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Alere (NYSE:ALR)

Q4 2011 Earnings Call

February 08, 2012 8:30 am ET

Executives

Doug Guarino - Director of Corporate Communications & Corporate Relations

Ron Zwanziger - Chairman of the Board, Chief Executive Officer and President

David A. Teitel - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Analysts

Ashim Anand - Natixis Bleichroeder LLC, Research Division

John M. Putnam - Capstone Investments, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Jonathan P. Groberg - Macquarie Research

Bill Bonello - RBC Capital Markets, LLC, Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Operator

Good morning, and welcome to the Alere Inc. conference call to discuss fourth quarter 2011 results. [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, Amy. Good morning, and welcome to the Alere conference call to discuss our results for the quarter and year ended December 31, 2011. We are joined today by Ron Zwanziger, Chairman and CEO; and Dave Teitel, CFO.

Before we get to that discussion though, I would first like to draw your attention to the fact that certain matters discussed in this conference call will constitute forward-looking statements within the meaning of the U.S. securities laws. These statements reflect our current views with respect to future events of financial performance and are based on management's current assumptions and information currently available. Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors including, without limitation, our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring and new business activities; our 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 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 and budgetary constraints, both in the United States and abroad; the effect of pending and future legal proceedings in 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 alere.com.

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

Ron Zwanziger

Thanks, Doug, and good morning, everyone. Our fourth quarter results were impacted by significant headwinds, which emerged in Europe, midway through the quarter and not only affected our financial results but our comfort in setting an upper range to our 2012 earnings outlook. On the positive side, sales growth in Asia Pacific region was strong, global new product sales showed encouraging acceleration and our Health Management unit continued to stabilize. Finally, in the fourth quarter, we reentered the diabetes marketplace and began to address the primary missing element in our portfolio approach towards the most expensive chronic diseases. I'll expand briefly now on some of these elements.

While Europe remained relatively strong during the first 10 months of the year, our November, December were particularly weak. While we had been highlighting the risk in Europe on earnings call during the past year, the abruptness which the situation deteriorate was still frankly surprising to us. While we're pleased that sales in Europe have been steady so far in the first quarter, continued uncertainty over the macroeconomic environment combined with how quickly ordering patterns can change has us feeling uncomfortable about predicting the European outlook for 2012. This concern compounded by an ease over the potential for further declines in U.S. states spending on health improvements programs led us in an Investor Conference in January to provide only minimal guidance around 2012 earnings. At that conference, we said that we expect to exceed $250 million in adjusted cash basis EPS in 2012, but the extent to which we exceed that minimum target cannot be predicted at this time, which continues to be our view today.

Despite the fourth quarter challenges in Europe, sales in the Asia Pacific region continued to accelerate supported by substantial growth in our high-margin cardiology and infectious disease products. As was the case in Q3, sales in Japan was strong in the fourth quarter with revenues continuing to rebound from the effects of the earlier problems in that country, supported as well as the impact of an expanded sales force supporting the numerous cardiology products, which were approved recently in Japan.

Through the full year of 2011, we achieved new product sales of $39 million, with $13 million occurring in the fourth quarter. The improvement in new product revenue performance in Q4 was driven by increases in sales related to our CD4 Analyzer as well as our blood gas and electrolyte system. These important platforms are achieving increased medical adoption, and this is a key factor behind our belief that new product sales will increasingly contribute to our expanding organic growth rate over the next several years despite any short-term fluctuations associated with economic issues in various countries.

Our reentry into diabetes with the acquisition of Axis-Shield provides us the world's best point-of-care test for A1C, which is a measure of how effectively an individual is controlling their condition. Additionally, our acquisition of Arriva Medical, a company which sells directly to consumers, has provided us with an entry point for offering expanded chronic disease monitoring to individuals with diabetes. Combining our experience working with individuals with congestive heart failure whom we supply monitoring device to at the moment with our past experience in diabetes, this should enable us to launch novel approaches in diabetes, which will yield better outcomes to both the individual and the payer.

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

David A. Teitel

Thanks, Ron, and good morning. Adjusted revenues for the fourth quarter 2011 were $652.6 million compared to revenues of $587.5 million from Q4 2010 and $585.8 million in Q3 2011. The effect of foreign currency translation decreased Q4 2011 adjusted revenues by $600,000 compared to Q4 2010 and by $8.1 million compared to Q3 2011. Adjusted cash basis earnings per diluted share from continuing operations for Q4 2011 were $0.74.

By business segment, adjusted products and services revenues from our Professional Diagnostics segment were $497.4 million in Q4 2011 as compared to $401.4 million in Q4 2010. Acquisitions accounted for $90.1 million of this increase. Revenues from North American flu sales were $8.3 million in Q4 2011 compared to $8.9 million in Q4 2010. Excluding the changes in flu sales, the currency adjusted organic growth rate for the quarter was 2.8% for our Professional Diagnostics segment. This growth was adversely impacted by year-over-year decline in our European professionals business. Excluding the impact of our European business, our currency adjusted organic growth rate was 5.8%.

Compared to our Q3 2011 Professional Diagnostics revenues of $426.3 million, the acquisitions of Axis-Shield; Arriva Medical; Avee Laboratories, a U.S.-based pain testing business; and Medical Automation Systems or MAS, a leader in information management for deployment care testing segment, added $74.0 million of incremental revenues to our fourth quarter results with Avee and MAS included in our results for substantially all of the quarter and access in Arriva each included from November 1 and November 23, respectively. Offsetting the revenue contributed from these acquisitions was a decrease in North American flu from $16.0 million in Q3 2011 to $8.3 million in Q4 2011 and the $8.1 million of adverse currency effects I discussed earlier.

Within our Professional Diagnostics segment, net product revenues for our Cardiology business were $127.7 million in Q4 2010 and $128.1 million in Q4 2011, with the acquisition of Axis-Shield adding $4.2 million of revenue, offset by continued softness in domestic BNP sales. Net product revenues in our Infectious Disease business grew from $134.5 million in Q4 2010 to $159.4 million in Q4 2011 with increased HIV and malaria sales, coupled with the Q1 2011 acquisition from Brazil and a $4.2 million increase from Axis-Shield accounting for the increase.

Our Toxicology business grew by 50% from $79.5 million in Q4 2010 to $119.2 million in Q4 2011, with our recent acquisitions of pain-testing laboratory CapTox and Avee contributing $36.0 million of the increase. Adjusted gross margins from our Professional Diagnostics segment were $60.0 million in Q4 2011 compared to $60.1 million in Q4 2010. Adjusted operating income in the Professional Diagnostics segment was $145.8 million or 29.1% of revenue in Q4 2011 compared to $116.1 million or 28.6% of revenue in Q4 2010.

Revenues from our Health Management segment were $125.9 million in Q4 2011 compared to $129.9 million in Q3 2011. Revenues from our disease and case management business were $55.8 million in Q4 2011 compared to $59.4 million in Q3 2011. Revenues from our wellness business were $24.5 million in Q4 2011 compared to $24.4 million in Q3 2011. Revenues from our women and children's business were $28.7 million in Q4 2011, which were flat with Q3 2011. Our Home Monitoring revenues were $16.9 million in Q4 2011 down sequentially from $17.6 million in Q3 2011.

Adjusted gross margins in our Health Management segment were 45.3% in Q4 2011 compared to 46.2% in Q3 2011. The sequential decrease in gross margin percentage resulted from the revenue decreases in the home monitoring and disease and case management business, which I discussed previously.

Adjusted operating income from our Health Management segment was $3.7 million or 2.9% of revenue in Q4 2011 compared to $13.1 million or 8.9% of revenue in Q4 2010 and $4.7 million or 3.6% of revenue in Q3 2011. Products and services revenues from our Consumer Diagnostics segment were $23.5 million in Q4 2011 compared to $24.7 million in Q4 2010. Q4 2011 revenues included $19.6 million of manufacturing and services revenues for product and services provided to the joint venture compared to $18.9 million in Q4 2011 -- I'm sorry Q4 2010.

Looking at results at the joint venture level, product revenues sold by the joint venture were $52.4 million in Q4 2011 compared to $53.9 million for the year-ago period. Adjusted gross margins from our Consumer Diagnostics segment were 19.5% in Q4 2011 compared to 22.5% in Q4 2010.

Adjusted selling general administrative expense were $187.8 million or 28.8% of revenue in Q4 2011 compared to $165.9 million or 28.3% of revenue in Q3 2011. The acquisitions of Avee, Axis-Shield, Arriva and MAS netted $22.4 million of incremental SG&A expense for 30.2% of their adjusted contributed revenue for the quarter. Adjusted research and development expense was $35.2 million or approximately 5.4% of revenues compared to $32.5 million in Q3 2011. The acquisition of Axis-Shield added $2.2 million of adjusted R&D expense during the fourth quarter. Our adjusted operating income was $141.4 million for Q4 2011 compared to $126.4 million in Q4 2010. Adjusted interest and other expense was $46.9 million in Q4 2011 compared to $30.5 million in Q4 2010. Adjusted interest expense, net of interest income was $47.6 million in Q4 2011 compared to $37.9 million in Q4 2010. In Q4, our adjusted tax rate was 30.7% of pretax income compared to 26.6% in Q4 2010.

Adjusted EBITDA from continuing operations for the quarter was $156.4 million, which includes deductions for restructuring charges of $8.7 million and $5.3 million of acquisition-related expenses.

Finally, during the quarter, we recorded a noncash charge for GAAP purposes of $383.6 million associated with the impairment of goodwill in connection with acquisitions in our Health Management segment based on the estimated current fair value of such goodwill. This charge has been excluded from our adjusted results.

And now let me turn the call back to Ron.

Ron Zwanziger

Thanks, Dave. In addition to the strong top line contribution that we're beginning to receive from recently launched products, our in-development products are also progressing well, and I'll give you a brief R&D update. As we touched on in our third quarter earnings call, preliminary results from the recent HABIT studies suggests that regular BNP monitoring using the Alere Heart Check platform may reduce the downstream rehospitalization and total health care costs. Alere Heart Check is the world's first handheld device for measuring BNP using a single drop of whole blood and has been designed with the ease of use and built-in connectivity that will allow it to be placed directly in the home. The next phase of the HABIT's trial will begin in the second half of this year and will assess the extent to which regular monitoring reduces hospitals readmissions. A separate interventional study of the home trial is currently underway in Europe and Asia with the results expected to be released in 2013.

In January, we provided a public update on our molecular programs. We have 2 primary platforms in development, the Alere NAT Analyzer and the Alere iNAT system. The NAT Analyzer will offer multiplexing capabilities and exquisite quantification. The HIV Viral Load will be the first application, but other applications including Hepatitis C are expected to follow. The NAT Analyzer should begin clinical trials to support regulatory approvals this year.

Our second molecular system is the iNAT platform which will provide low-cost molecular testing capability in the physician office and ultimately to the home where the simplicity required for broad adoption. Last week, we initiated U.S. clinical trials for the iNAT flu test, although the near absence of flu is complicating matters. Other infectious disease applications for this system are in development and will follow closely behind.

Additionally, in January we launched our CardioRenal panel in Europe for use on the Triage platform. The CardioRenal panel is the world's first point-of-care system to combine BNP and NGAL to wait [ph] in the real-time assessment of cardiac and renal status. We believe this panel will continue to support the greater adoption of NGAL as a novel biomarker for the evaluation of kidney function.

As we've now owned Axis-Shield for more than 3 months, we began to generate both revenue and cost synergies and continue to have a great deal of optimism about the company and its products. At this point, we feel quite confident we'll be able to continue the strong growth that Axis-Shield products generated in 2011 while taking in excess of $10 million out of our combined cost during 2012 alone. In fact, much of that low-end estimate has already been achieved.

Furthermore, the Affinion lipid panel is on track for CE Mark in European launch later this year. Finally, during the fourth quarter, we made additional progress in transferring responsibility for European operations into our new global principal operating company and shared service center located in Galway, Ireland. While this process will continue on a country-by-country basis throughout 2012, we expect to generate higher customer service levels and improve operating leverage on a sequential basis through the year.

As of today, 6 European countries are being converted with 3 more scheduled for the first half of 2012, after which our Irish principal operating company would have the responsibility for the bulk of our European business, excluding the recently acquired Axis-Shield business in Scandinavia.

And with that, let me now open the call to questions. Operator, can you take over please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ashim Anand at Natixis.

Ashim Anand - Natixis Bleichroeder LLC, Research Division

In terms of 2012 guidance, we do appreciate the challenges you guys are facing in Europe. As far as the weakness in health management is concerned, can you kind of give us some indication on how much that is weighing on 2012 guidance as compared to the challenges in Europe?

Ron Zwanziger

Well, as you can see from the numbers, we've managed to drastically slow down the losses in that business. There was a slight decrease in this quarter over the previous quarter and we've assumed some continued decrease in next year in our guidance. But the range of problems that we anticipate from Europe is a much wider range than the narrower assumptions we’ve made around the decrease in health management for 2012.

Ashim Anand - Natixis Bleichroeder LLC, Research Division

Okay. And in terms of your initiatives in terms of nucleic acid-based testing, if you can kind of talk a little bit about the strategy here. It's still a point-of-care-based focus, or you guys think about taking it into more complex labs, or just if you can talk about the strategy there?

Ron Zwanziger

Well, the technology itself could certainly be taken into more complex labs. But our focus, as always, remains point-of-care and our systems are designed for point-of-care and they're designed ultimately for home use. They're designed for -- to go into such places as emergency rooms, as well on doctors' offices to head off folks being -- showing up in the hospital to figure out what's going on. And so we're continuing to focus on sort of where you really need rapid testing -- where the advantage of rapid testing is compelling. Now you recall that in some countries and some payers do not cover or do not reimburse for some rapid tests at the moment on the basis that they're not accurate enough, and all those areas will obviously completely open up for us as we introduce true rapid testing into those new business opportunities. So we remain very focused on our core mission of rapid testing at the fingertips where there's an urgent need for a quick test.

Operator

The next question comes from John Putnam at Capstone Investments.

John M. Putnam - Capstone Investments, Research Division

Ron, I think everyone can appreciate the difficulty in Europe, but I was wondering if there's anything specific that you can do to try to mitigate that impact from the economies over there.

Ron Zwanziger

Well, I think the part that I think will help us through as they straighten things out over there and frankly will help us differentiate to other folks is the fact that the cardiac products while they've been selling in Europe for a few years are still at the early stage, and we have a number of products that are still beginning to sell and the sort of the medical need for them will help us. I mean, that's really what helped us all of last year and I'm -- we are feeling that, that's what's going to help us. So I think we're -- that's where we'll be able to cope with Europe perhaps somewhat differentially.

John M. Putnam - Capstone Investments, Research Division

Okay. And then on the health management, how do you drive volume there? What's kind of the strategy for doing that? Is it more physician?

Ron Zwanziger

Well, there's 2 elements. There's the one which is sort of hard to put your finger on, which is that because most payers are having such trouble getting their number to add up and with so much pressure on cost, we're seeing a surprising amount of inquiries about offering services. So I think the real -- the ultimate reason why that business will eventually turn around is because there is such a need because the health care system is there and the U.S. is in such really a mess that systems that helped to bring down costs are going to be required. Again, that explains why we're seeing so much activity around potential new business. But in addition to that, it's really the focus we have around driving improvement and outcomes using diagnostics. And although, for example, the INR, the Alere home monitoring was down sequentially as Dave explained, that was actually due to a charge in the underlying business and actually doing better than the numbers show. And so long as we can continue to show that our systems provide better outcomes, that's the way we expect to get growth in that business.

Operator

Next question comes from Peter Lawson at Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Ron, the $90 million acquisition contribution, wondered if we could get further breakout of that I guess is, what a 4-ish contribution from Arriva and Axis-Shield, I guess that was $25 million to $30 million. Where was the balance coming from?

Ron Zwanziger

Dave will give you some details.

David A. Teitel

The revenue contribution?

Peter Lawson - Mizuho Securities USA Inc., Research Division

Yes, that $90 million acquisition contribution, just try and get a better sense of where that came from.

David A. Teitel

Well, so the big pieces were Axis, which was about $35 million on revenue, product and services revenue in the quarter. Arriva was diabetes, that was a little over $5 million. And Avee pain testing business was about $29 million. Those were the bulk of it. Smaller contributions from the other acquisitions.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And what should we think about for 1Q and 2Q from the current acquisitions, the contribution there? Is it kind of -- is $90 million number sensible?

David A. Teitel

Yes, I think it is. I think we'll have a full quarter of Axis but their fourth quarter tends to be their strongest, so the 2 months we picked up were particularly good months. But most of the other acquisitions were in the -- for the fourth quarter.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And the EPS benefit from those -- that $90 million, what was that? Was that in the region of $0.05 to $0.10?

David A. Teitel

I won't break out at that level. There's a number of integration efforts going on that sort of blur some of the costs, so we -- the better job we do integrating, the harder it is to answer down to the EPS level.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Got you. But then on the Axis-Shield, the last bit of the business, is that -- do you have kind of flat line costs to the year and an uptick in revenues?

Ron Zwanziger

You mean are we making that assumption that, that expenses will be flat and revenues will pick up at the end of the year?

Peter Lawson - Mizuho Securities USA Inc., Research Division

Just generally, how that business has run in the past, has that been kind of back-end loaded for...

David A. Teitel

It has, and traditionally has some reasonably strong fourth quarters, reasonably stronger second half of the year than first.

Operator

The next question is from Zarak Khurshid at Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

I guess Ron or Dave, can you speak to the CD4 business and Epocal and how that's kind of tracking versus just some of the charges that you presented in your Analyst Day I think a little bit over a year ago? Where is that relative to expectations and what's working, what's not, how should we think about the new segments going forward?

Ron Zwanziger

Well, you probably recall that back in December of '10, we said we expected perhaps $50 million of new revenues in '11, and we got $39 million including $13 million in the fourth quarter, and the majority of those revenues were CD4 and Epocal as you might expect. And what's interesting about both of the products is that in the case of CD4, which has a very long sales cycle because you have to convince where we -- particularly in Africa, where you have to convince the ministries of health of changing the way they test for -- they alter their treatment plan for the treatment -- for testing and treatment of HIV, and that inherently requires a long cycle. So despite that, we've made a lot of progress and are growing. We have a little bit of sales in Europe and a little bit in Asia. We're expecting to see more of that this year and we're hoping to get FDA clearance. So what's really happening is we're getting growth in CD4, essentially without the major markets being addressed yet, although we should see a pickup, so we expect to continue to see a sharply upwards growth in CD4, continuing the trend we've seen in '11 certainly through '12. But then as the U.S. comes on, we don't expect to see a significant acceleration of that already sharp increase accelerate in '13. In the case of Epocal and the blood gas electrolyte product, we are seeing pickup. It's an interesting product. We're seeing pickup in all units around the world and that's particularly encouraging because if you stop to think about it, it hasn't got a wide -- as wide a menu as the competing product. So in a sense, it's competing with a handicap. And despite that, we've seen rises -- we've seen significant rise and we expect to continue to see increases the product. And as to the shortage of the menu, a couple of products are being applied for clearance and so we expect to add at least 2 more, which is a good percentage of what's missing in the menu later this year. And again, we expected to see that continue to grow. And as that menu expansion comes on, we should then see a further acceleration in -- from the increases, which we, in any event expect to see in '12, we'll see an acceleration in '13. So we're quite optimistic about these products. And while that's going on, we've gradually developed acceptance for the various other new products that we have as well for those products which will get launched.

Zarak Khurshid - Wedbush Securities Inc., Research Division

And then on disease management, we were expecting maybe a little bit more strength there, kind of a stabilization in the fourth quarter. I think you had alluded to that as well in the prior quarter. Can you just explain to us maybe, if you can, what happened or what changed during the fourth quarter that caused maybe the more pronounced weakness?

Ron Zwanziger

Well, I mean, it was only marginally down and it was more to do with -- we put a new team in to run the Alere Home Monitoring business and they got on top of it and cleaned it up a bit and that impacted revenues a little. So I wouldn't read terribly much into it. I think we're getting that business more under control. It was, obviously, as you know, in freefall because of some in-sourcing by some of the larger accounts. And we're at the tail end of that -- don't expect to see that in the rest of this year. And so we sort of feel that most of the bad blood is behind us at this point.

Operator

The next question comes from Greg Simpson at Wunderlich.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Three topics or 3 questions for you, Ron, or I guess actually Dave first. Strong -- very strong gross margin performance, certainly relative to my model, despite the weak health management margins and kind of the absence of flu in the quarter, so I’ll zero in on kind of the contribution from the new products. We've talked before obviously about how the drag from the new manufacturing plants related to the new products would ease throughout the year and then kind of flip positive. So can you kind of give us maybe a sense of what the impact was in Q4 and kind of what the near-intermediate-term outlook is from that standpoint, Dave?

David A. Teitel

Yes. So clearly, the drag has abated a little bit from the first half of the year to now. I think that will become more apparent particularly related to CD4. I've mentioned, at least on one or some of the other calls, that we expected to implement some automation in that process late this year beginning of 2012, and that effect in fact has kicked in at this point. So we do expect to see continued improvement, particularly in that product line over the course of the year. The acquisitions in the fourth quarter helped with the overall professional gross margin. They contributed slightly higher average gross margin as a group than the overall average, and that did help in the quarter as well. So it does do account for some of the increase you saw from the third quarter into the fourth quarter.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Okay. And can you quantify it all or would you be willing to the new manufacturing plant, the variances, the drag is -- are we through the drag, I guess...

Ron Zwanziger

We're nowhere near through it. I mean that will happen -- that will help us all year. One of the other reasons why the margin was better, of course, in Q4 was because we're selling more cardiology products outside the U.S. and they have good gross margins. And you're observing the rules here, Greg, we said one question each and you started off by saying there were 3.

Gregory J. Simpson - Wunderlich Securities Inc., Research Division

Okay. Well, then let me -- I tell you what, I'll skip the second one and let me just get right to the third. Health Management, I mean clearly, there's a stark contrast between the 2 pieces of the overall business. Diagnostics, despite the pressures, again, very strong performance and again relative to what's going on in Europe. Health -- now that you give the operating profit detail, what can you do to improve the profitability on the health management side? So forget about the revenue picture for a minute, what can you do to improve the profitability? And if you can't improve that profitability enough, again given the stark contrast between the 2 pieces of the business, at what point, Ron, do you start to work down the size of that business, not sell off the whole thing but work down some of it?

Ron Zwanziger

Well, first of all, we are rationalizing the business, so we are looking at the cost side and merging some of the units to get more efficiency, and we're working on that at the moment. As I said in response to one of the earlier questions, we are having a lot of discussions of that new business, and that may seem -- particularly given where we have been, may appear unlikely to Wall Street, and I can understand that. But we're still working our way through this and do feel we've got the business stabilized. But our own patience and my patience with this business is running a bit thin, so we're expecting to have some either positive aspects in the business emerge this year or we will, by the end of this year, look at doing something with some of the businesses.

Operator

The next question comes from Isaac Ro at Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just first off, on the new product contribution, you said $39 million for the year this year. Can you maybe offer a sense of where you think the contribution will be this year? And just trying to get a sense of what assumptions on the top line are baked into your growth plans for this year.

Ron Zwanziger

Well, we'd like to avoid getting into the specifics. As you know, our guidance tends to be around earnings. But the acceleration we've seen through the year as it's progressed, even back into the previous year, has been a reasonably sharp increase. And we don't see any reason why that won't continue. But as you may have noticed in my comments, we do feel that the Epocal system has been handicapped by menu shortage and CD4 by lack of approval in the U.S. And so while we expect '12 to be on that same sharp increase that we've seen and expect that to continue, we expect even sharper acceleration as those issues get resolved towards the end of the year and into '13 as well.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And then just the second question here would be on -- if you could maybe detail for us what operating margins were in health management this quarter and then as we look forward for the tax rate, what does the move to Ireland have as an impact to your tax rate.

David A. Teitel

So the operating margins read earlier in the Health Management business were about 3.7% in the fourth quarter.

Ron Zwanziger

We gave you those already, Isaac.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And the tax rate for the move to Ireland, is there an impact there?

David A. Teitel

So the impact to the tax rate will phase in over the course of this year. You make that change, but then there's sort of an exit charge as you transition from the old model to the new model. So I wouldn't expect much impact to the tax rates in the first half of the year. And as we get into the second half of the year, you'll start to see some benefit to that, which we'll quantify better as we move through the course of next year.

Operator

The next question is from Jon Groberg at Macquarie.

Jonathan P. Groberg - Macquarie Research

So first question, Ron, can you maybe in Europe provide a little bit more detail? I remember last year it was pricing that you saw some pretty dramatic decreases in pricing. But looking at the gross margins as highlighted earlier, it seems like maybe it wasn't so much pricing but just end-market demand. Can you maybe just talk a little bit more about Europe?

Ron Zwanziger

No, I don't think it's really demand. I think it is -- we've had a significant compression in margin. I mean, we're not into ever losing market share, and it's definitely been a pricing. I mean if you think about most of the health care systems over there, they're not going to withhold health care. So it's been mainly in pricing. I think the reason we saw a particularly sharp downturn was also related to reduction in the inventory levels, less frequent ordering. But I don't think we saw a reduction in usage. I mean, perhaps in 1 or 2 minor cases, but basically, it was really all in the price.

Jonathan P. Groberg - Macquarie Research

And can you just remind me in Europe, do you mainly use distributors or are you direct in those countries in Europe?

Ron Zwanziger

Well, just to be clear, when we say we're direct in mostly all countries in Europe, but what that means is we have our own sales and marketing operations. But in most countries, we use -- in a good number of countries, we do use distributors in one form or another. So in a sense, it's both.

Jonathan P. Groberg - Macquarie Research

Okay. And then can you -- on the goodwill and health management, I thought last year's write-off you'd written off most of it. Is there any more goodwill to write off, or are you pretty much done at this point?

David A. Teitel

So there is a little bit of goodwill left. It is a very precise calculation that you need to go through to quantify the amount. There's about $80 million of goodwill left in that segment that remains after the write-off.

Operator

The next question comes from Bill Bonello with RBC Capital Markets.

Bill Bonello - RBC Capital Markets, LLC, Research Division

So I just wanted to press a little bit more on the 2012 outlook, and I understand the lack of visibility in Europe. But I guess I'm struggling to see how you couldn't end up significantly better than what you did this year just given the massive amount of acquisitions that you did in 2011. I mean maybe give us a sense if you were to strip out acquisitions, would the Professional Diagnostics business from a profit standpoint have actually grown in 2011, and do you think it's going to grow in 2012 x acquisitions?

Ron Zwanziger

Well, I mean our business x acquisitions has grown very nicely this year. I mean it was obviously affected in Q4 by Europe. And really there's little reason to suppose that the business won’t continue to grow, the organic x acquisitions won’t continue to grow. But it is getting harder to estimate what's going on in Europe. And I think we've been very cautious and I think the circumstance is prudent in giving the guidance that we've done regardless of the acquisitions.

Bill Bonello - RBC Capital Markets, LLC, Research Division

And just I mean to be sort of at that $250 million range, I mean what would -- things have to get worse in Europe relative to what they are now? I mean, just how do we think about that?

Ron Zwanziger

Well, we assumed Europe in pretty difficult conditions throughout the Europe -- throughout the year. We didn't assume a complete collapse, but we did assume it will be pretty poor for Europe. I don't know if you picked up in the prepared remarks, we said that it didn't start quite as badly so far this year. But given the unpredictability and the strange buying patterns from -- we saw last year, and which we also saw a little bit right after the '08 financial crisis, I think it would be imprudent to change our position at this point.

Operator

The next question comes from Jeff Frelick at Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Ron, can you just maybe expand a little bit on the new products? When do we start seeing kind of a greater contribution from Alere Heart Check on the professional side?

Ron Zwanziger

I don't think that you're going to see significant revenues for a little while, which is why we're focusing so much on CD4 and Epocal. I mean I think Alere Heart Check, I think NGAL, the Viral Load, PLGF and the others, we are very much an education market development working with physicians for acceptances. There's a big difference between those products and CD4 and Epocal in the case of the underlying treatment, but the test itself is sort of more well known. And so the acceptance is easier, so we're very much focused on primary demand. We're working with physicians. We're doing studies. We're doing outcome studies on all these products at different levels. And so I think you can -- so it will be a slower ramp of all the products, including Alere Heart Check.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then just a quick follow-up still on Heart Check, maybe more on the consumer side, thanks for the update on the home study. Where do we stand with the HABIT II study? Have you locked down the final design, when do you start enrolling, when does that likely conclude?

David A. Teitel

We're still working through the design of the protocols, so it will likely be a second half start.

Operator

The next question comes from Nicholas Jansen at Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Just want a little bit more color on the diabetes testing supply business that you acquired with Arriva. I know you've done a couple other tuck-in acquisitions since then. I guess what are you guys assuming for competitive bidding? I know the bids are due this month, and just kind of your thought process on that revenue hit that you'll see in 2013 from that.

Ron Zwanziger

Well, I'm not going to comment other than you’ve probably seen for yourself what the preliminary competitive bids did, and we're well aware of that and do expect to prevail.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Okay. And then just on the home monitoring for the INR, obviously you've got some competition growing. Just kind of get your sense of -- I know you talked about the underlying business is doing better than what the headlines number are. So maybe could you just update on kind of how many patients you have and kind of how that's grown through the year so we can get a better sense of the earnings contribution going forward after some of the revenue headwinds kind of go away.

Ron Zwanziger

Yes, I don't have the numbers at my fingertips, but I will say that there obviously has been a little headwind not as much as some people expected from DTIs on these various drugs and there’s new ones coming. We think that because of the whole notion of getting better outcomes at lower cost is how the health care system is evolving. This is a particular good example of that, and I think that our program does in fact do that. And I think it's going to become clearer, particularly this year on that. And so we actually are quite quietly optimistic about how that business is doing even with the impact of the DTIs. And I think it will become clearer, I think there'll be more papers getting published in this space showing there'll be more discussions at medical meetings around comparing patients controlled in a controlled setting with using products particularly ours relative to just using DTIs. And so I think outcomes-driven medicine is the way the world is going, and I think it's going to reflect really well on this business.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

And then lastly, I think you mentioned at the JPMorgan conference about kind of state -- Medicaid budgets or state budgets also being challenged. But if you kind of look at some of the state revenue data, it's not as dire as it was last year considering that you don't have the big stimulus hold of sales. So maybe just update on kind of the state of the states in terms of how that would impact your Health Management business next year.

Ron Zwanziger

Well, I mean if the pressure comes off, that will certainly help. I mean we certainly saw some pretty bizarre behaviors last year, including states reducing appetizing for example on their Quit for Life program, the smoking cessation, which is an incredibly odd thing to do considering that within a year or 2 it leads to increased health care costs. So there was odd behavior. And if you're right that it really continues to ease up and perhaps sanity returns to some of the decision-making around it, then perhaps things will be better. But who's going to predict that?

Operator

We have a follow-up from Peter Lawson at Mizuho.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Just what are the assumptions for the medical device fees for 2013? How should we think about that?

Ron Zwanziger

I mean I just think you should assume that it's coming in and that, that will happen. I think we're certainly assuming it's going to show up.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And what percentage of the business should we be assuming for that 2.3% tax?

Ron Zwanziger

I don't have the number at my fingertips. We'll give it to you on the next call.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Okay. And then just on the health care management business, what is your gut feeling for that business turning around, and wondering if can you give us any color on the mix between differentiated versus nondifferentiated business and the strengths you're seeing coming out that differentiated business?

Ron Zwanziger

In the health management unit?

Peter Lawson - Mizuho Securities USA Inc., Research Division

Yes.

Ron Zwanziger

Well, at this stage, it was 50%-50%. It's now -- the differentiated piece, the way we count the differentiation is now more than 50%. But as I said in a response to a previous question, we are getting a lot of inquiries about both sides of the business at the moment, and so we'll see how it works out for the rest of this year. We don't -- the main thing is at this point is we're not expecting significant losses and actually are cautiously optimistic that we might pick up some new business given the amount that seems to be out there. Although even when I say that, I say it with a certain amount of caution because we've seen a lot of interest in the past, which hasn't translated into new business for anyone, although I think we picked up more of them, we picked up probably share, but a lot of business that might be available but sometimes doesn't get -- it doesn't happen at all. So we're actually a little bit optimistic that we have almost bottomed out now. Although as I said in a previous comment, announced to a previous question, we've assumed a slight decrease again this year. But having said that, we are seeing a lot of potential new business pretty much across the board actually. So in closing, our goal remains to become the world leader in enabling individuals to take charge of their health under medical supervision at home, and our reentry to the diabetes marketplace represents an important milestone that opens up new opportunities for us to address chronic care. As we continue to commercialize our new products targeted ultimately into their home, we expect both rising rates of organic growth, revenue growth as well a significant annual increases in adjusted cash basis, earnings per share to continue over the next several years. Notwithstanding the near term, particularly external challenges we have highlighted during our call today, we believe that we're on track towards achieving our longer-term goals and unlocking significant shareholder value during 2012 and beyond. 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 has now concluded. Thank you for attending today's event. You may now disconnect.

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