Alere (ALR) Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Alere Inc. (ALR)

Alere, Inc. (NYSE:ALR)

Q2 2014 Earnings Conference Call

August 4, 2014 8:30 AM ET

Executives

Jon Russell – VP, Finance

Gregg J. Powers - Chairman

Namal Nawana - Interim CEO and President, and COO

David Teitel - CFO, VP and Treasurer

Analysts

Anthony Petrone – Jefferies

Isaac Ro – Goldman Sachs

Mark Massaro - Canaccord Genuity

Zarak Khurshid - Wedbush Securities

Nicholas Jansen – Raymond James

Operator

Hello, and welcome to the Alere, Inc. Second Quarter 2014 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this conference is being recorded. Now I would like to turn the conference over to Jon Russell. Mr. Russell, please go ahead.

Jon Russell

Thank you, Keith. Good morning and welcome to the Alere conference call to discuss our results for the quarter ended June 30, 2014. We are joined today by our Chairman, Greg Powers; our Interim CEO and President, Namal Nawana; and our CFO, David Teitel.

Before we get to that discussion though, I would like to point out that during this conference call we may make forward-looking statements 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 current assumptions and information currently available. Actual results, and the timing of events, could differ materially due to the risks and uncertainties described in our Form 10-K, Form 10-Q, and other reports and filings with the SEC. 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 our Chairman, Gregg Powers.

Gregg J. Powers

Thanks Jon, and good morning. It has been a busy quarter for the company and it is my goal this morning to shed some light on recent developments. In conjunction with my appointment as Chairman, the Board commissioned a major international consulting firm to conduct a comprehensive strategic review of the company's operations. As part of that process the Board subsequently accepted the resignation of Ron Zwanziger and appointed Namal Nawana, Interim President and CEO. The review process is ongoing and purposefully comprehensive. We are examining each business unit from the top down to understand its strategic place within the company. Within the business units themselves we are evaluating each product from the bottom up, calibrating the strength of our technologies, sizing the available market opportunities, and determining the best allocation of resources to drive growth and shareholder value.

Our prior operating strategy resulted in an organization with excessive breadth and profound inefficiencies. It's also clear that prior management had failed to coherently integrate many of its more than 100 acquisitions. These organizational challenges were compounded by management's prioritization or more accurately stated preoccupation with the Connected Health initiative.

The concepts and technologies surrounding Connected Health are important and relevant. While the vision behind the Connected Health initiative remains a promising one, it is the judgment of the Board, our consultants, and the new management that given our scale and desire for sharpened focus, our strategic review process will consider if another owner could derive more value from these assets.

Alere possesses market leading diagnostic technologies and its professional diagnostics business should be able to grow at rates equal to or in excess of the markets we serve. As you can see from today's results this is currently not the case. We believe that both near-term and long-term shareholder value can be enhanced materially through focused and disciplined execution within the core business.

Over the last 18 months in his role as Chief Operating Officer, Namal has observed numerous opportunities to improve this business. He however was not empowered to affect many of the changes necessary to sharpen our focus, drive growth, and further enhance our financial performance. This situation has now been corrected. Since the transition I have personally spoken with each member of the company's global leadership team and have been impressed by their passionate support for the changes we have made and those we will make in the near future, along with their commitment to drive this company's performance to levels commensurate with our technologies and market position.

With that said I will turn the call over to Namal to share his thoughts.

Namal Nawana

Thanks Gregg and good morning everyone. On today's call I will focus on three key areas. Firstly, commenting on results of our second quarter earnings; secondly, discussing progress and further plans associated with our strategic reviews and repositioning the company as a global leader in rapid diagnostics; and thirdly, bringing some perspective to our financial outlook and approach going forward.

The 2014 second quarter financial results for Alere are unsatisfactory. Adjusted earnings per share in the quarter of $0.42 are below expectations and we are impacted by several factors including one-time costs associated with two product recalls, gross margin pressure due to weak results in higher margin geographies, and increased spending within our Connected Health unit.

The effect of two product recalls contributed to below plan organic revenue growth for the global professional diagnostics business in the quarter as well as depressed gross margins on a one time basis. Gross margins were also negatively affected by geographic revenue mix, specifically weak U.S. results and a relatively strong quarter in Africa.

Excellent growth in many of our international businesses continued in Q2 but was not sufficient to offset the revenue challenges just mentioned. These international markets will be a continued area of focus and investments going forward and should help drive stronger organic growth overall. Dave will report more details on revenue results shortly.

Adjusted SG&A spend overall was flat sequentially from the first quarter. In the second quarter we eliminated approximately $21 million in annualized SG&A costs through restructuring initiatives. However, the timing of these changes allowed little benefit to flow through in the quarter. Total operating expense is also adversely impacted by substantially increased spending on the strategic build-out of our Connected Health unit. In fact investments in Connected Health generated an unfavorable effect on operating income of roughly $10 million in the quarter.

I want to make it clear that we are moving rapidly to improve financial performance in line with a new strategic direction, which will center around Alere’s core strengths as the global leader in rapid diagnostics and in particular in our focus areas of infectious and cardiometabolic disease and toxicology. I anticipate that within the next few months these plans will be fully formed and communicated broadly.

We also remain committed to further streamlining our cost structure. In addition to the approximately $21 million in annualized SG&A costs we removed late in the second quarter there are multiple initiatives underway to further rationalize our annual cost base in both the near and mid-term.

The combination of weakness in our U.S. respiratory categories, product recalls, and our inability to bring select Triage cartridges fully back to market are weighing on our near-term growth prospects in North America. Although we have improved our quality and manufacturing operations substantially in recent times, we recognize that Alere still has substantial opportunity to improve in this domain.

As quality issues are fully resolved and automation and consolidation opportunities take hold, this challenge ultimately represents a further major horizon for revenue growth acceleration and operating income margin expansion. I am confident that these issues are completely resolvable. But it is my approach to deliver outcomes rather than offer promises.

Our investments in Connected Health in recent times have accelerated and are now substantial in terms of both direct costs and organizational energy. As we aggressively re-scope our investments in Connected Health, we are confident that this will directly improve our financial and organizational performance. Some elements of our technology platform related to instrument connectivity will continue to support our core business significantly going forward and these investments will be protected. Other assets in Connected Health will be evaluated for divestiture and in the very short-term we will limit investment in these activities.

As Greg has indicated, Alere has both acquired and developed an impressive and broad array of assets over the past decade. However, operating so broadly has caused diffused resource allocation that has ultimately hindered financial performance. I can report that through excellent discussions between the Board and new management we have agreed to plan to assess the full range of Alere's technology assets going forward, going against our forward strategic direction. This work will be completed in the coming months. Importantly certain decisions have already been made in this domain. I can confirm that we will actively divest our health management businesses, looking to complete this before year-end. We have no plans to restart the BBI asset spinoff at this stage. However, we will look at the right options for each of the component businesses that we will put together through that process.

We will also look to stop investment against and potentially divest other smaller, non-core assets in various fields of oncology, women’s health, and veterinary products. It has additionally been agreed that we will cut certain speculative R&D projects, invest more in several others but in total will bring down overall R&D expenditures. We will focus on the highest impact projects and we are committed to improved R&D focus and productivity.

A strategic review that we are performing in partnership with a major external consulting firm has moved to a new, much more detailed phase. We expect this deep evaluation of our entire portfolio of businesses to be completed before year-end with transparent communication of the conclusions to shareholders shortly afterwards. By committing to a new strategic direction that would better utilize the strengths in our core rapid diagnostics businesses, Alere will position itself to be a strong solutions provider for healthcare globally in the fields of cardiometabolic disease, infectious disease, and toxicology.

While our recent growth headwinds are real, we expect that these issues will be mitigated as just discussed through strategic focus and direct cost measures. Through renewed focus and investment in our core, we will enhance our competitiveness in growth markets where we enjoy leadership positions already. It is a belief of the Board and new management that this will deliver more predictable, long-term, sustainable shareholder value. And now let me turn the call over to Dave for a more detailed discussion of our reported financial results for Q2.

David Teitel

Thanks Namal and good morning. Adjusted net revenues for the quarter was $738.3 million, compared to $764.6 million in Q2 2013. The effects of foreign currency translation increased Q2 2014 adjusted net revenues by $5.5 million compared to Q2 2013. Adjusted net product and services revenues from our professional diagnostic segment were $578.4 million in Q2 2014 as compared to $600.2 million in Q2 2013.

The decrease in segment revenues relates principally to lower U.S. revenues from our mail order diabetes business which decreased from $56.2 million in Q2 2013 to $33.0 million in Q2 2014 despite an increase in patient served from 455,000 as of the end of Q2 2013 to 778,000 as of the end of Q2 2014, due to the decrease in reimbursement rates that became effective on July 1, 2013. Excluding the impact of the change in U.S. influenza revenues, the impact of revenues from the U.S. meter based Triage product sales, and the impact of the mail order diabetes reimbursement rate reduction, currency adjusted organic growth in our Professional Diagnostics segment was 0.4%.

This growth rate reflects a 4.1% decrease in the adjusted U.S. revenues compared to the second quarter of 2013, offset by a 4.3% increase in our international business. The decrease in U.S. business principally relates to continued lower utilization levels during 2014 than during 2013 and to the impact of product returns on our INR business as a result of the recall initiated early in Q2 which adversely impacted revenues by $3.7 million. International growth in the Professional Diagnostics segment was highlighted by continued strong performance in both Africa and India both of which grew by over 20% offset by weaker performance in Latin America where a diabetes tender in Brazil in Q2 2013 did not recur in 2014. And a weak dengue season impacted overall revenues in the region.

New products contributed favorably to our overall adjusted growth rates with sales of CD4 products increasing from $4.6 million in Q2 2013 to $7.6 million in Q2 2014. And epoc sales increasing from $5.5 million to $6.9 million for the same period.

With respect to other new products we filed CLIA waiver submissions for our Alere i Influenza test and our Determine Combo antibody/antigen test, and filed for 510(k) clearance for a strep A test for the Alere i platform during July. Additionally we have self certified our Alere Q instrument for CE mark and have submitted our certification packages for CE mark to our notified body for the disposables which run on Alere Q for early infant diagnosis in August.

Net revenues for our Health Information Solutions segment were $125.8 million in Q2 2014 compared to $134.8 million in Q2 2013 reflecting growth in our patient self testing business from $25.7 million in Q2 2013 to $29.4 million in Q2 2014 offset by decreases in all other areas of this segment as a result of challenging contracting season for this group in the second half of 2013.

Net product and services revenues for our consumer diagnostic business were $27.4 million in Q2 2014 compared to $24.7 million in Q2 2013 reflecting continued success from our joint venture with Procter & Gamble driven particularly by the Clearblue Advanced Pregnancy Test with Weeks Estimator in the U.S.

Adjusted gross margins were 48.4% of adjusted net revenues in the second quarter of 2014 compared to 52.8% in the second quarter of 2013. The lower gross margins in the current period principally reflect revenue on cost charges totaling $7.5 million related to INRatio2 recall that I discussed earlier and to a second quarter recall of certain Beckman Coulter Triage BNP Test. Additionally our continued growth outside the U.S. coupled with weak U.S. revenues contributed from a mixed perspective to weaker gross margins in the quarter.

Adjusted selling, general, and administrative expenses were $220 million or 29.8% of adjusted net revenues in Q2 2014 compared to $222.2 million or 29.1% of adjusted net revenues in Q2 2013. Adjusted research and development expense was $35.0 million or 4.7% of adjusted net revenues compared to $37.9 million or 5% of adjusted net revenues in Q2 2013. During the second quarter we implemented work force reduction which we expect will reduce combined operating expenses by $21.3 million annually and which reduce Q2 2014 operating expenses by $2.1 million. Adjusted interest and other expense was $49 million in Q2 2014 compared to $57.7 million in Q2 2013.

Adjust interest expense net of interest income was $51.1 million in Q2 2014 compared to $55.0 million in Q2 2013. Our adjusted tax rate was 26% of pretax income compared to 34% in Q2 2013. We expect the tax rate for the balance of the year to be slightly less than 30%. Our non-GAAP EBITDA for the quarter was $110.2 million which includes deduction for restructuring charges of $15.8 million, 100,000 of acquisition related expenses and $11.6 million of costs associated with potential dispositions.

Cash flow from operations was $19.3 million offset by capital expenditures of $26.9 million. Cash flow from operations during the quarter was adversely impacted by the payment of $9.1 million of severance charges associated with work force reduction, $6.2 million of payments associated with costs incurred related to the planned dispositions and $16.7 million of contingent purchase price payments in excess of acquisition date accruals. Additionally cash flow from operations for the second quarter reflects the payment of $49.6 million of semi-annual interest payments on the senior subordinated notes.

On an LPM basis, our adjusted non-GAAP EBITDA with restructuring, acquisitions and other cost added back was $623.7 million resulting in the net debt through adjusted non-GAAP EBITDA ratio of 5.4 times.

I would now like to turn the call back over to Namal.

Namal Nawana

Thanks Dave. Before opening the call up for questions I would like to provide some commentary on the three point plan that Alere has been working towards since late 2012. Point one of the plan related to organic growth acceleration. Full year 2013 performance returned Alere to mid-single digit organic growth mostly driven by focused resource allocation and energy on international markets, but also helped by strength in our infectious disease business.

In the first half of 2014, softness in our respiratory business as well as overall U.S. market performance and the effect of two recalls has stalled growth. This will not be materially reversed during the second half of 2014 despite solid performance in international markets. Alere's health management businesses have suffered revenue losses in early 2014 which despite some modest recent wins will persist and dampen overall growth until divestitures of these businesses are complete.

As I indicated previously Alere cannot and will not rely on revenue growth to achieve operating income target in this calendar year and will revert to further assets on the cost base. However this should not be construed as a lack of confidence in our overall growth potential. With improved manufacturing performance, our full portfolio of products back in the market, and a more focused approach of our core diagnostics areas, we expect organic revenue growth to resume in 2015.

Point two of the plan related to an improved cost base. In 2013, 150 basis points of leverage were achieved versus 2012 despite substantial investment to initiate enterprise infrastructure that was not in place and support quality remediation efforts. In the first half of 2014 progress on the SG&A rate has been hampered by revenue shortfalls. But meaningful cost basis improvements were initiated. These were however more than fully offset by increased spending in Connected Health.

As we look to the second half of the year, a strategic focus shift and new cost initiatives will improve on first half performance and we will seek to deliver on the commitment of a 28% SG&A rate as we exit 2014 and for full year 2015. This will remain in our strategy for financial execution going forward ensuring a foundation for solid earnings growth.

Point three of the plan committed to deleveraging the business and was updated to target three times net debt to adjusted cash basis EBITDA by the end of calendar year 2015. Whilst efforts were made to divest certain assets including a proposed spinoff of our BBI business and associated units, asset sales have not yet contributed to deleveraging.

With the management transition I have already initiated a new assessment of all technologies in conjunction with the Board and have become actively involved in portfolio management. This will become a part of my personal focus in the coming months in order to fully execute on divestitures now agreed with the Board and to diligently evaluate our full portfolio of assets as discussed earlier. However, we will only move forward with divestitures that support our new strategic direction and in which the value received is attractive. We will additionally continue our efforts to increase cash flow from operations to improve focus and execution. The strategic review currently underway will allow our business to succeed in the critical areas identified in the three point plan; organic growth, operational excellence, and a stronger balance sheet.

We are committed to enhancing shareholder value and we will take the next few months to refine and consolidate our plans. In the interim and in the absence of revenue growth as a driver, we will be using the principal levers of strategic focus and further cost measures to deliver solid financial results for the second half of 2014 while remaining committed to extracting improved cash flow from operations and executing on asset divestitures.

A final critical initiative during the second half of 2014 is rapid improvement in the integrity of our forecasting through sharpened focus on key profitability drivers as well as increased accountability within the organization. Enhancements in this area will allow us to confidently resume providing earnings guidance early in 2015.

And now let me open the call up to questions. Thank you, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And the first question comes from Anthony Petrone from Jefferies Group.

Anthony Petrone – Jefferies

Thanks and good morning everyone. Maybe just a couple for Namal, first on the quarter, maybe can you explain if at all possible how much of the performance in the quarter can maybe be credited to distractions with management changes and also the attempt to sell BBI as opposed to just general headwinds in the business? I know utilization was also called out this morning, so maybe just to sort of reconcile those two moving parts and then one follow-up, thanks.

Namal Nawana

I think first of all the financial performance in the quarter were more related towards our challenges in the U.S. which principally also related to the product recalls and challenges in pricing with respect to toxicology business in rehab and equally we have talked about it before, this is the last quarter where we see the year-on-year challenge with respect to our mail order diabetes business where we had a substantial decrease in revenue versus prior year. So, I would say that the results and financial performance of Q2 really are related to those effects. Dave you may want to add to the detail of that.

David Teitel

I think you hit the highlights, you know, obviously there was significant change in the quarter and the BBI transaction did absorb some resources. But as Namal said, the issues are primarily on the U.S. side.

Anthony Petrone – Jefferies

No, it is helpful and maybe just to tie that in to the next question, looking ahead into the second half and the shift in sort of the outlook for revenue there is a lot of moving parts here, how much does that reflect potential asset sales as well. So when we sort of look at the combined business certain assets potentially are going to be sold here, so how much does that offset say improved performance into the second half if at all you see that as well as maybe the potential launch of some other assets within professional diagnostics mainly flew into the second half, thanks?

Namal Nawana

As we work towards the asset sales we’ve described I think that closing by the year-end won't have a meaningful change in our financial performance from those sales. And in terms of our full financial performance, I think that the closure of those asset sales will more fully affect 2015 and baseline 2015. I do think the critical thing relates to how in the second quarter we had to absorb the recall effect for INRatio where we took a contra revenue on our quarter for INRatio and obviously that really affected gross margin.

So quarter three you will still us work very hard to respond to the full demand of INRatio. We probably won't be able to meet full demand still, having had to swap out that product and that's weighing on us. But I expect that by quarter four we will be in a better place with respect to INRatio. And I think also natural cycle is such that we have larger quarters in Q3 and Q4.

Anthony Petrone – Jefferies

Thanks again.

Operator

Thank you. And the next question comes from Isaac Ro of Goldman Sachs.

Isaac Ro – Goldman Sachs

Good morning guys, thanks a bunch. I know there is a lot of moving parts and you are not necessarily talking about long term guidance, but maybe in the short term just trying to get a sense of given the puts and takes in your last comments there, how we should think about the sequential trend in the business, is it fair to say given seasonality and all the changes that sequential revenue maybe flat or down or how should we just think about the next couple of quarters?

Namal Nawana

Look sequential revenue is still going to be flat is how we would look at it versus prior year. So we don’t forecast organic growth for the remainder of this year as a total business and as a total professional diagnostics business. And what we are trying to communicate is that we are taking measures in our cost space to ensure that we still have solid financial results for the remainder of the year and then getting into 2015, we are really confident that the issues that we have faced are fully resolvable and that we will spring back to organic growth heading into the New Year.

David Teitel

So, I think I would just add to that, that sequentially which I think is how you phrased the question, we are heading into the respiratory season, we are heading into the cholesterol screening month in the U.S. so there are reasons to expect sequential growth as we move from the second quarter.

Isaac Ro – Goldman Sachs

Good, that's helpful David, thank you. And maybe just a follow-up on health management, I think in the past you guys have talked about having active bidders out there, so hopefully trying to get to a point where you could agree on a price, I just want to confirm if that's still the case now or you are kind of putting more of those discussions on hold until you can kind of get the profile of the business to where you want it before you engage with potential buyers?

Namal Nawana

Couple of things, in the past we have talked about select divestures within health management and I think the way we put the assets together for those divestitures in the past have made it less or more difficult to execute. Today I feel very good about how we have packaged the assets and that we will -- that we have a good interest and we are already well progressed now in that process. So, these things do take time but I think that we have recomposed how we are going about that divestiture and I think that's also a characteristic that you can expect from us just to look carefully about how we proceed with these divestitures to create the most value possible.

Isaac Ro – Goldman Sachs

Got it, thank you guys.

Operator

Thank you and the next question comes from Mark Massaro with Canaccord Genuity.

Mark Massaro - Canaccord Genuity

Hi, good morning thanks for taking the question. Maybe just a follow-up to that last one, can you just kind of walk us through how you are thinking about divesting the health management business. Is it likely to all come at once and also could you characterize whether or not you think you can achieve even half of a turn of a revenue multiple on that business, thanks?

Namal Nawana

So, I am not prepared to talk about the valuations for the businesses that we are looking to divest but I would say that it is a much more complete view. So we are looking at the majority of our assets in health management. And I think what's really important to note is that we are doing this with purpose around really focussing on our core. And you know we are the leader, the global leader in rapid diagnostics, so with this change we can make sure that our resource goes to supporting to our competitiveness in those core fields. And we are actually at the moment disproportionally spent in our health management and Connected Health businesses. And being able to turn that resource allocation into our areas where not only we have strengths but we have fabulous differentiated technologies I think is the key. So in terms of the actual divestiture process and what it will return I am not prepared to comment on that at this time. It is a process, we are confident that there is value in undertaking this process and so we are proceeding with that in mind.

Mark Massaro - Canaccord Genuity

Thanks and just a quick follow-up on the progress made with the Alere i obviously filing the CLIA waiver for flu is good progress. Can you maybe just talk about competitively how you think that assay will be differentiated with respect to other flu options in the market place?

Namal Nawana

Yeah, sure. First of all we don’t believe that there is another product that is out there or in near point of release that is easily CLIA waivable. So obviously we are going through our own CLIA waiver process and we have to see that through to achieve that result and take the time required to do that. But we don’t see anything on the horizon that has that potential which gets us into a market position which is very strong, where reimbursement is very, very strong and where we can drive strong gross margins.

I think the other part of that is that as we focus our business again as the global leader in rapid diagnostics we are going to turn more of our attention into getting out extra analytes on that platform and other platforms. And when we think about overall reducing our R&D expense but how we reallocate resource, this is an area where we feel that we haven’t the opportunity to potentially accelerate other analytes through extra resource allocation. And I am pretty pleased to say that we have already had our strep analyte go through clinical trials and obviously that submission has now been made to the FDA as well. So, once we have the dual parts of platform with multiple analytes and is CLIA waived I think that's a product which I feel very, very strong about and our horizon is for further analytes going forward.

Mark Massaro - Canaccord Genuity

Thank you.

Operator

Thank you. And the next question comes from Zarak Khurshid with Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Hi, thanks for taking the questions guys. I was wondering if you could clarify more on what's happening in the cardiology business, was the impacts from INRatio more than you anticipated last quarter than in the troponin business and BNP, can you just talk to us how you think about potential for share gain over the next couple of quarters?

Namal Nawana

Yeah, great question and no, couple of things that I would highlight. First of all INRatio was an unexpected event for us. And I think we have actually responded very well, being able to swap out the product and supply a large proportion of our customers with a historic product in the U.S. So, the execution around that actually has been strong in light of the size of that change. The absolute impact on our business, again in the Q was pretty substantial and both from a revenue -- contra revenue standpoint as well as the gross margin standpoint. And if you really look at our results I think, the gross margin piece is the one that hurt us ultimately in the quarter.

So INRatio will take another quarter at least to fully resolve and then once we can meet the customer demand in the market place with the substituted product we hope to then finally go back out and get back off to business that was lost in the process. We don’t anticipate that can occur till at least the fourth quarter. So that's a headwind that continues but again ultimately is very salvable for us. And into next year we will see growth versus the challenges we have had this. Equally and in a more broad basis, when we think about how we thought we would get this year done. INRatio was a growth product for us and we had a really strong growth prospective on INRatio.

The other couple of challenges that we had that may bring insight into our performance for you related to Triage. We were successful in March in bringing back select Triage cartridges in toxicology that had a very nominal impact in Q1 and had a reasonable uptick in Q2 but we are still not at full production capacity on our toxicology cartridges for Triage either. And if you look at the quarterly results for hospital products, still below prior year even on toxicology. So whilst we had a lot of businesses and good growth, the hospital talks and our rehab businesses weighed us down. The reason I raised that again is Triage TOX is a $35 million business at peak times and so on an annualized basis we do believe that that will be material once we are up and fully running.

And then with respect to Triage more broadly, we were able to get a change in our commercial structure in Q2. The second quarter still had $2 million to $3 million decline in our U.S. business so we expect that again to improve over the next period. Final one and I don’t know if Dave wants to add anything to this but I would say that epoc is the other piece where we really believe we have got a great product. It's highly differentiated, we are operating in a market structure that there really is only two players and we are at a stage where we can't meet market demand and we have been challenged to get a second manufacturing line completed and validated. We are making good progress.

When that does happen, I mean, I really believe that that will call the growth. We have customers literally waiting for that product. So that is more of an execution issue that would take several more months I think to get again up to the customer demand level. Dave, do you want to add anything.

David Teitel

So, being slightly more specifically on INR, we didn’t know about the recall as we closed our books for the first quarter. We recorded a $1 million reserve for potential returns in the first quarter. We got that much more product than we expected. Primarily at the end user level, the distribution amounts were about what we expected but at the end user levels they are a bit higher. So we had about $3.7 million of incremental charges in the quarter related to INR which came through as a reversal of revenue.

So compared to year ago we had $9.4 million of revenue from INR products in North America. That same number was $2.8 million after the reversal of $3.7 million. So a very significant impact year-over-year in our cardiology business related to INR. If you look at the run rate absent the recall we are about at around $6.5 million of sales for that North American business. Which is more or less what we had expected coming into the quarter. So the recall really did have a bigger impact on revenues and overall organic growth in the U.S. business than we had expected.

Zarak Khurshid – Wedbush Securities

Thanks Dave, thanks for that color there. And then maybe just a follow-up for you Dave, can you breakup the gross margins for the professional and health management businesses like in prior quarters and my apologies if I missed it in the prepared remarks, thanks?

Namal Nawana

So they were in the -- the published information that we have sent out so the in the professional business the gross margin was 49.6% and in the Health Information Solutions business it was 46.6%. The 49.6% does reflect the returns both of the INR products as well as the cost of sales charges for Beckman Coulter, together those had about a 130 basis point impact on that gross margin in the quarter.

Zarak Khurshid – Wedbush Securities

Great, thanks.

Operator

Thank you and the next question comes from Nicholas Jansen with Raymond James.

Nicholas Jansen – Raymond James

Hey guys. Namal, I think in the prepared remarks either you or Greg mentioned that there was some numerous opportunities that you guys saw but were not empowered by the old CEO to kind of -- to rectify certain areas so I am just wanting to get a sense of maybe some more color surrounding those comments, either what those opportunities are, the timing of those, the size of those, any color there would be helpful, thanks?

Namal Nawana

Thanks Nick, well first of all we are making a big change here. Obviously not all the ways to our strategic review process and we will take the remainder of the year to put the detail and diligence behind that plan but we are communicating today, a real refocus on our business. We are going from a very broad based set of assets and a broad based business to one which is centred around strength as the global leader at the diagnostics. And so as you make that change there are a lot of opportunities that come with it in terms of how you organize your company, how you go to market, and how you allocate resource and that's the principal opportunity. So, I think that horizons that we weren't able to access in the past, I would say unencumbered going forward we can certainly access other cost base initiatives that we couldn’t get at with the previous strategy. And I would say that's the most important part of that process. I am not sure if anyone else...

Gregg J. Powers3

I would just add that there were clear partitions within the business and places that Namal was not empowered to go. And that came out during the strategic review and it's important because Namal was being held accountable to run the business but not given purview over the whole business and that's not a very fair situation for him to have been in.

Nicholas Jansen – Raymond James

Thanks for the color there and then quickly on Connected Health, the spend there. I think this might be the first time that I have heard specifically dollar amounts being spent there and I am just wondering why weren't those disclosed previously and if they were kind of in the budget before, why were they being spent. I am just trying to get a sense of -- I think you mentioned about $10 million of year-over-year spend there. You guys were planning to strip out cost in terms of reducing SG&A as a percent of revenue. You would have thought that that would have been part of that plan, so just wanted anymore color surrounding the spend on Connected Health, thanks?

Namal Nawana

I think the key plan is that we are having a change in direction. And whilst the direction was centred around Connected Health, it was a strategic build. So the challenge that I think Greg just articulated is we were trying to improve our cost base and resolve certain issues, bounded issues within our business but issues that needed resolution with a certain amount of resource. Because we were also adding to our spend in a strategic area. Now that we have made a decision around what we are going to focus on again we can rebase that cost base. In terms of what was communicated, what was not communicated I am not going to comment on what Ron historically communicated. But today we are bringing a new level of transparency and hopefully you will have the questions you have answered going forward.

Nicholas Jansen – Raymond James

Thanks Namal.

Namal Nawana

No problem.

Operator

Thank you and the next question is a follow up from Anthony Petrone with Jefferies Group.

Anthony Petrone – Jefferies

Thanks, maybe just a follow-up on Health Connect and the numbers that were called out there and Namal is -- how quickly can those be redeployed, those investments in Health Connect and should we assume that they are redeployed into other areas of the business mainly professional diagnostics or some of that eventually fall to the bottom line and will it be allocated to debt service?

Namal Nawana

First of all in Connected Health what we communicated was a $10 million negative impact in our operating income so the spend is slightly high. There is some revenues attached with parts of that business. We have a great rapid diagnostics business and we need connectivity solutions for our instrument platforms. So, we will be retaining the technologies that support great connectivity of our instrumentation and in fact we have got very good technology in that domain. We also have an informatics group which is very well covered throughout the U.S. hospital base and we are retaining that.

Then with respect to the broader plan on Connected Health and the other assets, now first of all we believe there is strong value to those assets but equally now that they are not a focussed area for us we are not the right people to further invest in that. So, hence our goal to assess potential other owners for those assets and I think that's the most effective way of us refining our strategy and also the most effective financial way forward for us. I think that we will mostly see the improved P&L impact of that change. So the vast majority of that heading into next year in particular because it takes a little bit of time for us to go through this little step. But into next year in particular I would say that we are going to see the vast majority of that reverse and be seen in our P&L and that's part of our goal.

Anthony Petrone – Jefferies

Thank you again.

Operator

Thank you and this does conclude our question and answer session. Or actually, I am sorry, yes we do actually do have a follow-up question as well from Nicholas Jansen with Raymond James.

Nicholas Jansen – Raymond James

Hi, this is Nick, sorry about that. I just wanted a quick question, I think I saw on the trade rags on Friday after the close that Procter & Gamble is maybe looking to sell some their non-core assets and I know you guys have a strategic partnership with them with the Clearblue Pregnancy Test, so I was wondering if considering that was piece of the BBI spin, I know there was some questions surrounding the ability to do that given the 50-50 dynamics there, I was wondering if any thoughts surrounding that asset in particular if you think about deleveraging going forward, thanks?

Namal Nawana

So, I saw the same article with a 100 assets they are looking to divest. They haven’t contacted us and again we would include that in our group of areas which are not our core. So again potential opportunity, we haven’t been contacted by P&G at this time.

Nicholas Jansen – Raymond James

Thank you.

Namal Nawana

Operator if that's the only questions for the day let me just start by saying thank you for the questions. And in closing, with the support of our Chairman, Greg Powers and the Board to focus on Alere's strengths as the global leader in rapid diagnostics. I personally feel a renewed optimism about the financial and overall outlook for Alere.

We will immediately activate numerous levers to simplify our business further. Reduce our cost base and also reallocate expense to support the future growth of our core businesses. We are the global leader in rapid diagnostics and have a highly differentiated products as well as services in the majority of businesses we will choose to focus in the future.

The short-term revenue headwind of Alere (ph), we recognize that to achieve our goals further assets required to fully remediate our product performance, optimize our broad portfolio and support of our strategy, and of course improved execution. Well I just require some time and some investment ultimately will support accelerated growth and operating income margin expansion.

Our underlying core assets are valuable, our competitive positions and key business areas are strong, and our senior leadership team is aligned, energized and capable of making the challenges and act on the opportunities ahead. Our desire to better serve our shareholders and customers is and will continue to be at the forefront of conversations and actions within our global organizations. Thanks for your support and interest and have a good day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation, you may now disconnect. Have a nice day.

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Alere (NYSE:ALR): Q2 EPS of $0.42 misses by $0.16. Revenue of $737.9M (-3.4% Y/Y) misses by $9.65M.