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Alere Inc. (NYSE:ALR)

Q3 2011 Earnings Call

October 26, 2011 8:30 AM ET

Executives

Doug Guarino – Director, Corporate Relations

Ron Zwanziger – Chairman, President and CEO

David Teitel – CFO, VP and Treasurer

Analysts

Jon Groberg – Macquarie Capital

John Putnam – Capstone Investments

Peter Lawson – Mizuho Securities

Zarak Khurshid – Wedbush

Ashim Anand – Natixis

Greg Simpson – Wunderlich

Jeff Frelick – Canaccord

Isaac Ro – Goldman Sachs

Operator

Good morning, and welcome to the Alere Inc. conference Call to discuss Third Quarter 2011 Results. All participants will be in listen-only mode. (Operator Instructions) Management has asked that you limit yourself to two questions while in the queue. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Doug Guarino, Director of Corporate Relations. Please go ahead, sir.

Doug Guarino

Thank you, Danis. And good morning, and welcome to the Alere conference call to discuss our results for the quarter ended September 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 a number of 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 payers, 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 healthcare 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 and budgetary constraint 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 the call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available on the company’s website at alere.com.

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. I’m pleased to report a strong third quarter highlighted by currency adjusted organic growth in our diagnostics business of 8.7%. Given the increasing uncertainty in the world, we carefully managed expenses throughout the third quarter to deliver solid leverage below the line. In response to continuing worldwide economic uncertainties, we will continue to carefully monitor spending and further tighten as necessary to respond to any additional pressures.

Despite the ongoing EU debt crisis, our European in particular has performed well throughout 2011 and sales in the third quarter were no exception. Supported by new product sales, revenues in Europe reflected strong organic growth, particularly in our cardiology and infectious disease units. We feel well-positioned for the rest of the year in this geography.

Sales growth in Asia were also particularly strong with revenues in Japan beginning to rebound from the effect of earthquake earlier this year and further benefiting from higher sales of recently cleared new cardiology products. Additionally, the investments we made in R&D and sales force during the first half of the year have begun to show earlier results which we expect to accelerate through to ‘12.

In the U.S., an otherwise strong performance, was offset by the expected negative effect of ongoing quality and related FDA problems being experienced by Beckman Coulter with the sales of our BMP test for the use on their instrument in the U.S. down 9% to $2 million in the quarter compared to last year.

Viewing global revenue trends as a whole and factoring the projected income of new product sales over the next several years, we continue to expect strong and increasing organic topline growth for our Professional Diagnostics business throughout 2012 and beyond.

In our Health Management unit consistent with the trends we highlighted in our Q2 call, revenue declined sequentially in our smoking cessation unit primarily a result of state budgetary pressures.

Additionally, revenues in our coagulation monitoring business also declined for the third quarter in a row as the final negative impact of the CMS reimbursement policy change flow through their results. This impact has now been fully absorbed by the business and we expect to return to modest growth for our home monitoring unit in the fourth quarter.

Excluding the impact of the decline in these two businesses, overall Health Management revenues were flat sequentially from Q2 to Q3 which should be viewed as a good indicator that our Health Management unit is beginning to stabilize.

Based on the trends just discussed as well as other information available to us at this time, we are reaffirming our full-year 2011 guidance of between $2.50 and $2.60 a share in adjusted cash basis earnings per share.

And with that, let me turn the call over to Dave for a discussion of our reported financial results for the quarter.

David Teitel

Thanks, Ron, and good morning. Revenues of $585.8 million for the third quarter of 2011 compared to revenues of $538.7 million from Q3 2010 and $567.2 million in Q2 2011. The effects of foreign currency translation increased Q3 2011 by $9.9 million compared to Q3 2010. Adjusted cash basis earnings per diluted share from continuing operations for Q3 2011 were $0.67.

By business segment, product and services revenues from our Professional Diagnostic segment were $426.3 million in Q3 2011 as compared to $359.5 million in Q3 2010. Acquisitions accounted for $19.4 million of this increase. Revenues from North American flu sales increased to $16.0 million in Q3 2011 from $7.0 million in Q3 2010. Excluding the change in flu sales, the currency adjusted organic growth rate for the quarter was 8.7% for our Professional Diagnostic segment.

In our earnings release this morning, we included details of major revenue categories within our Professional Diagnostic and Health Management businesses by quarter for each of the first three quarters of 2011 and 2010.

Within our Professional Diagnostic segment, net product revenues for our cardiology business grew by 6.6% from $120.0 million in Q3 2010 to $127.9 million in Q3 2011, particularly driven by growth outside the U. S. and in our domestic cholesterol and professional coagulation testing businesses offsetting continued softness in domestic BMP sales, particularly related to issues with sales on the Beckman platform.

Net product revenues in our infectious disease business grew by 33.8% to $106.6 million – from $106.6 million in 2010 to $142.6 million in Q3 2011 with increased North American food sales and increased HIV and malaria sales coupled with the impact of our Q1 acquisitions in Brazil accounting for the increase.

Our toxicology business grew by 20.8% from $77.4 million in Q3 2010 to $93.5 million in Q3 2011 with our recent acquisitions of CapTox, a pain management, an immunalysis, a reagent supply business contributing $10.5 million of the increase.

Adjusted gross margins from our Professional Diagnostic segment were 58.9% in Q3 2011 compared to 59.9% in Q3 2010. Lower gross margins earned by our toxicology services businesses contributed to the decreased gross margin. Combined, these businesses added $53.7 million in Q3 2011 at an adjusted gross margin of 42.5% compared to $45.1 million and 31 – 38.1% in Q3 2010. Excluding the services businesses, gross margins for our Professional Diagnostic products were 61.3% in Q3 2011 compared to 63.0% in Q3 2010, reflecting lower gross margins earned on sales of HIV and malaria tests in resource poor countries.

Revenues from our Health Management segment were $129.9 million in Q3 2011 compared to $152.9 million in Q3 2010 and $135.6 million in Q2 2011. Revenues from our disease and case management business were $59.4 million in Q3 2011 compared to $73.1 million in Q3 2010 and $61.2 million in Q2 2011. Compared to Q3 2010, the revenue decrease relates primarily to the insourcing of certain – by certain large health plans beginning in Q4 2010.

Revenues from our wellness business were $24.4 million in Q3 2011 compared to $25.4 million in Q3 2010 and $26.1 million in Q2 2011. The sequential decline in revenues from Q2 to Q3 relates to a decrease in revenues from Alere Wellbeing formerly called Free & Clear, which decreased from $18.6 million in Q2 to $15.4 million in Q3 as a result of the continuation of decreased funding under certain State Quitline programs which we began to see in Q2.

Revenues in our women’s and children’s business were $28.5 million in Q3, which were flat with Q2 2011. Our Home Monitoring revenues were 17.6 million in Q3, down sequentially from 19.7 million in Q2, which was below our expectations for the quarter. As it has taken more time to adjust to the impacts in the Medicare billing practices that we had anticipated at the end of last quarter. Overall, we expect sequential health management revenues to be flat, to be modestly up in Q4 as we believe the adverse impacts on state funding on our Alere well-being business and the impacts of the Medicare billing change on our Home Monitoring business will begin to lessen as we move forward.

Adjusted gross margins from our health management business were 46.2% in Q3, 2011 compared to 51.8% in Q3, 2010 and 48.4% in Q2, 2011. The sequential decrease in gross margin percentage resulted from the decrease in revenues in the Home Monitoring and wellness business which I previously discussed.

Products and services revenues from our Consumer Diagnostic business segment were 24.3 million in Q3, 2011 compared to 22.2 million in Q3, 2010. Q3, 2011 revenues included 19.7 million of manufacturing and service revenues from product and services provided to the joint-venture compared to 15.1 million in Q3, 2010. Looking at the results of the joint-venture level, product revenue sold by the joint-venture were 55.6 million in Q3, 2011 compared to 50.1 million for the year ago period.

Our adjusted earnings from our interest in the joint-venture was income of 3.6 million during the third quarter of 2011 compared to income of 1.5 million in the third quarter of 2010 and a loss of 700,000 in the second quarter of 2011.

Well our legal and sales and marketing expenses at the joint-venture level account for the sequential increase. Adjusted gross margins from our Consumer Diagnostic segment were 23.8% in Q3, 2011 compared to 27.9% in Q3, 2010. As we indicated in our Q2 earnings call, the put rates, which Procter & Gamble had under the joint-venture agreements collapsed without being exercised. As a result we included another income for GAAP purposes again of 288.9 million. This gain and its related tax effects have been excluded from our adjusted earnings.

Adjusted selling general and administrative expenses were 165.9 million or 28.3% of revenues in Q3, 2011 compared to 171.1 million or 30.2% of revenues in Q2, 2011 reflecting the adjustment of our expense levels in light of the reduced revenue levels for the year which we discussed on our last earnings call.

Adjusted research and development expense was $32.5 million or approximately 6% of revenues compared to 32.3% in Q2 2011. We expect total R&D expense to continue at approximately 5% to 6% of net revenues for 2011. Adjusted operating income was $122.1 million for Q3 2011. Adjusted interest and other expense was $36.1 million in Q3 2011 compared to $30.1 million in Q3 2010. Adjusted interest expense net of interest income was $45.0 million in Q3 2011 compared to $30.3 million in Q3 2010.

Also included in other income for the third quarter was a gain of $11.3 million associated with the amendment of our license with Quidel that we disclosed earlier in Q3 and a $5.0 million gain associated with the settlement of a dispute over past royalty obligations offset by unrealized foreign exchange losses of $6.6 million as a result primarily of the sharp decline in the value of the pound and euro around the end of Q3. In Q3, our adjusted tax rate was 29.2% of income tax compared to 33.5% in Q3 2010. For 2011, we expected adjusted effective tax rate of approximately 33%.

Adjusted EBITDA from continuing operations for the quarter was $149.5 million, which includes deductions for restructuring charges of $3.4 million and $2.9 million of acquisition related expenses. Adjusted free cash flow for the quarter was $36.9 million reflecting cash flow from operations of $64.0 million, offset by capital expenditures of $27.1 million.

During the third quarter, we repurchased 7.6 million shares of our common stock for an aggregate purchase price of $183.9 million. These repurchases made throughout the quarter had the effect of reducing our weighted average shares during the quarter by 3.3 million shares.

Also during the third quarter, we made five small acquisitions at a combined cost of $18 million. Four of these acquisitions related to toxicology while the fifth related to a diagnostic test connectivity solution for healthcare information systems.

In addition, subsequent to the end of the third quarter, we acquired a U. S. -based pain management business and a leader in information management for point of care testing for an aggregate cost of $163 million. Combined, these businesses generated approximately $37 million of revenue for the six-month period prior to the acquisition of each.

Finally, we now have our own – we now own or have valid acceptances on our offer of approximately 90% of the outstanding shares of Axis-Shield and Axis has become a process of remaining outstanding shares.

We will begin to consolidate the results of Axis-Shield in our financial statements and we will record an adjustment to earnings for the portion of common stock that we have not yet acquired within a day or two.

As required under the UK takeover rules, all funds are necessary to finance the acquisition of 100% of Axis-Shield or deposited in the segregated bank account prior to August 5, the date of our initial debt.

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

Ron Zwanziger

Thanks, Dave. During the quarter, extremely favorable preliminary results from the HABIT trial were presented at the Heart Failure Society of America 15th annual scientific meeting in October, obviously that was just subsequent to the and. These preliminary results from a study, which utilized our Alere Heart Check device support our view that BMP could become an important monitoring tool to use in the homes of patients to managed congestive heart failure remotely, resulting in a reduction in healthcare costs and downstream re-hospitalizations.

Alere Heart Check is the world’s first handheld device for measuring BMP, using a single drop of blood and has been designed with ease of use and built-in connectivity, which allow it to be placed directly in the home. The platform is approved for use in the physician office in Europe and we expect to submit the test for home CE marking clearance in 2012.

While further studies are needed and are already underway, the presentation of the initial HABIT trial present an important milestone for Alere Heart Check.

For the third quarter, year-to-date, new product sales have reached 26 million and added roughly 200 basis points to organic growth rate over the last two quarters. Sales of the epoc blood gas and electrolyte platform are beginning to increase in the U. S. and CD4 continues to have high demand in sub-Saharan Africa, despite systems in contracting delays. While year-to-date new product revenues are trailing our initial expectations, the progress and containing indications from the field have not changed our view that the new product sales would increasingly contribute to our expanding organic growth rate over the next several years.

In addition to the strong topline contribution we’re receiving from recently launched product, our first molecular platforms are moving closer to commercial launch. Our initial device will be a NAT analyzer with multiplexing capabilities and exquisite quantification, HIV viral load will be the first application for the platform, but other applications are already under development and we expect to begin clinical support – clinicals to support regulatory approvals in 2012.

Following behind this platform is a development program based on technologies acquired in 2010, which will provide the low-cost molecular testing capability in the home with a simplicity required for broad adoption. Clinicals for the first product based on this platform are expected also to commence in 2012.

Another important achievement in the third quarter was the initial launch of our global principal operating company in service center located in Goa Island. Now this location has become operational, where it become the process of moving responsibility for our non-U. S. core diagnostics operation into Goa on a country-by-country basis, which will continue through 2012.

Beginning in 2012, this initiative will provide benefits including high customer service levels, lower operating cost and improved control over our global operations.

As Dave discussed earlier, our acquisition of Axis-Shield is nearly complete. We are excited about the fact that our business is extremely complementary, both in terms of geographic strength, as well as product portfolio. Tom believes that early as well as established global point of care salesforce will enable Axis-Shield’s product to achieve greater market potential more quickly, while the Axis-Shield distribution system will better enable us to penetrate the Scandinavian market. In our next call, we will try to highlight the benefits of the transaction in more detail.

To understand our optimism about the near-term outlook for Alere is necessary to way the strong performance in our professional diagnostic business over the past several years against the significant demand with short-term challenges in our health management business today. As health management continues to stabilize, we expect our overall business and quarterly revenue earning trends to become more predictable.

And in addition, our expectation for an increasing contribution from new product sales, and the fact that our new product development is progressing well, it should be clear why we remain confident about our ability to generate sustained topline growth and steadily increasing adjusted cash earnings per share over the next several years.

And now, let me open the call up to questions. Danis?

Question-and-Answer Session

Operator

Thank you, Mr. Zwanziger. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Mr. Jon Groberg of Macquarie Capital. Please go ahead.

Jon Groberg – Macquarie Capital

Hi. Thank you for taking the questions. This is actually Dan in for John. Maybe just starting with a little bit more color on how you see penetration of Axis-Shield ultimately occurring and the synergy is that could be pulled out of that business as it’s integrated into Alere?

Ron Zwanziger

Well, as we said earlier, we’re going to comment on the more specifics in subsequent call. But just in terms of some additional color, I’m not sure if you are aware, but the European distribution system, we are not direct in any of the Scandinavian countries, and as we are most – which we are in most European countries, although we’re present of course in the Scandinavian countries and to the most of our products, we’re actually also the market leader, but acting through distributors. So clearly that’s an opportunity.

And in the reverse, obviously, we have direct operations in numerous countries. And we will – as the contracts with existing distributors that Axis-Shield might have with various other parties as we look at for now, the arguments will take month, and in a small handful of countries including United States, Germany, the UK and Switzerland, we have overlapping distributions systems and the things to rationalize those. In addition, that’s going to be on de-rationalization as well. So there is plenty do here and we’re very excited about this acquisition.

Jon Groberg – Macquarie Capital

Great, and sounds like a good acquisition. And then just in the – for the remainder of the year, if you could provide a little bit more color on margin stability in the fourth quarter, again I think operating margins were still down year-over-year in the third quarter and you made same commentary on maybe some stability in the health management business going forward. Is there the possibility of moving into the fourth quarter in the current environment or maybe if you expect an improvement in the current environment in the fourth quarter or is that we could actually see margin expansion?

Ron Zwanziger

Well, I actually doubt your question a bit, and I’ll answer it slightly differently. We gave the range, fairly wide range on EPS for – by confirming our guidance. And the reason for that is to reflect so much uncertainty that’s out there, including the possibility of margin pressures. So, I mean, that’s really why we gave the range just to reflect so much uncertainty that’s floating out there.

Jon Groberg – Macquarie Capital

Okay. I guess, yeah, then additional color because, this is kind of looking in to model, that implied step up in the fourth quarter is, I would say sizable given the commentary during the persistent weakness, so is kind of looking for any –?

Ron Zwanziger

Well, I think you should actually think about what the business normally looks like in the fourth quarter as distinct from the revenue line as opposed to so much from the specific margin line, because our fourth quarter, traditionally, and I think with one exception over the last five years, has been up significantly and the reason is quite simple, because there is more cardiology issues in the fourth quarter, so weather gets colder. And so we tend to see our products getting used more many of the respiratory products, not just flu, but many of the others, also get used. So our fourth quarters some tend to naturally be stronger because of – just because of the way the diseases work.

Jon Groberg – Macquarie Capital

Great. Thank you. And finally was the BMP issue in America, was that a deterioration from what you’ve highlighted previously or just a continuation?

Ron Zwanziger

Dave, do you want to answer that?

David Teitel

Well, I think it’s more a continuation. We’ve obviously talked about the Beckman issues for the past few quarters. It continues to be a challenge in that space in particular, that was a business that was growing reasonably well for us that has now begun to reverse.

Jon Groberg – Macquarie Capital

Great. Thank you for the additional detail on the business lines.

Operator

Thank you. And our next question will come from John Putnam of Capstone Investments. Please go ahead.

John Putnam – Capstone Investments

Yeah, thanks very much. Ron, I wondered if you might comment on the regulatory pathway for Axis-Shield’s Afinion system here in the United States? And also is there any tie-in with many of their products with Health Management?

Ron Zwanziger

Well, I actually can’t comment on the first one, John, simply because I don’t know enough to make a sensible comment. This has been an unusual acquisition and that there was no data exchanged in the process, because that was kind of how they tried to do the defense. So we haven’t had the information directly, of course we know a lot about the product. So it’s a bit premature to say that.

Is there a tie-in with Health Management? I’m not sure that one could say there is a tie-in in the very short term, but there is clearly a tie-in, because many of their products like some of our products are involved in chronic care. And the more you’re involved with rapid diagnostic chronic care, the better it ties in with Health Management and their products do tie together.

John Putnam – Capstone Investments

Thanks.

Operator

And our next question will come from Peter Lawson of Mizuho Securities. Please go ahead.

Peter Lawson – Mizuho Securities

Good morning. This is actually Eric stepping in for Peter. On the SG&A spending, it’s a little lower than what we had modeled. I know you took some of the expense reductions in the quarter. Was the sales force, was that still increased, or was there kind of a pause or a reduction in that as well?

Ron Zwanziger

Sales force was not because – in the case of the sales force, the rate of increase was just slowed down a bit, but other expenses were taken out. And as we said in the call, we’re being very careful about expenses just because we worry about what’s going on in quite a number of the European countries, worrying about reimbursement issues in the United States, policy changes around Medicare and Medicaid, which could happen and related to the federal budget and so on. So we are being cautious and we’re watching the expense lines very carefully.

Peter Lawson – Mizuho Securities

So the salesforce was added – it was added to, but it just wasn’t added to as much as previously?

Ron Zwanziger

Dave, I don’t have the exact numbers in my fingertips. So do you –

David Teitel

So it was up ever since with additions, but attrition as well, so it was net just over flat for the quarter, which the rate of increase is going down from where it was at the beginning of the year?

Ron Zwanziger

Okay. Great. Thank you. And then just on the share repurchases, are you going to continue to be aggressive in that area or was this kind of like a one-time quarter for the decrease?

Ron Zwanziger

We’ll – first of all, we have authorization, you might recall that we had authorization for 200 million and we acquired 186 million. So, we may, but we are not committing to, for sure, to buy what we do authorization and if market conditions permit, we may – we may buy the additional and we may also contemplate additional purchases beyond that, which we’ve committed to.

Ron Zwanziger

Great. Thank you.

Operator

And our next question will come from Zarak Khurshid of Wedbush. Please go ahead.

Zarak Khurshid – Wedbush

Good morning, guys. Thanks for taking the questions. As usual, a lot of information here, what was the additional $5 million gain?

Ron Zwanziger

Well. It’s related to the settlement of NIT matter, but we won’t go into the specifics.

Zarak Khurshid – Wedbush

Okay. So that was unrelated to the Quidel?

Ron Zwanziger

That’s correct.

Zarak Khurshid – Wedbush

Okay. Got it. And then Ron, with some of the pieces of the disease management business continuing to cut off, I guess, struggle or melt, can you speak to just the profitability of the segment or the disease management business overall as well as the various kind of sub segments and maybe talk about your inclination to maybe divest some of those underperformers?

Ron Zwanziger

Right. Well. First of all, the use of the word melt is a bit exaggerated. It is obviously true that we’ve had serious problems particularly last year and you could see those in the numbers. But the point about the ones where we had serious problems and the use of melt for last week, last year around it was clearly correct. We’ve managed to get those stabilized. And we are reasonably optimistic that not only is it stabilized, but could eventually contribute to growth again.

And we’ve highlighted some issues, we think the one in the Alere Home Monitoring unit, because of the changing reimbursement, that we’ve got that one behind us, there is some evidence that the issues are wellbeing with the state behavior has diminished. So we’re feeling somewhat cautious and you might have heard that we comment and Dave commented that we saw in Q4, there is a possibility that the revenues will be flat with Q3 and possibly a modest increase. So we think we’ve got our arms around it.

And we have reasonable profitability from these various segments at the moment. So while clearly their issues yet to be addressed, and it has nothing like the strength of our diagnostics operations, of course, we’re seeing increasing integration between the operating units within the health management fees and the diagnostics operations, and we expect to see continued integration.

At your last point about what we might – would we or might we divest some elements of the health management? At some point we might, but at the moment, just at the moment, we think we’ve got our arms around it or substantially got our arms around it. So I don’t think we’ll do anything in the immediate short term, but that doesn’t preclude this to something a little later.

Zarak Khurshid – Wedbush

Excellent. Thank you for that. And second, quickly another one, you provided some information around the molecule strategy, so I just want to understand the developments there and if that is indeed the prior cartilage platform or some other platform, and what’s happening with the isothermal amplification technology? Thank you.

Ron Zwanziger

Well, the comments that we made – that I made about those were about the same technologies that we talked about before. So the first comment we made about the viral load quantitative was on the platform similar to the CD4. And yes, in that certain format and the other parts that we’re talking about also going into clinicals next year are the isothermals and we’ve had really very successful results, preclinical results on our own and so we’re increasingly confident about it.

Zarak Khurshid – Wedbush

Thank you.

Operator

And out next question will come from Ashim Anand of Natixis. Please go ahead.

Ashim Anand – Natixis

Thanks, guys. I was wondering about non-point of Businesses of excess shall, what are the plans in terms of lab and better distribution business?

Ron Zwanziger

We have no plans at the moment to do anything with those, I mean, first of all the point about that distribution business as I commented already that they have a distribution business in Scandinavia, which fits perfectly without missing capabilities in Scandinavia for those. So clearly that’s actually a good fit.

And as to the other business that you’re referring to, look, we have a business that doesn’t get much attention, but it has been doing quite well in terms of supplying various components to other diagnostic companies. And it’s a thriving little business we have and that element does it fits with that one. So we have a natural home for every element of the Axis-Shield business.

Ashim Anand – Natixis

Okay. And in terms of continuing challenges with the coagulation, tell us what’s going on in the marketplace considering that, if I remember correctly, Roche actually posted a pretty strong growth, so this is something specific here that you guys are facing or anything you can comment on that?

Ron Zwanziger

Yeah, sure. We have two aspects to our business of course, we have the pure diagnostic business, which grew and part of our organic growth in cardiology reflects the fact that we had in Europe and within the United States some really good sales of the instruments and sales, and the results of that are inside the Diagnostic Cardiology section of our reports.

Now in terms of the Alere Home Monitoring, where we had the change of reimbursement towards the beginning of last quarter, because of the change of the reimbursement we are billing later for that business and it’s taken rather longer than to get the new billing system under way, but it’s now underway and we don’t expect an impact or minimal impact in Q4.

So what you really have to look given that there has been a change in reimbursement, you actually have to look at what’s been happening to that unit in the context of new patients, and in particular some people are quite concerned about the impact of the various new drugs, the DTIs and so on, on that business. And so first of all and perhaps the most important issue is that in each of the quarters at this year, in each of the three quarters, we’ve had a net gain of patients in each of the quarter, in each quarter, so we’ve had a net gain. Now, it doesn’t show up in the revenues, because of the way the revenue recognition change to billing at the end of the period once the test have already been done.

So as a result, the billing hurt in both Q2 and Q3, but despite the increasing impact of DTIs on the business, we’ve actually had a net increase in patients in each of the first three quarters. We’ve had an increase in the number of patients that we’re handling at Alair Home Monitoring.

Ashim Anand – Natixis

Okay. And in terms of your small acquisitions in terms of toxicology, is this – if you can kind of talk about strategy, is this fitting in well with drug of abuse business? Are you seeing something there in terms of that market where there is opportunity?

Ron Zwanziger

Yeah, but these are very small acquisitions and they’re really basically buying out little distributors that are our distributors and it’s just getting as closer to the end customer. So just in most of these cases, these are very small operations with several people and they distribute locally and we’re just bypassing by going direct to the customer by buying them out.

Ashim Anand – Natixis

Thanks a lot guys.

Operator

And our next question will come from Greg Simpson of Wunderlich. Please go ahead.

Greg Simpson – Wunderlich

All right. Thanks. Good morning, guys. Ron, as always, so much information here, it gets a little confusing in the short-term, so without trying to pin you down to any kind of longer-term guidance, can I focus on 2012 a little bit and Dave, if I can start with you, you talked about the toxicology impact on Professional Diagnostics gross margins, but can you maybe give us some sense, there has been pressures on gross margins related to the new manufacturing facilities, things like that and my expectation has been that those would ease as we get through the end of 2011. Can you talk about those kinds of pressures and then also on the SG&A front, is this a reaction – to follow up on that previous question, is this a reaction to simply the current environment or is this maybe an indication you guys have found maybe a little additional religion so to speak on the SG&A front here?

David Teitel

So to take the first part of the question, the gross margins, yeah, we did see a little bit of improvement and do expect there’d be more improvements in the manufacturing particularly around the CD4 product as we move forward here. We are – we will implement in Q4 an automated manufacturing solution there and are hopeful that we do see continued progress in that area. We’re still not making a whole lot of money on the cartilage sales, but hopefully that turns around relatively quickly as we move forward here and that should be helpful. So some of the things we said previously, we continue to expect particularly in the toxicology business, our recent acquisitions in the pain management space should help to improve the service side of the toxicology business as we move forward. So we’ll probably get a little help on that side as well.

Greg Simpson – Wunderlich

Okay. And can you talk about the SG&A outlook, again not trying to pinning down a number, just kind of the thinking there. Seems you’ve got a lot of discretionary expenses there, I’m curious if there’s a longer term commitment to try to drive down that number?

Ron Zwanziger

Well, the longer term commitment, Greg, is not specifically around the SG&A number, but more about wanting to bring better predictability into our long-term EPS growth. Now if you think about what’s going on in the world and the changes that are taking place, we’re halfway through. Well, I said the way say through Q4 and like other companies, we’re having to give a fairly wide range on Q4, because of so much instability in our markets. So what we are trying to do is to use – pull levers and given that we’re trying to get more predictability and in particular growth into our EPS year-on-year. We have to be one way to do be a bit careful of the SG&A line.

Greg Simpson – Wunderlich

Okay. And then couple of other questions. Again, kind of looking forward to 2012, seems to shape up, again not knowing what the macro environment is necessarily going to be, seems shape up as a potentially very good year for you guys. Again, not trying to get into guidance, but can you talk about in general in terms the potential impact of Axis-Shield on 2012 and then on the new product front, understanding the delays in booking revenues here in the short term, but kind of the – has the longer term outlook change at all with respect to, I’m not again trying to get you to comment on the previous guidance you have given, has the longer term outlook change at all for kind of the new product potential?

Ron Zwanziger

Well first of all, your first part of the question, we already said in our prepared remarks and again that we’ll comment about most specifics about Axis-Shield at a later call. But in terms of the longer range, there certainly hasn’t been any, and in fact passage of time, even though some of the products of CD4 has had in terminable contractor delays in subs in Africa, which has cost us a fair deal of revenues. But what we’re actually seeing is very broad, broader than we would have thought number of customers spending a lot of time with the product getting very good results, understanding how they can change the treatment plan within their countries on a mass scale.

So using the CD4 as an example, we can see that the kind of views we had around what this product can do has certainly on-demand. In fact, as you see the behaviors of the medical community within the countries where we’re beginning to sell, and you think, and you can extrapolate that behavior in countries where we get paid significantly, because at the moment of course we lose, we’re losing about $5 and that goes to your question, at the moment, we’re losing that $5 a test for every test that we sell into Suburbs in Africa. But obviously, as we bring those products more into the U. S. and into Europe, the products are being high, the margins are immediately volatile, and the margins will be positive in Africa because of the automation in any of them. But what we’re seeing is, we are seeing a change, the appropriate change in behavior with the medical communities. And so when you take that change and extrapolate that change to the rest of the world, that gives you increasing confidence in the fact that we can see, again using CD4 as an example, as that we’ll see significant pickup, and that’s why a long-range fuse on the product is healthy.

Again, looking at what people are saying and what doctors are saying about Alere Heart Check, Alere Heart Check is obviously not going to turn profitable in the next year or two. But given what we can see, given the HABIT Study and other studies that we are doing, and given the response of the medical community, we have more and more confidence about long-term value of the product. On the product with Epocal, we commented on the call that we’re beginning to see a pickup not just outside the U. S., but we’re seeing a notable pickup within the U. S., and that’s despite the fact that, before expanding the menu on that and we have even more reason to be optimistic about that product and so it goes.

We are optimistic and response to previous question again about the long-term around on molecular platforms, both the platforms we have the quantitative as well as the isothermal, both looking promising. And again we’ve said that we are in clinicals, on both of them we expect clinicals next year, which I expect is earlier than most of you would have expected, and we are feeling really good about the in-house clinicals that we already have on these products. So we can’t be more excited about the nature of the slew of products that we have coming and how they interact with health management, because all these products of course our going to be sold in the health management models. So we are more bullish than ever about future.

Greg Simpson – Wunderlich

Okay. A couple of follow-ups Ron, revenues from molecular conceivable in 2013 in Europe then?

Ron Zwanziger

Oh, actually, there’s very good chance that they have.

Greg Simpson – Wunderlich

Okay, great. And any comments on diabetes, you’re about three weeks away from the end of your non-compete?

Ron Zwanziger

I give the same answer when I get asked about diabetes, where our company that’s involved in chronic care and in all aspects of chronic care, and it’s hard and many of our cardiology patients, of course, that’s kind of morbidity obviously, dramatic morbidity between cardiology and diabetes. And so we’re looking very hard at what we can do particularly from our diagnostic perspective and feed into our health management system to improve the outcomes of people with diabetes, and so we’re looking very seriously at diabetes.

Greg Simpson – Wunderlich

Okay. Thanks, guys.

Operator

And our next question will come from Jeff Frelick of Canaccord. Please go ahead.

Jeff Frelick – Canaccord

Yes, good morning, folks. Ron, would you – given more about a year and away from last year’s kind of Investor Day update on the product pipeline, you have several products rated to launch in 2012 in the U. S., just kind of revisit, what you’re most excited about hitting next year?

Ron Zwanziger

Well, now, if you are saying about hitting in the U. S., I’m afraid given the regulatory climate in the U. S. has not been this poor probably in the three decades that I’ve been in business in the diagnostic space. It’s a little bit hard to say what I’m excited about in the U. S., I mean, we do expect to get these products eventually approved in the U. S. But I am extremely excited, you asked about new products, I mean, of the new products that are public, that we haven’t launched, I’m particularly excited about the molecular platforms. Although, I’m even more excited about the potential of the products that we have recently launched within the last couple of years, I haven’t mentioned Engal and Preeclampsia would continuing to get good feedback on those in Europe.

The Engal is getting a new and updated devices, its’ going out later this year, early next year, that should help for getting really good response from customers, where key opinion leaders were getting good response from key opinion leaders on Preeclampsia. So if you ask me what I’m excited about? I mean, I’m just excited about all these, about some of these products and perhaps what excites me most is that, as we were planning many of these products that are now in the marketplace and coming through, whether it’s in Preeclampsia or Engal or some of the products in coagulation monitoring or Alere Heart Check or indeed that new viral loads statistically, some of these should have failed either for technical reasons and not gone out the door we would bungle the assumption around the product and the products would not be taking in the marketplace.

And so what I’m actually most excited about since you asked the question, you actually asked me, I’m excited about the fact that they’re all in the game. And that I would have felt by now, we would be thinking, we blew it. And indeed I actually thought that about our determine combo that’s the HIV, a rapid HIV with the antigen. I would have felt we blew that and it certainly didn’t pick up when we launched it a couple of years ago as I would have thought it would have done. But now in fact it’s beginning to pick up outside the U. S. and that is the product that could well get clearance in the U. S., because there is a desperate need for that product in the U. S. So I’m afraid that’s a bit of a rambling answer to excitement, but I’m just very excited about how flew these new products.

Jeff Frelick – Canaccord

Great. Thanks for the update. And then with respect to the salesforce investments here, are you at a point now kind of three, four quarters out from that major salesforce investment. Is the salesforce start contributing somewhat similar to the veteran salesforce or are there still ways to go?

Ron Zwanziger

Well, there are ways to go. But we are beginning to see some of the additions, we’re beginning to see some impact from already. It’s always a bit hard to quantify, but we do try, we obviously look at each individual territories, so can’t see some – we’re beginning to see some pickup and we expect to see some more.

Jeff Frelick – Canaccord

Great. Thanks.

Operator

And our next question will come from Isaac Ro of Goldman Sachs. Please go ahead.

Isaac Ro – Goldman Sachs

Hey, guys. Thanks for taking the questions. It’s actually Jeff in for Isaac. Looking at operating front and few people have asked questions around here. Starting out the beginning of the year, you guys were planning on increasing the salesforce and then I think there were some reductions last quarter and you’ve made some more expense reductions this quarter. With new products coming out in the back half of this year, early next year and the oncoming clinical trial cost, how do you look at the overall uprating expense as we go into next year and how much of their reductions you did in the quarter were variable, given more timing oriented around uncertainty and how much was actually structural?

Ron Zwanziger

That’s a good question. It was actually a little bit of both. We took a hard look at some expenses from our existing operations is distinct from related to new product launches. And we’re fairly critical and took some of those out. So some of those we took out are fairly permanent and we did delay some expenses as well. But if you are trying to get at the issue of operating leverage, I do think we’ll get operating leverage next year in the SG&A line.

Isaac Ro – Goldman Sachs

Okay. Thanks. And then looking at some of the business lines in the professional, I think one of the things in the scan diagnostics you guys are having some production issues in the first half of this year where you’re actually constrained and – I believe and now they’re supposed to work off towards the back half of this year. Do you start to see an improvement there in the growth with that?

Ron Zwanziger

Yeah, I think that’s a good observation and actually we’re feeling a bit better about getting some of those production issues, more production has gone into that facility. We’ve been adding – we’ve added space and we’re commissioning more space as we speak. So I think we are getting on top of those issues.

Isaac Ro – Goldman Sachs

And then lastly on the repurchase in the quarter, I mean, I think initially when you guys have the authorization announced, you had a preference for buying back preferred, but I think you mentioned you bought common in the quarter and preferred looked to be about the same. Can you talk a little bit about your choice there and what your thoughts are going forward?

Ron Zwanziger

One of the reasons we switched to is because it was more financially advantageous and also we’re now able to pay the dividend on the preferred in cash. So given that we can do that and before we were issuing additional stocks, it was more dilutive, but now that when we did the recent refinancing, we were able to pay the preferred in – the dividends in cash. And so the common looked more attractive. I don’t know, Dave, do you want to add anything to that?

David Teitel

Yeah, well, just to add to that, the premium on the preferred widened out a bit from where it has historically been, so it did just make the common more attractive.

Isaac Ro – Goldman Sachs

All right. Thanks a lot.

Ron Zwanziger

Okay. Operator, unless you have any question, any more – are there any more? I’ll take one more if you have one. Otherwise we’ll wrap up here.

Operator

Just one, we have a follow-up question from Zarak Khurshid of Wedbush. Would you like to take that call?

Ron Zwanziger

Yeah, we’ll take that as the last question.

Operator

Okay, sir. You may go ahead.

Zarak Khurshid – Wedbush

I appreciate you taking the follow-up. Just a quick one on flu strength in the quarter. Can you just talk about what drove that? Is it kind of one-time sort of pull forward of revenue from fourth quarter or is that kind of end user demand driven? Thank you.

Ron Zwanziger

Well, it certainly wasn’t end-user demand driven, because there is not much flu around. Now I think we sold a lot of flu simply because two years ago, we’d also sold a lot of flu and there was quite a bit left in the distribution channels or a reasonable amount left in the distribution channels and I think what you’re seeing was merely a return to normal stocking levels in anticipation of the flu season if there’d be one – there probably would be one in the next few weeks and that’s all it was.

Zarak Khurshid – Wedbush

Sure.

Ron Zwanziger

Okay then we’ll wrap up the call. I’ll just add that despite the residual issues in our health management unit and the economic instability in the U. S. AS. And Europe, we will continue to strive some more consistent quarterly and annual earnings growth and seek to add increasing predictability to our business. Within that framework, the longer-term objective of Alere will obviously remind and that is becoming the world leader and enable individuals to take charge of their health and then medical supervision at home, in all countries, in all major markets around the world. We will stay focused on that objective and until the full potential of our company and our business model is unlocked for the benefit of our customers and our shareholders.

As always, I’d like to thank you all for your continued support and interest. Thanks very much, and have a good day.

Operator

Thank you. This will conclude our conference. Thank you for attending today’s presentation. You may now disconnect.

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