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Alere Inc. (NYSE:ALR)

Q2 2011 Earnings Call

July 27, 2011; 08:30 am ET

Executives

Ron Zwanziger - Chairman & Chief Executive Officer

David Teitel - Chief Financial Officer

Doug Guarino - Director, Investor Relations

Analysts

John Putnam - Capstone Investments

Peter Lawson - Mizuho USA

Constantine Davides - JMP Securities

Greg Simpson - Wunderlich

Ashim Anand - Natixis

Dane Leone (ph) - Macquarie

Justin (ph) - Goldman Sachs

Bill Bonello - RBC Capital

Zarak Khurshid - Wedbush Securities

Jeff Frelick - Canaccord

Dan Leonard - Leerink Swann

Presentation

Operator

Good morning and welcome to the Alere Inc. conference call to discuss second quarter 2011 results. All participants will be in listen-only mode. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Doug Guarino. Please go ahead.

Doug Guarino

Thank you Sue and good morning and welcome to the Alere conference call to discuss our results for the quarter ended June 30, 2011. We are joined today by Ron Zwanziger, Chairman and CEO; and David Teitel, CFO.

Before we get to that discussion now 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 U.S. securities laws. These statements reflect our current views with respect to future events or financial performance and are based on management's current assumptions and information currently available.

Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors, including without limitation our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring in new business activities; our exposure to changes in interest rates and foreign currency exchange rates; our ability to successfully develop and commercialize products; the market acceptance of our products; continued acceptance of health management services by payors, providers and patients; our ability to develop enhanced health management programs through the integrated use of innovative diagnostic and monitoring devices and to recognize the expected benefits of this strategy; the impact of health care reform legislation as well as future reform initiatives; the content and timing of decisions by regulatory authorities as well as the impact of changes in reimbursement policy, 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, 2010, 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, 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.

Ron Zwanziger

Thanks Doug and good morning everyone. From a short-term financial perspective, this was a disappointing quarter and during this call we will describe several mainly transitory matters that affected our financial results. These issues did not diminish the strong momentum in our base diagnostic business, which had an organic growth rate of 7% and cardiology, which has slightly over 10% growth or our optimism about the future, which continues to strengthen.

Specifically our revenue in earnings for the quarter were negatively impacted in three major areas. Underperformance in specific segments of our health management unit, higher than expected litigation costs in our consumer products joint venture and modest delays in our new products sales ramp.

I will briefly discuss each of these issues now with Dave providing more details later in the call. First, addressing health management, which was by far the largest issue. Despite a high request for proposal pipeline, our high win rate of new business opportunities and record referrals from physicians for our health management services, broad economic pressures have continued to depress revenues and margins in certain segments of the health management business.

Specifically our Women & Children’s revenues were negatively impacted in Q2 by the loss of a drug therapy due an FDA labeling decision. Additionally the group is currently experiencing delays in implementing high risk pregnancy programs for Medicaid beneficiaries due to a longer than expected formal contracting process.

Separately we have stated to see changes in behavior around the willingness of States to commit funds for programs already underway, such as smoking cessation, which suggest these programs may under-perform during the remainder of the year.

Finally, the home monitoring segment of our health management business was impacted by a reinforcement related adjustment to our coagulation monitoring revenues during this quarter. The mechanics of change will be discussed by Dave later in the call.

Finally, in context of this issue is particularly unfortunate in line to recent investor concerns about new direct thrombin inhibitors that have begun to enter the market as potential alternatives to warfarin.

We believe that it is a reasonable assumption that new compatible course and overall reduction in a very large number of individuals that take warfarin today. On the other hand home monitoring of warfarin currently has a very low overall penetration rate, which provides an opportunity for sustained growth, even if the total number of people on warfarin declined.

Additionally the lower cost and higher compliance rate achieved through our home monitoring program, early indications of a possible high incident of side effects for the new DTIs, as well as the notation on who will be a suitable candidate for the new drug therapies gives us confidence that while our growth may decline over the next several years, our home monitoring business will nonetheless continue to grow and successfully co-exist with the new compounds.

We are obviously monitoring the losses of patients to the DTIs and these have been quiet modest thus far. In addition we’ve already seen some patients returning to home monitoring after only a few weeks on the new compounds.

The high legal expense in the consumer product business, which I mentioned previously, was primarily related to our JV ongoing litigation with Church & Dwight and were approximately $3 million above our expectations for the quarter. These costs were likely to stay above our previous expectations through the remainder of the year.

The final issue which negatively impacted our Q2 results was a slightly lower than expected ramp of new product sales, which were approximately $9 million in the second quarter, up from $7.5 million in Q1. At this point while the $50 million of new revenue use to be this year that we had originally estimated, but it might be slightly at risk. The customer feedback we’re seeing is raising our overall confidence level about the products themselves. As a result we feel more optimistic than ever about the positive impact these products will have on our performance in 2012 and beyond.

To understand our confidence in this area, it’s important to appreciate the performance we are seeing in the field. There happens to be enhancements that are coming in the near term in the specific issues that have affected growth up to now. In the case of our CD4 Analyser, product performance has been superb and we continue to increase our installed base of devices. We are seeing a corresponding increase in cartridge revenues.

The challenge in predicting CD4 platform sales is that at this early stage we are heavily weighted towards large initial governmental contracts, the timing of which is extremely hard to predict. On the other hand the quantity and magnitude of these opportunities is continuing to increase and we feel extremely good about the overall prospects for this analyzer.

In the case of the blood gas and electrolyte system, revenues more than doubled sequentially to approximately $3 million. The current shortfall relative to our expectations is primarily the result of delays in US implementation of actual orders. As we work through these projects, we expect revenues to continue to ramp through the remainder of the year. Because the in-process implementation pipeline and operational performance of this new platform are strong, we remain optimistic about the full year revenue opportunity.

Alere Heart Check while it’s generating low revenues is progressing along the typical path of a newly launched novel diagnostic platform. As with CD4 a year ago, the initial clot will reveal small technical issues including connectivity and consumable (Inaudible), challenges which we are working through.

While these challenges are likely to somewhat delay the launch of this platform into additional geographies, we remain extremely positive about the value of the appointed care and the home testing for BMP and expect positive data from the HABIT trial, which will be presented later this year to strongly support the high value we attribute to this product.

Finally, improvements in the performance of Triage Ngal cartridge should be produced later this year in Europe and should give us a boost to sales growth for this promising marker in 2012.

Before turning the call over to Dave, I’d like to give an update on some of the other issues we highlighted previously in our Q1 call. Europe has continued it’s modest top line recovery, which began in the fourth quarter of 2010. Gross margins are lower than the prior year and have not shown any further weakness.

In the case of Japan while our sales have remained lower than our initial expectations coming into the year, there was no further revenue decline during the second quarter and from a manufacturing standpoint we’ve experienced no significant issues and believe that the risk is now substantially behind us. While Japan continues to be a drag on overall performance this year, we are encouraged that the situation there won’t be as stable.

On the other hand the ongoing quality and related FDA problems being experienced by Beckman Coulter continues to affect ourselves and BMP tests for use on their instrument in the US. At this point we’ve taken the assumption that this pressure will continue through the end of this year, possibly into early next year, depending on their progress and resulting their regulatory issues.

Taking all these factors into account, we’ve decided to revise our full year 2011 guidance to a range of between 250 and 260 in adjusted cash basis earnings per share. While we are extremely disappointed about having to do this, we remain confident about the revenue and earnings potential of our business during the second half of the year and into 2012 and I’ll elaborate further on that after Dave presents the financials.

And now let me turn the call over to Dave for a discussion of our reported results for the quarter.

David Teitel

Thanks Ron and good morning. Revenues were $567.2 million for the second quarter of 2011, compared to revenues of $523 million from Q2 2010 and $500.5 million in Q1 2011. The effects of foreign currency translation increased Q2 2011 revenues by $16.2 million compared to Q2 2010, by $6 million compared to Q1 2011. Adjusted cash EPS per diluted share from continuing operations for Q2 2011 were $0.46.

By business segment, products and services revenue from our professional diagnostics segment were $404.2 million in Q2 2011, as compared to $343.6 million in Q2 2010. Acquisitions accounted for $21.1 million of this increase.

Revenues from North American flu sales increased to $2.3 million in Q2 2011 and $600,000 in Q2 2010, both reflecting typically low seasonal revenues. Including the change in flu sales, currency adjusted organic growth for the quarter was 7%.

Net product revenues from our cardiology business grew by combined 10.5% during the second quarter of 2011 compared to the same quarter a year ago, particularly driven by strong sales outside the U.S. Adjusted gross margins from our professional diagnostics segment were 58.6% in Q1 2011 compared to 59.4% in Q2 2010 and 59.6% in Q1 2011.

Lower gross margins earned by our toxicology services businesses contributed to the decreased margin. Combined these businesses added revenues of $51.2 million in Q2 2011 at a combined adjusted gross margin of 42.6% compared to $45.2 million and 37.3% in Q2 2010.

Excluding the services businesses, gross margins from our professional diagnostics products was 60.9% in Q2 2011 compared to 62.8% in Q2 2010, reflecting the lower gross margins earned in our business in Europe as a result in part of the start up cost from our heart check and CD4 manufacturing facilities, which contributed negative $3.6 million of gross margin during in the quarter and operating income of $2.8 million for our expectations were down from Q2 2010 levels. European gross margins were approximately flat with Q1 2011, reflecting the continuing stabilization in margins that we anticipated.

Revenues from our Health Management segment were $135.6 million in Q2 2011 compared to $149.8 million in Q2 2010 and $143.1 million in Q1 2011. Revenues from our Alere Home Monitoring business were $19.7 million in Q2 2011 compared to $21.4 million in Q2 2010 and $23.2 million in Q1 2011.

Decrease in revenues from Q1 2011 reflecting impact of a change in our billing practices based on recent CMS guidance related to the portion of our population covered by Medicare, which represents approximately 75% of our coagulation monitoring patients. The CMS change did not affect the monthly billing rate applicable to such patients, however the change does cause a delay to the timing of revenue recognition for financial reporting purposes and the time of the provision of disposables to the date on which the patient performs the test.

This change resulted in our reduction revenues recognized related to these services during the quarter of $4.4 million. The change will adversely impact the remaining quarters of 2011 by approximately $1 million per quarter, principally related to the timing of revenue recognized on new patient placements, compared to what we would have previously recognized.

Excluding the Alere home monitoring business, revenues in the remainder of our health management businesses were $115.9 million in Q2 2011 compared to $128.4 million in Q2 2010 and $119.9 million in Q1 2011. Compared to Q1 2011, the decrease resulted from seasonality and larger than anticipated reductions in revenues from our Alere well-being unit. This unit formally known as Free & Clear provides principally tobacco cessation services to clients, which include US state governments.

Funding for such programs have been reduced by several states, which likely impacted the second quarter and will continue to impact the balance of the year, along with lower than anticipated revenues for our Women & Children’s fitness, which will also be impacted over the balance of the year by a variety of anticipated start-up of services performed for our state government and by the loss of revenues related to the administration of a drug therapy as a result of an FDA labeling decision.

Adjusted gross margins from our health management segment were 48.4% in Q2 2011 compared to 52.4% in Q2 2010 and 49.0% in Q1 2011. When we gave our initial guidance for the year our expectations for revenues for the second quarter assumed approximately 5% sequential growth in our health management revenues from Q1 to Q2 2011 and approximately 50 basis points of sequential growth in health management gross margins. Instead as a result of the factors that I just covered, our sequential revenues declined by approximately 6% and our gross margin percentage declined by approximately 60 basis points from the first quarter.

In combination these factors reduced our health management gross margins by approximately $10 million compared to the result that we anticipated in our original 2011 guidance. This shortfall was offset by approximately $2 million compared to the -- by expense reductions of approximately $2 million compared to the first quarter, resulting in an operating income shortfall of $8 million in the quarter compared to our original expectations.

Products and services revenue from our consumer diagnostic business were $22.6 million in Q2 2011 compared to $23.5 million in Q2 2010. Q2 2011 revenues include $16.6 million of manufacturing and services revenues for products and services provided to the joint venture compared to $16.9 million in Q2 2010.

Looking at the result of the joint venture level, product revenues sold by the joint venture were $56.1 million in Q2 2011 compared to $48.5 million for the year-ago period. Despite the higher revenues, our adjusted earnings from our interest in the joint venture was a loss of $700,000 during the second quarter of 2011, compared to income of $4.4 million in the second quarter of 2010. The difference primarily relates to the litigation cost incurred during Q2 which Ron referred to earlier.

Adjusted gross margins from our consumer diagnostic business were 25.6% in Q2 2011 compared to 27.0% in Q2 2010. Subsequent to the end of the quarter, the put rates, which Proctor & Gamble had until the joint venture agreement lapsed without being exercised.

Adjusted selling, general and administrative expenses increased to $171.1 million or 32.2% of revenues in Q2 2011 from $169.3 million or 29.1% of revenues in Q1 2011. Compared to Q1, spending increased by approximately $2.2 million as a result of exchange rate changes and $800,000 as a result of recent acquisitions, offset by a variety of expense controls, including a reduction in workforce of approximately 74 people, which contributed savings in the quarter of approximately $600,000 and which will contribute savings of approximately $2.5 million per quarter for the remainder of 2011.

Adjusted research and development expense was $32.3 million or approximately 6% of revenues compared to $33.3 million in Q1 2011, reflecting our continued spending principally relating to investments in molecular technologies. We expect the R&D expense to continue at approximately 5% to 6% of net revenues for 2011.

Our adjusted operating income was $107.8 million for Q2 2011. Adjusted interest and other expense was $38.2 million in Q2 2011 compared to $29.2 million in Q2 2010. Adjusted interest expense, net of interest income was $38.2 million in Q2 2011 compared to $33.0 million in Q2 2010.

On June 30, 2011 we refinanced our senior credit facility with a new expanded senior facility, the details of which were included in an 8-K, which we filed on July 7. As a result of the higher drawings under the new facility and a change in interest rates, we expect our interest expense to increase by approximately $5 million per quarter for the balance of 2011.

The new credit agreement and an amendment to our public debt securities completed there in the quarter provided for repurchases of $200 million of equity securities in addition to certain existing allowances. We expect to commence repurchases of our common and preferred securities during the third quarter in accordance with this consent.

In Q2 our adjusted tax rate was approximately 33.2% of pre-tax income, compared to 32.4% for Q2 2010. For 2011 we expect an adjusted effective tax rate of approximately 33%. Adjusted EBITDA from continuing operations for the quarter was $116.3 million, which includes deductions for restructuring charges of $5.4 million and $1.4 million of acquisition-related expenses. Adjusted free cash flow for the quarter was $32.7 million, reflecting cash flow from operations of $71.3 million offset by capital expenditures of $38.7 million.

Capital expenditures were particularly high in the second quarter, in part due to our additional significant capacity in our South Korean manufacturing site, resulting in a key constrain to our growth in emerging markets. The impact of this extended capability will be almost immediately felt and should enable us to capture additional revenues outside US, beginning in the second half of this year. During the second quarter we made one small acquisition, which did not materially affect revenues or earnings.

And now let me turn the call back over to Ron.

Ron Zwanziger

Thanks Dave. Investors should expect us to continue to deploy our cash through accretive acquisitions, which further expand our global capabilities. But as in the past few quarters to the extent that acquisitions cannot be made at responsible prices, additional share purchase will remain an attractable option. As David already has said, we expect to make share repurchases later in this quarter.

Before going into Q&A, I would like to comment very directly on and try to add some perspective as to what is clearly a disappointing quarter. As we look back not only on our performance for this quarter but for the 10 years we’ve been building this company, we can be proud of many accomplishments and milestones.

From our inception, our vision has consistently been one of a long-term nature, always thinking at least three to five years down the road. We have struggled at times to meet the external quarterly performance targets when those expectations clash with the very significant long-term investments we tend to make.

Whilst occasionally debating this contradiction, we realize that pitfalls are not remaining committed to our goal of building a business, not only to meet the demands of today, but more importantly the challenges of tomorrow. Relatively speaking, we still view ourselves as a young company, one who has grown tremendously over the past 10 years, yet one who still struggles with the growing pains of our expanded size and scope, as well as an increasingly difficult economic and health care environment.

However we feel very strongly about or patient centric approach to the business, our internal capabilities and our business model and we plan to fact these changes head on and come out on the other side a better organization, having dealt with them successfully.

As we mature as an organization, I expect that our rival become a little less bumpy and that our employees and investors will be rewarded for their belief in our vision for the future of health care and our singular focus on effectuating that future.

While we compare the strong continued performance from our base business over the past sever years, against the significant but manageable short term challenges which we have described today, our belief in the near-term earnings potential of our company remains strong and as an organization we are fully committed to generating an excellent revenue and earnings through the remainder of this year, through 2012 and beyond.

And with that let me open up the call to questions. Sue, can you take over please.

Question-and-Answer Session

Operator

We may now begin the question-and-answer session. (Operator Instructions) The first question comes form John Putnam of Capstone Investments.

John Putnam - Capstone Investments

Hi, good morning and thank you. I was wondering Ron if you could just talk a little bit more about the Women & Children’s health situation and when and if you think that there might be a change in that.

Ron Zwanziger

Well it’s actually hard to say. I mean I think that we will continue to get business, because the reluctance of States to deal with Medicaid and issues, which if they don’t deal with them of course there’s greater cost. If they don’t deal with them, will eventfully force logical behavior. But in the meantime we are sort of seeing people just delaying committing to the short-term costs, thereby effectively creating a situation where they have high costs later and since that’s irrational, I think it will reverse itself.

One of the other factors that we are seeing which is sort of the change in behavior, we’ve seen a record level of referrals from physicians, but we’ve also seen a very odd effect, which is we are seeing an increase. We normally get about 5% to 7% drop-off between physician referrals, which as I just said are at a record and we get a drop-off of 5% to 7% of those women that don’t actually enroll in the program from the physician referral. We’ve recently seen that go up to 16%.

So what you are seeing is really a sort of a change in behavior by consumers, which makes it a little hard to predict. Yet we think that the linkage of that increase reflects the high cost deductible plans that have proliferated as you are aware and since this behavior is not a good thing for employers, we think that employers will start fixing some of the early mistakes they have made and implementing these type of high deductible plans, so that these kinds of situations don’t apply.

So I think that as the year progresses, and certainly as next year comes in, employees will start dealing with some of these issues so that they don’t get hurt themselves later by getting sort of deviant behaviors which just leads to higher cost.

So that was a bit of a long winded answer to say, but I think this thing will get under control; that is the area that we’ve had the most trouble in. Its an area which previous has been a particularly stable one through the previous recession, held it together, but now with all the noise around healthcare in Washington and the States, the financial crises in the States, its had its issues, but I can say that we will get this resolved or it’s a little bit hard to predict, but I would have though by the end of this year, early next year, we should be on the way to fixing it.

Operator

The next question comes from Peter Lawson of Mizuho USA.

Peter Lawson - Mizuho USA

BNP pressure, do they get worse during 2Q versus 1Q?

Ron Zwanziger

No, I don’t think so. What are you referring to Peter?

Peter Lawson - Mizuho USA

Just in 1Q you highlighted the issue with – about Beckman Coulter. We were expecting that to sort of hang in to the quarter, we got sort of other issues appearing in 2Q, but did that get sequentially worse or is that…

Ron Zwanziger

It essentially just continued and then we commented that we expected it continue for a while.

Peter Lawson - Mizuho USA

Okay.

Ron Zwanziger

The problem for us Peter on this issue is that we planned that as triage sales, as some hospitals when the volume of BNP of triage gets to a certain level, those hospitals then have a financial incentive to switch to an alternative platform and previously we had expected to retain a bit of that business by retaining the business through Beckman, but that’s of course not happening at the moment because of the problems they are having and so that’s how we are being affected.

Peter Lawson - Mizuho USA

And then the home monitoring issue with CMS, does that continue through to 2012? Is that something we should just really wait for an annualization for that deferred revenue?

David Teitel

Well, so the timing impact in the quarter, $4.4 million is sort of a permanent reduction there. This will go though, but as I said in the prepared remarks, we expect about $1 million per quarter on continuing impact and it just really relates to the timing of revenue recognized for the added volume as we sign new patients.

We recognize less revenue, less quickly than we previously would have on the old method. So the business should return more to what it was performing like in the past, but the growth rate for it will be a little bit slow because of the fact of the change.

Peter Lawson - Mizuho USA

When did the factors affecting the management business and the monitoring business as you start playing out during the quarter?

Ron Zwanziger

They sort of towards into the quarter, not at the begging of the quarter. They sort of started weighing us and that’s when they started building.

David Teitel

And in particular the home monitoring situation developed late in the quarter from some guidance from CMS that took some time to be interpreted at the local level in terms of when it would be applicable and how it would be applied.

Peter Lawson - Mizuho USA

Great. Thanks so much.

Operator

The next question comes from Constantine Davides of JMP Securities.

Constantine Davides - JMP Securities

Thanks. Just a question on the Women & Children’s business. Is that FDA labeling issue you guys referred to, is that terbutaline or is it some other drug?

Ron Zwanziger

No that’s it. Is that the question?

Constantine Davides - JMP Securities

I’m sorry, I missed that.

Ron Zwanziger

Yes, that was it.

Constantine Davides - JMP Securities

That was it. Okay and so how much in annualized revenue did you guys get from that drug or how much did you get in 2010 and how much of a decrease or step-down did you see in the second quarter.

David Teitel

It had been running at around 15 million a year and the business effectively has gone away.

Ron Zwanziger

Well we decided that we would actually as a result of labor change not shift the product.

Constantine Davides - JMP Securities

Okay.

Ron Zwanziger

It’s gone away completely.

Constantine Davides - JMP Securities

Okay. And then Dave on the well-being side, I was wondering if you can kind of quantify what that run rate is currently and I’m a little unclear, is that customers that you have currently terminating the tobacco programs or is this prospects in late stages of contracting, just deciding to walk away from contract execution.

David Teitel

The business itself runs around $20 million a quarter. It was right around $18 million in this particular quarter. In terms of the impact of the state funding, we effectively outsource or run on an outsourced basis the equipped lines as the States fund less of those programs and discontinues certain ones, it obviously impacts our revenue on a significant and rather rapid way.

Ron Zwanziger

The impacts is of existing contracts where they just don’t spend as much on the contacts which we already have; that’s what’s been going on.

Constantine Davides - JMP Securities

Okay, thank you.

Operator

Next question comes from Greg Simpson of Wunderlich.

Greg Simpson – Wunderlich

All right, thanks. Good morning. Obviously lot of issues here, so I’ll try to limit it and some of it have been addressed. First of all I was glad to hear you guys touched on the gross margins issue from the new plants, but can you address that in greater detail. Dave you gave some numbers, but can you may be, can you guys may be address it as how it will payout throughout this year into 2012, because that is a fairly significant drag on margins at this point that should go away, am I correct.

David Teitel

It will diminish over time, it won’t go away quickly. In particular on the CD4 side as the volumes ramp and we get more experience, it is and will improve over the balance of this year. The next significant step though will be through some automation, which is currently being delivered, will take a little while to ramp-up and moreover start to impact late in the fourth quarter, but will be more noticeable in 2012 in terms of being a next significant step to drive down the cost.

Similarly on Heart Check, it’s really a function of scaling up volumes in that product, which will come as the volumes begin to grow.

Greg Simpson – Wunderlich

Well let me ask you in a different way, on a combined basis the negative impact in 2011, does that go away and become a positive to gross profits on a combined basis from these planes, become positive in 2012, is that the expectation?

David Teitel

So in particular, Heart Check I think is a little bit further behind in the cycle and will take time to work its way out of the process. I think on the CD4 side we will see improvement into 2012, how that nets out is a little bit hard to predict at this point.

Greg Simpson – Wunderlich

Okay, all…

Ron Zwanziger

May be this is not quite the question you are asking, but if you look at say Alere Heart Check, that unit between R&D and cost of goods cost us $8 million a quarter between the two.

Greg Simpson – Wunderlich

$8 million a quarter in Q2.

David Teitel

Yes, per quarter.

Greg Simpson – Wunderlich

Yes, I’m trying to get at how that transitions or trends throughout the year and ticks down as we go forward.

Ron Zwanziger

Well, that particular one won’t tick down much. The one as Dave just said, because we are seeing increase in the CD4, that’s the one that’s going to come down.

Greg Simpson – Wunderlich

Right. Okay can you quantify that, may be. Because I think people need to understand this issue.

David Teitel

Well so I’ll quantify it as the majority of the $3.6 million was in CD4 and that is the one that we expect to improve next year.

Greg Simpson – Wunderlich

Okay. Ron on Heart Check you mentioned performance issues that could delay it a little bit and again, I don’t think that’s particularly new, well if there is something lese that I’m not away of. As it stands right now, given and acknowledging the unpredictability of the FDA, the original expectation was that there was a chance you could see it approved in a professional setting by late this year, but more likely in Q1 of 2012. Is that still within the realm of possibility?

Ron Zwanziger

No, my hunch is it will be slightly delayed. But it’s a good question you ask about issues relating to the FDA, because as we look at all the products, including CD4 and a host of new ones that we got coming and as we look at our three to five year plans, its really unfortunate that the amount that we are expecting from US sales for these new innovative products, which have a major change in the way particular diseases or issues we have dealt with, we are making incredibly low assumptions around the up-tick from the US, precisely because of just expected FDAs and so we are seeing that we’ve got expectations all around the world well ahead of the US.

Greg Simpson – Wunderlich

Okay. Outside the US…

Ron Zwanziger

And we are structuring our whole business that way.

Greg Simpson – Wunderlich

Yes, and outside the US things basically remain on track.

Ron Zwanziger

Yes.

Greg Simpson – Wunderlich

Okay and then final question. Given what has been a particularly difficult series of quarters, you are not happy about the stock price, you’ve got a very high quality shareholder base and nobody is happy about the stock price, so its stating the obvious. Do you as a company, view yourselves as vulnerable?

You are right at the beginning of a very major new product cycle on several fronts. You stock obviously doesn’t reflect it at this point for obvious reason and I know based on my meetings with you guys in June, there are massive costs with the cost structure that could be leveraged or from a strategic buyers standpoint could go away pretty quickly.

I’m viewing -- I want to know as the management team how you view the idea of you guys being venerable in an environment where we have seen some up-tick and take over activity in the diagnostic area

Ron Zwanziger

Well I mean, your right to point out that we are at a stage where the kind of products that we have are exactly what and so the range of products that are out and the ones that are coming through, we didn’t mention birelo, we didn’t mention our isothermal programs, all which are moving very well and circulating tumor cells, that program -- essentially all the programs are moving very well.

So we are, we do have sort of a line-up of products that folks like to have and there is a tremendous amount of interest in our business in general and the reality is, you know there has never been a hopeful takeover that we don’t like. But the reality is that I think that we will continue to execute and despite what is a low share price, I think the stock market is quiet sound at the end of the day and after they reflect on it and they can see what the pair of these products are, we will get the right valuation in the stock markets, so I’m not excessively worried.

Operator

The next question is from Ashim Anand of Natixis. Please go ahead.

Ashim Anand – Natixis

Thanks for the details on the gross margin, especially on the professional diagnostic side. I was wondering if you guys can give more detail, specially considering that the growth rate has been extremely high, over 10%, so if you kind of a little bit pass out you know ex-Beckman issues and new products if there are additional pricing issues.

And also considering that you guys added a bit amount of sales force last quarter, how should we think about the growth rate going forward. Like there would be incremental growth rate in professional diagnostic because of that sales force or how essentially should we think about it?

David Teitel

So from a margin standpoint in the professional diagnostic side, we went from 59.6% in Q1 to 58.6% in Q2. You know the biggest similar drive in that change is the impact just of flu sales, where in Q1 included $19.5 million of flu sale, Q2 about $2.3 million. If you take that out at above average margin and you figure out the impact from Q1 to Q2, we are about flat quarter-over-quarter from a sequential standpoint in the margins.

The margins are somewhat impacted by where we are growing, the fastest, which tend to be outside the US and in Asia Pacific in particular. Margins then tend to be a little bit lower than the overall average, with some pressure on the gross margin percentage, offset by the fact that we’re generating higher revenues in general and lower from an SG&A stand point in those places, underneath those sales. So you know the margins quarter-over-quarter weren’t that dramatic.

Ron Zwanziger

And as to your second question, I mean we have been adding these sales people, particularly around the world, some in the US, but mainly around the world because we see sales opportunities. Those folks now have been on for a little while and are getting trained up and we should start seeing the benefits of these folks.

Ashim Anand - Natixis

Any updates on the joint venture in terms of going forward. Has that been renewed or any comments from that?

Ron Zwanziger

Well in the prepared remarks Dave said that the putt option that Procter & Gamble had expired. So that issue is gone. I think that the -- or despite the litigation cost which are actually surprisingly high, in a litigation that it has there are quite number of growth opportunities there. There is some white spaces, some countries which have not been penetrated yet, some that we could a lot more in. We think there is a good change of finally getting this conception guidance, indicate that despite these mammoth delays that we’ve had in to the US. So I would say it’s looking pretty good.

Ashim Anand - Natixis

Thank you.

Operator

The next question comes form John Groberg of Macquarie.

Dane Leone (ph) - Macquarie

Hi guys, thanks for taking the question. This is actually Dane (ph) in for John. Actually, I’m sorry if this asked, but just a quick question on your thinking for free cash flow on an adjusted basis for you know the full year and may be going forward beyond that. I think there was kind of a large CapEx in the quarter if I heard you correctly, that kind of brought it below you know the first quarter run rate and potential down year-over-year. So just looking for a little bit of color and you know in terms of cash generation I guess for the remainder of the year.

David Teitel

So the biggest individual driver of CapEx in the quarter was the investment in the South Korean plant, which individually was about an $8.5 million in the quarter and should diminish rapidly form this point forward, that was the bulk of the investment which included purchasing some space in a building. So we would expect CapEx to reduce to a more consistent level, which you know typically has been somewhere around $30 million a quarter.

Obviously one of the things that drives cash flow is just the base earnings, which because they were down a bit in the quarter drove them, the cash flow from operations. From a working capital standpoint we used a little bit of cash from working capital in Q1, that flipped in Q2 and generated a little bit of cash, so there was nothing dramatic in those numbers.

So we would expect the CapEx number to moderate over the balance of the year and therefore the cash flow to improve.

Dane Leone (ph) – Macquarie

Okay, great. And I just curious on the Tox Services, which seem to be dragging down the gross margin professional diagnostics. I think a while ago you had mentioned that that could potential be a business that would be sold. I was just looking for kind of updated thoughts there. I guess I don’t want to put words in your mouth; it was potentially under performing but it does seem to be kind of you know under performing in some of the other areas of the professional diagnostics business.

Ron Zwanziger

I think there is a tendency to confuse sort of gross margin with net margin. It is true that the toxicology business and the service business in particular has a slightly lower margin, but it’s also pretty profitable for us and it’s been growing and so we see that as a strong business.

And the issue about some of the business was only – we had only indicated that if we hadn’t -- that we had it as a backup potential for paying off our previous senior debt if we didn’t refinance the debt, the senior debt we had at prices that were expectable to us and we timed, and we recently did that as you know at the end of Q2. And so that took away the reason that we had for that business, you know in fact quiet the reverse.

We think that’s a really good business. It’s been solid business growing. We can see a number of growth opportunities in that business and we’ll actually get additional investments from it.

Operator

The next question comes form Isaac Ro of Goldman Sachs.

Justin (ph) - Goldman Sachs

Hi guys this is actually Justin (ph) for Isaac, thanks for taking my question. Looking at (inaudible) and going back to some of the earlier questions on the physicians program, what percent of your health management business is tied to state and federal funding?

David Teitel

In that business itself.

Justin (ph) - Goldman Sachs

That business and overall.

David Teitel

I don’t know the number off hand.

Ron Zwanziger

Approximately 60% of that business, roughly speaking.

Justin (ph) - Goldman Sachs

Okay.

Ron Zwanziger

That’s a very rough number.

Justin (ph) - Goldman Sachs

So roughly like $50 million, $60 million.

Ron Zwanziger

No, its 60% of 80, yes.

Justin (ph) - Goldman Sachs

Okay, and then what are your expectations for growth in this business given the uncertainty at the State and the federal level that’s ongoing or just (inaudible)?

Ron Zwanziger

Well actually it’s interesting you say that, you asked that question, because the obvious response is that well, the states are going to be in financial difficulties and so this problem is going to continue, but in fact at the federal level folks understand that these are exactly the kind of programs that need to be protected, and there is already discussions at the federal level about figuring out ways to make sure that this doesn’t happen.

Because I mean you can drive a direct correlation between numbers of smokers and then costs of Medicare and Medicaid. So there is already talk about reversing it. So actually I think that despite the fact that we are currently having short-term issues around this, that in fact it will abate despite -- I mean the States will continue to have difficulties and so some States will continue to act sort of irrationally, but I think over time, particularly with the federal people dealing with this, looking at it, I think the thing will work out.

Justin (ph) - Goldman Sachs

Okay, thanks very much.

Operator

The next question is from Bill Bonello of RBC Capital.

Bill Bonello - RBC Capital

Hey guys, sorry had to un-mute my phone. So I guess I just have a question about the revised guidance. It would appear that you are expecting a year from an EPS standpoint to be significantly more backend loaded than what we have seen for the past couple of years. I don’t know if that’s predominantly due to the impact of the share repurchase that you are anticipating and from an earnings progression if it would be more normal, although I would think the interest increase would sort of offset the share repurchase impact to some degree.

I guess may be you can just sort of help us understand on you know what gives you confidence and then sort of combined with that, just given what seems to be really limited visibility into what’s going to impact you and you know frankly a pretty core ability to guide how do we feel confident?

Ron Zwanziger

Well, I mean the main reason that its backend loaded is because we had it for a while is that we continue to see revenues ramping and that’s what we expect to see from our unites and we have a fair amount of confidence, help partly by adding a lot of new sales people and so that’s really where it mainly comes from.

We can see opportunities particularly on the, outside the US in a whole host of areas that are already kicking in and we expect it to kick in further. So that’s really where we get most of the confidence. Now you are right that there will be some other factors that would help such as share repurchases, but the main confidence comes form what we are seeing is our base business.

Bill Bonello - RBC Capital

Okay and how much of that ramp is sort of carrying along the new products versus you know as you talked about just sort of expended distribution etc.

Ron Zwanziger

Oh, well most of that growth is from our existing products spinning around the world the way we have. I mean, you’ve probably noticed that we already 7% of organic growth around the world and 10% in cardiology and that’s where, and we see that’s the road to growth in the short term.

Bill Bonello - RBC Capital

Okay and just the last piece of the question. If there anything in that guidance that you would worry about, anything that sort of has to get better or you know -- I know you can’t predict things that might go wrong in the future, but is there anything that’s been to improve that we shouldn’t really count on.

Ron Zwanziger

Nothing in particular. I mean flu, you know we have a sort of a base assumption in flu, which is relatively modest and of course that can have an impact, but I don’t think so. I think we’ve tried very hard in this call to lay out where we see sort of issues that are ongoing and we try to take those into account.

Bill Bonello - RBC Capital

Okay, thank you.

Operator

The next question comes from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid - Wedbush Securities

Hi, good morning guys. Thanks for taking the questions. First with respect to the new products, how should we think about the, you know the relative contributions for the remainder of the year, CD4, Epoc versus others.

Ron Zwanziger

Well, I mean we are pretty hopeful and have reasonable visibility, although particularly with CD4 it’s hard to predict, because even if we get one or two large government contracts and it sways the numbers. So we are pretty optimistic about CD4 continuing to pick up. The good thing about CD4 is that we continue to get evidence of really good usage on the instruments that we place. So when they get placed they stick, which is obviously a very good thing for our business. So we think that will go.

We discussed some of the issues on the blood gas and electrolytes and that we have quiet a lot of orders and its just taking given the complexity of putting these units into hospitals, converting them from existing practices, the whole sort of implementation cycle is taking a while, but we expect that to continue. So we expect both of those to continue to grow. That’s, actually a lot of growth comes from.

Zarak Khurshid - Wedbush Securities

Got you and then as far as the CD4 stickiness, any sense for the consumable annualized sort of consumable revenue per box.

Ron Zwanziger

It’s hard to pin it down. I mean it is running at about 8 per day. But you know at this stage its sort of hard to know whether that’s the number one should take. We are watching that fairly closely. We don’t have enough statistics to really cut, bend down and really commit to a particular number at this stage.

Operator

The next question comes from Jeff Frelick of Canaccord.

Jeff Frelick - Canaccord

Hello. Hey Ron, can you give us a sense on from a macro view point, just on unit volumes into the physicians office.

Ron Zwanziger

Well, you know when you ask that question, I immediately get a sense that you mean the US physician market.

Jeff Frelick - Canaccord

That’s correct, yes.

Ron Zwanziger

Right, but you know our business is worldwide and the growth we are seeing is overseas. I don’t know that there are any particular trends one can comment on that we’ve seen; by the way positive or negative recent trends, so there is really nothing much to comment about in the US.

Overseas of course there are far more doctor visits and those are obviously have increased utilization of rapid tests and we are benefiting from that.

Jeff Frelick - Canaccord

And then with respect to, I might have missed the opening remarks by Dave, organic growth in the quarter with respect to professional diagnostics and just you know given the (inaudible) and expect that our new products specified this year, what’s the kind of the outlook, what should we assume for organic growth and professional kind of in the back half of the year.

David Teitel

So the number we gave was 7% on an overall basis on a kind of fees adjusted organic basis in the professional business, (a) including 10.5% on the cardiology business. As we said we expect organic growth to accelerate in the back half of the year, the reasons are in the sales force investment we gave in the beginning of the year. We expect to see more payback from that over the second half of the year.

Jeff Frelick - Canaccord

Okay, thanks Dave.

Operator

The next question is from Dan Leonard of Leerink Swann.

Dan Leonard - Leerink Swann

Thank you. My question is a bit similar to Bonello’s. I’m still having trouble coming up with the guidance range for the full year and I think maybe the plug is the accretion you are expecting from capital deployment in the second half of the year. So what is, may be you can communicate the aggregate amount of the dollars going out the door that will be spent in an accretive fashion, whether it be through share repurchases or accretive acquisitions in the second half of the year.

Ron Zwanziger

Well we do anticipate that we will use the majority of the cash we have and we don’t feel we particularly need to have cash on the balance sheet, because we are generating a lot of free cash flow which we have a very significant amount of control any way. So we do expect to invest the cash that we have on the balance sheet.

Dan Leonard - Leerink Swann

Okay, that’s helpful and then my follow up question, just a couple of housekeeping items for Dave. Dave did you provide the FX benefit for professional diagnostics and also the disease mentoring revenue number for the quarter.

David Teitel

The FX benefit was $60 million year-over-year and $6 million compared to the first quarter.

Ron Zwanziger

That was overall. You seemed to have asked, I think your question …

David Teitel

The majority of that is in the professional space.

Dan Leonard - Leerink Swann

Sure and the disease monitoring revenue number.

David Teitel

I think you are asking about the Alere Home Monitoring.

Dan Leonard - Leerink Swann

Yes, the one you provide in heath management very quarter.

Ron Zwanziger

Just about 19. That was the one that was short because of the change in the way we recognize revenues.

Dan Leonard - Leerink Swann

Okay. Thank you.

Ron Zwanziger

Okay, may be we we’ll take one last question if there is one operator.

Operator

The next question is from Greg Simpson of Wunderlich.

Greg Simpson - Wunderlich

Okay, yes thanks. Just a couple of follow-ups really quickly. First one, the share buybacks you addressed how aggressive you intend to be and also second part of that, in the past at the previous company when things got rocky management stepped up and was buying stock, could we see that here?

And then second question for you and then I asked this of you recently and got a no, but any further thinking, you know the idea of may be bringing in a COO you know to kind of help prevent these kind of things. I think it will send a great message to the street.

Ron Zwanziger

We will sort of review the share repurchases. Our current intention, but it is impacted by $200 million that we authorized, but we will see. We will be very carefully about what we purchase between the preferred and the common. We expect to take advantage of it. I don’t know whether management will buy. At this point I’m not sure, I doubt it, but I don’t know at this point.

And as for management changes, we don’t do reach out reactions. You know I think that in fact our business actually is in good control. We do change people obviously from time to time and constantly make changes. The issues that we’ve dealt with, particularly sort of changes in behavior that we have seen that cause most of the problems here, are sort of things that are very hard to predict.

Now may be we should have been able to predict this weird behavior of the States, but I do think we have the management in place to deal with it as we are at the moment.

Greg Simpson - Wunderlich

I’m not calling you out on that, right. I mean there’s things that happened within the quarter that you just can’t control. I guess my question is more directed at, you know having been there recently, there are a lot of cost savings within the cost structure that are possible and probably and I mean basically who’s accountable to make sure those things come to fruition. I think that’s kind of what I’m look for.

It seems like 2012 could really shape up as a very good year and if the cost savings developed, it could be really an excellent year and I’m just curious about your thought on that.

Ron Zwanziger

Well we have, well we have plans around changing the back office operations that we’ve talked about before, which we haven’t mentioned on this call, but we are doing that in Europe and that has a particular team associated with it. We have a lot of IT integration in the US on systems, there is a separate team on that. So every area that has cost savings has – or potential for restructuring, already has people on it and we are pretty comfortable that we have all these activities in hand.

Greg Simpson – Wunderlich

Okay. Thank you.

Ron Zwanziger

All right, so I’ll now close as we’ve been going an hour here. With the contribution from our new products expected to increase in 2011 and new product development progressing well, I hope we got across that we are very confident and remain confident about our ability to generate, to stay in top-line growth, as well as annual increases in adjusted cash-basis earnings per share over the next several years.

Our goal remains to become the world leader in enabling individuals to take charge of their health under medical supervision at home, not just in the U.S., but in every major market around the world. We will remain focused on that objective until it’s achieved and the full potential of our company and our business model is unlocked for our customers and our shareholders.

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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