t dramatically change our SG&A rate over the course of the year.

Ron Zwanziger

You had a second part of the question?

Anthony Petrone – Jefferies

In terms of achieving that goal from the first quarter, can you give a sense of are some of the initiatives in place already from the cost containment initiatives you did in the fourth quarter or what should we expect in the second and third quarter in the way of getting that and marching towards that 28% SG&A goal by the fourth quarter?

Ron Zwanziger

I’ll let Namal answer the question in a moment but as we already said in the prepared remarks, as we saw the numbers in Q1 and the lack of utilization on some products which were certainly unexpected, we started taking measures. But Namal, why don’t you answer the question?

Namal Nawana

The first part is quarter-on-quarter we did still see reductions in our SG&A. Some of our plans probably slightly later than we would have hoped but I think we’re very well on track for the 28% in Q4. The plans are continuing from last year in terms of some of the infrastructure pieces that enable us to take further cost out but also rely on unit consolidations which have been ongoing for the last year and which delivered the 150 basis points of improvement in the full calendar year last year.

We have the continuation but as Ron said, given that we had this softness, first of all we were able to adjust following essentially a soft February to tighten down in March and I think that’s a good sign for the rest of the business. But secondly, we are initiating and have initiated further measures in Q2 to make sure that our financial performance will be solid for the remainder of the year. So, we’re confident about the 28% in Q4.

Operator

Your next question comes from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid – Wedbush Securities

As we think about the impact from the reduction in hospital visits, help us understand how much of that is related to the lighter flu and cold season versus how much is perhaps maybe a more sustained shift in the way patients behave?

Ron Zwanziger

Well that’s an exceptionally good question Zarak. Clearly, there was a huge impact of the flu. Our flu reduction was in the quarter – Dave, what was it?

David Teitel

Down from $34 million to around $7 million.

Ron Zwanziger

So, that’s a massive earnings hit we had to overcome in addition to the $7 million of loss profits as a result of the reimbursement cut quarter-on-quarter so we had a massive thing to overcome and there was sort of a parallel of some additional products as well. Clearly, that was flu related but at the same time there did appear to be, or at least we had reports and this unfortunately is not a quantitative statement, so it may not be worth very much, but we did get quite a number of reports that patients were delaying visits and so there was an appearance for a change in behavior and there’s possibly any number of reasons for that. Because of that, and because that seems a little unpredictable, that’s why it’s for that reason that we’ve taken some real hard measures because having seen it and finding it difficult to understand how that will unfold, we’ve taken precautions.

Zarak Khurshid – Wedbush Securities

In terms of the R&D line, can you give us a sense for the priorities there between Alere i and Q and other endeavors?

Ron Zwanziger

No change from previous comments about the fact that we have an increasing focus on some of the shorter term products, products that have already been launched, product improvements and the reason is we don’t feel a need, at the moment, for a new platform precisely because we have them already. The Alere i, the Alere Q will get launched later this year and so on and this is something that is a theme you may have noticed was running a good chunk of all last year and continues to accelerate as we move away to shorter term products because we do have the platforms for the longer term.

Zarak Khurshid – Wedbush Securities

Then as a final one, just on the CapEx side, I’m curious how that is expected to play out this year?

David Teitel

It was a little lighter than it’s been running in Q1 so somewhere between 30 and 35 a quarter is still the right way to model.

Operator

Your next question comes from Jeffrey Frelick at Canaccord Genuity.

Jeffrey Frelick – Canaccord Genuity

Ron, just a follow up to the last question, are you seeing any improvements in 2Q on utilization?

Ron Zwanziger

Again, mixed but we’ve had some positive comments from some dealers about their sales out have improved slightly. I wouldn’t say that’s consistent and I wouldn’t say that’s something we can bank on but basically we have seen reports from dealers saying so yes. But, it’s very sporadic so we don’t know what to make of it at this point.

Jeffrey Frelick – Canaccord Genuity

Remind us how dealer inventories are going into 2Q?

David Teitel

There’s nothing extraordinary in the channel. Most of our flu revenues dried up earlier in the quarter so we think we’re well positioned for next season.

Jeffrey Frelick – Canaccord Genuity

Last question for Namal, what helped with the European health growth rebound in the quarter and what will drive it throughout the year?

Ron Zwanziger

What’s going to drive the European growth? I mean that’s really a complex question and you’ve seen discussions around what’s happening in the healthcare systems there. At some level the growth we’re seeing is directly because there’s been a slight improvement in some economies over there and that seems to be continuing so we have a tad more optimism that we’ve had before. We’re getting fairly consistent read from our units on this in terms of not only their performance in Q1 but also in terms of their reactions with customers both public and private. So, there is just a little sense of improvement in quite a number of countries.

Operator

Your next question comes from Nicholas Jansen – Raymond James & Associates.

Nicholas Jansen – Raymond James & Associates

Looking at the BBI IPO, I’m just trying to get a sense of maybe going the IPO route versus a full out asset sale, maybe just kind of your color surrounding the divestiture process as a whole, were there fewer buyers than you were hoping for? Just maybe any incremental color on why choosing the IPO versus the outright sale?

Ron Zwanziger

We looked at selling units individually, had a lot of interest over time. But if you look at sort of the balance, we’ve always said we’re worried about dilution, we’re going to be careful about dilution. We actually think that doing it this way is not only slightly more tax efficient but it actually we think will end up being less dilutive and we can also control it a lot better. We have more influence on the timing.

It’s taken a long time, by the way, to put together the IPO because we’ve had to strengthen the management team so that it’s able to do that, we’ve had to assemble an external board to comply with the UK rules, there’s obviously been a bunch of financials that have had to be done and carved out. We’re fortunate in that we figured out a way of having our 50% of the JV actually inside the spinout which involves some complexity which also took some time to resolve. This took quite a bit of effort to orchestrate but fortunately we’re through that now.

Nicholas Jansen – Raymond James & Associates

Is there anymore incremental asset sales that you’re kind of working on? On that point, looking at the health information solutions segment, certainly a challenge contract season late last year which impacted the numbers and now you have a modest product recall in the only segment in that business line that is actually growing. What’s your longer term aspirations within that product line?

Ron Zwanziger

First of all, we didn’t have a recall in that product segment because that product, which we sell through, was the previous generation so actually we don’t have a recall on that product. But you’re right in that we are in an active process looking at some elements of the rest of the unit which are non-core. I think we’ve mentioned that before and so there might well be additional divestitures.

Nicholas Jansen – Raymond James & Associates

Lastly, in order to get to that 28% operating expense target, what level of revenue should we be thinking about in terms of absolute dollars that would make it easier or more comfortable to reach that level? I’m just trying to get an idea of any size or sequential increase or decrease in terms of total operating expenses over the next couple of quarters.

David Teitel

Sequentially we would expect the expenses to drop quarter-over-quarter as a result of the actions we’re taking. When I went through my prepared remarks I did breakout the sequential change from Q4 to Q1 and point out that $3.7 million of the change from Q4 to Q1 was revenue driven, lower commission, and things that are driven off of revenue. The balance were reductions from quarter-to-quarter and as Namal had previously talked about, we’re implementing incremental actions to continue to bring down the expenses. So, the absolute dollar is somewhat dependent on revenue and the things that move with revenue, but the trend should be to continue the expense controls.

Ron Zwanziger

The point about the extra expense controls is precisely because of anxiety around revenue so we want to make sure that even at slightly lower revenues we can still achieve that target.

Operator

Your next question comes from Isaac Ro with Goldman Sachs.

Isaac Ro – Goldman Sachs

Given the growth we’ve seen in CD4 can you discuss the margins you’re seeing in that product? Then, can you remind us what’s the latest view on long term growth and revenue and margin potential for that business?

David Teitel

Obviously, it’s been a challenge ramping up production in that business and getting to the place we are. We are at a point where we are making money on the sales and the amount of money is increasing as we run incremental volumes through that facility. So we won’t give an absolute margin for the product or the business but it is improving and as sales continue to grow the variable expenses there or the fixed expenses there are being absorbed better resulting in lower product costs. So, we feel like we’re in a good position after a long period to get to this point to see incremental profit driven through that facility.

Isaac Ro – Goldman Sachs

Then not to harp on these headcount reductions but obviously, the pace has increased. Can you just talk about any changes you’ve made to how the sales force is incentivized? I’m just trying to understand how you’re handicapping any impact or destruction that may affect the organic growth profile of the business?

Ron Zwanziger

First of all I’d comment that when we make changes we’re always very careful in terms of preserving customer relationship and customer facing. But, I’ll let Namal answer that question.

Namal Nawana

The actual restructuring we have maintained our sales forces very stable over the course of the last year particularly in light of the other changes we’ve made, and that will continue to be the case. The unit consolidations have really been concerned more with the G&A side and so I think we feel there will be low disruption because of that. Then in terms of compensation, we have various different compensation programs around the world but what we do do, and just as we focus a lot on the call, is to focus on select products, growth platforms, and thereby align the goals of the company with what our sales force activity is.

Operator

Your next question comes from Zarak Khurshid – Wedbush Securities.

Zarak Khurshid – Wedbush Securities

I just had some questions on China, it seemed quite strong. Can you give us a sense for you investment in that region and kind of the sustainability of growth or long term opportunities?

Ron Zwanziger

That’s another good question. I’d tell you that there has been some pretty aggressive price cuts actually in China, on our key products including triage. That category has had cuts and fairly severe cuts and so the fact that we actually got a good growth rate had to overcome a significant price cut in one of our largest products that we sell. We’re very committed to China. I think our products haven’t scratched the surface. In general it takes a while to get regulatory clearances for product and so although we’ve made a lot of progress and we’re closing in, we might not quite hit $100 million this year in China, we have been growing very well.

It’s basically been done on some of the products where without some clearances, which we’ve recently been getting, so our optimism around China is really pretty good because not only are we doing well, penetration rate of our existing products is nowhere near where it should be. There are tertiary markets that we’re not present in and frankly, some of the primary markets we’re not as strong as we should be so we have plenty of opportunity as I said, we’re getting additional products. I think we’re actually quite optimistic about the progress in China.

Operator

At this time we can conclude the question and answer session.

Ron Zwanziger

I’ll just make a couple of closing remarks. Steady improvement in our operation effectiveness, continued advancement in the development and launch of our new products, and meaningful progress in our deleveraging efforts should be taken as an indication that our long term value creation strategy will enable us to generate sustainable success. We’re confident this approach will continue to support improving financial performance and predictability of earnings and strongly believe that our unique positioning to capitalize on the evolution of global healthcare will enable us to deliver long term value for all Alere’s shareholders 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

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: Alere's CEO Discusses Q1 2014 Results - Earnings Call Transcript
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