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Alere Inc. (NYSE:ALR)

Q2 2012 Earnings Call

August 8, 2012 8:30 AM ET

Executives

Doug Guarino – Director, Corporate Relation

Ron Zwanziger – Chairman and CEO

Dave Teitel – CFO

Analysts

Dan Leonard – Leerink Swann

Jon Groberg – Macquarie Capital

John Putnam – Capstone Investments

Zarak Khurshid – Wedbush Securities

Isaac Ro – Goldman Sachs

Nicholas Jansen – Raymond James & Associates

Greg Simpson – Wunderlich Securities

Peter Lawson – Mizuho Securities

Operator

Good morning and welcome to the Alere Inc. Conference Call to discuss Second Quarter 2012 Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded.

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

Doug Guarino

Thank you, Emily, and good morning and welcome to the Alere conference call to discuss our results for the quarter ended June 30, 2012. 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 or financial performance and are based on management’s current assumptions and information currently available.

Actual results and the timing of certain events could differ materially from those projected or contemplated by the forward-looking statements due to numerous factors, including without limitation, our ability to successfully acquire and integrate our acquisitions and to recognize the expected benefits of restructuring and new business activities; our exposure to changes in interest rates and foreign currency exchange rates; our ability to successfully develop and commercialize products and services; the market acceptance of our products and services; 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 regulatory decisions and actions, including the results and consequences of FDA inspections, 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 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, 2011, as well as in our Quarterly Reports on Form 10-Q. Our company undertakes no obligation to update forward-looking statements.

Additionally, please note that during this call we may discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available on the company’s website at www.alere.com.

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

Ron Zwanziger

Thanks, Doug, and good morning everyone. Our second quarter results were impacted by the regulatory issue with our Triage product. Despite this setback, as well as the effect of ongoing weakness in Europe, all our major commercial units around the world including Health Management performed well and came close to compensating for the regulatory matter in Europe.

Our results were also negatively impacted by an unusually high effective tax rate related to a combination of higher profits in the U.S. and lower profits in Europe.

As the issues in San Diego have been covered several times over the past few months in public presentations and via 8-K filings, I’ll limit my prepared comments today to a general update, with Dave providing further details later in the call.

During the second quarter, we continued to work with the FDA to establish a plan around revised release specifications for the Triage products manufactured in San Diego. During the quarter, we began tightening our release specifications in accordance with the plan agreed to with the FDA and, while the adjustments are still generating supply issues, we continue to be increasingly confident that once our manufacturing processes are optimized we will be able to cost-effectively meet market demand in the U.S. for our Triage panels.

Nonetheless, despite having more than doubled our production capacity, with further increases planned, we do expect supply issues mainly in the U.S. with certain tests, primarily the Cardiology panels. This situation is likely to persist through the remainder of the third quarter and into the fourth quarter, as we continue to work through our manufacturing process changes.

An additional challenge for us in the second quarter was Europe. On nearly every quarterly call for the last several years we’ve highlighted macroeconomic risks in Europe, and have occasionally experienced difficult quarters in the region. While Europe performed relatively well in the first quarter, revenues were low in the second quarter, down approximately $10 million from Q1.

In addition, margin pressures which have persisted for more than a year continued to reduce profits in Europe. With the continuation of budgetary problems in many countries, we expect difficulties in Europe to continue through the remainder of this year, with the actual impact on any given quarter difficult to predict.

On the other hand, Asia performed well yet again in the second quarter, with China demonstrating a particularly high growth rate throughout the first half of 2012. As we continue to launch additional products through our expanded and increasingly experienced sales force in key countries throughout Asia, it’s our expectation that this region will help us generate improved organic growth rates over the next few years.

Considering the issues that I just discussed, the adjusted overall organic growth rate for our Professional Diagnostics business was over 6%, when excluding the impact of U.S. flu and the U.S. Triage sales, which I just discussed. And that’s a good indicator for the underlying strength of our business, which should become increasingly apparent to investors as we begin to move past the near term pressures on earnings, particularly from the regulatory issue in San Diego.

Our Health Management business posted a second consecutive strong quarter with revenue growth of 2% compared to 2011 and 110 basis-point improvement in gross margin compared to the first quarter. Our differentiated programs such as the patient self-testing, high-risk pregnancy management, and tobacco cessation were the primary contributors to the improved financial performance. As our Health Management business becomes somewhat more predictable, we expect greater profitability from this division over time.

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

Dave Teitel

Thanks, Ron and good morning. Before going into the specifics of the quarter, let me begin by recapping the second quarter impact of the FDA matters related to the Triage product line. As previously reported, we implemented two recalls during the second quarter involving a total of approximately 1.7 million Triage meter-based tests.

To date, we have received requests from customers to refund or replace a total of 195,000 tests with the volume of additional requests having declined to the point that we consider the recalls substantially complete at this point.

During the second quarter of 2012, our sales of meter-based Triage products in the United States totaled $40.6 million and included $10.7 million of Cardiac Panel sales and $29.9 million of combined BNP, D-dimer and toxicology sales.

Q2 2012 revenues of $40.6 million compared to revenues of $50.5 million in Q1 2012 and $51.9 million in Q2 2011. As compared to Q1 2012, reduced revenues result principally from limitations in product supply, particularly in our relation to Cardiac Panel tests.

The total cost of refunds made during the quarter, replacement products issued at no cost, unfavorable manufacturing variances and the lost margin on reduced volume of tests sold during the quarter as compared to our Q1 volume resulted in a reduction in gross margin during the quarter of $9.9 million.

Additionally, we incurred legal fees of approximately $1.1 million related to the FDA matter and in responding to the OIG subpoena. In total, these charges, net of tax, reduced our adjusted diluted earnings per share by $0.08. I will talk more about the impacts of these matters in a moment when I discuss our segment results.

Focusing back on the second quarter of 2012 as a whole, adjusted revenues for the quarter were $701.6 million compared to revenues of $567.2 million in Q2 2011 and $672.4 million in Q1 2012. The effects of foreign currency translation decreased Q2 2012 adjusted revenues by $13.9 million compared to Q2 2011 and by $4.8 million compared to Q1 2012.

Adjusted cash EPS per diluted share for Q2 2012 were $0.48, which again reflects a reduction of approximately $0.08 as a result of the Triage related matters in the quarter, which I just described.

By business segment, adjusted product and service revenues from our Professional Diagnostics segment were $538 million in Q2 2012 as compared to $404.2 million in Q2 2011. Acquisitions accounted for $135.4 million of this increase.

Revenues from North American flu sales were $4.2 million in Q2 2012, that’s compared to $2.3 million in Q2 2011. Excluding the change in flu sales, but including the reduction in our U.S. meter-based Triage product sales, which I mentioned earlier, the currency adjusted organic growth rate for the quarter was 2.7% for our Professional Diagnostics segment.

Excluding the impact of the Triage issue, the currency adjusted organic growth rate for the remainder of our Professional Diagnostics business was 6.3%, reflecting continued healthy growth in the remainder of our business, despite continued economic difficult environment.

Compared to our Q1 2012 Professional Diagnostics product and services revenues of $516.7 million, the acquisition of AmMed, which we completed in March 2012, added $8.7 million of incremental revenues and the acquisition of eScreen, which we completed on April 2, 2012, added $40.7 million of revenues.

Within our Professional Diagnostics segment, net product revenues for our Cardiology business were $132.9 million in Q2 2011 and $125.6 million in Q2 2012, reflecting the reduction in U.S. based Triage sales more than offsetting continued growth in our cardiology sales outside the U.S.

Net product revenues in our Infectious Disease business grew from $122.5 million in Q2 2011 to $137.8 million in Q2 2012, with increased HIV and CD4 revenues and a $7.6 million increase from Axis-Shield contributing most of the growth.

Our Toxicology business grew from $88.8 million in Q2 2011 to $159.9 million in Q2 2012 with our recent acquisitions of Avee and eScreen contributing a combined net $61.8 million of the increase.

Adjusted gross margins from our Professional Diagnostics segment were 56.3% in Q2 2012 compared to 58.6% in Q2 2011. The inclusion of $40.7 million of revenues from eScreen at an adjusted gross margin of 31.3% reduced our Q2 2012, adjusted gross margins in this segment by 205 basis points.

This, along with a 79 basis point reduction in margins as a result of the Triage-related costs and lost revenues in the quarter, that I discussed earlier, accounted for most of the year-over-year margin decrease.

Foreign exchange related headwinds, particularly relating to Europe, also weighed on our Q2 2012 gross margin results. Adjusted operating income in the Professional Diagnostics segment was $124.7 million or 23% of adjusted revenues in Q2 2012 compared to $107.0 million or 26.2% of revenues in Q2 2011.

Revenues from our Health Management segment were $138.6 million in Q2 2012 compared to $135.6 million in Q2 2011 and $130.8 million in Q1 2012. Compared to Q1 2012, each of the sub-segments included in this business unit grew, reflecting the continued stabilization and slight improvement in these units.

Adjusted gross margins from our Health Management segment were 46.5% in Q2 2012 compared to 45.4% in Q1 2012. Adjusted operating income from our Health Management segment was $3 million in Q2 2012 compared to a loss of $2 million in Q1 2012.

Product and services revenues from our Consumer Diagnostics business segment were $21.8 million in Q2 2012 compared to $22.5 million in Q2 2011. Q2 2012 revenues include $14.8 million of manufacturing and services revenues for products and services provided to the joint venture compared to $16.6 million in Q2 2011. Adjusted gross margins from our Consumer Diagnostics segment were 27.1% in Q2 2012 compared to 25.6% in Q2 2011.

Adjusted selling, general and administrative expenses were $216.7 million or 30.9% of revenues in Q2 2012 compared to $205.9 million or 30.6% of revenues in Q1 2012. The acquisitions of AmMed and eScreen added $8.9 million of the incremental adjusted SG&A expense compared to Q1 2012, accounting for most of the increase.

Adjusted research and development expense was $38.1 million or approximately 5.4% of revenues compared to $35.2 million in Q1 2012. We expect R&D expense to be approximately $40 million in each of the – quarters of the balance of 2012.

Our adjusted operating income was $119.7 million for Q2 2012 compared to $107.8 million in Q2 2011. Adjusted interest and other expense was $50.4 million in Q2 2012, compared to $38.2 million in Q2 2011. Adjusted interest expense, net of interest income was $53.7 million in Q2 2012 compared to $38.2 million in Q2 2011.

In Q2, our adjusted tax rate was approximately 39.2% of pre-tax income compared to 29.4% in Q1 2012. The higher than normal rate in the quarter reflects a higher percentage of earnings for Q2 earned in high tax jurisdictions coupled with pre-tax losses incurred in the quarter in low tax jurisdictions. On a year-to-date basis, our adjusted tax rate was 33.5%, which is a reasonable approximation of the rate we expect for the balance of the year.

Adjusted EBITDA for the quarter was $149.7 million, which includes deductions for restructuring charges of $1.4 million and $3.8 million of acquisition related expenses. Adjusted free cash flow for the quarter was $46.2 million, reflecting cash flow from operations of $64.3 million and $21.0 million in proceeds from the sale of vacant land and an idle facility, offset by capital expenditures of $39.1 million.

Coming back to our Triage business in the U.S., we are continuing to make progress in working with the FDA on all aspects of this matter. In June, the FDA completed its inspection of our San Diego facility and issued to us its Form 483 inspection observations. We responded to the 483 in July and included the corrective actions which we’ve already taken, or plan to implement, in response to each of the observations and we are continuing to work constructively with the agency around process improvements.

We will propose final release specifications for the Triage products to the FDA in September and expect that agreement will be reached in advance of the September 30, date by which the new specifications must be implemented.

The tightened release specifications that we have been operating under since mid-June has resulted in lower manufacturing yields than we’d previously been achieving. While subsequent process improvements for our BNP and D-dimer Triage tests have returned our yields for these products to approximately where they had historically been, our yields for the Cardiac Panel products and the Toxicology products remain significantly lower than historic levels.

To compensate for these yield losses, we have expanded our production capacity from approximately 900,000 tests per month to 2,000,000 tests per month. We will further add production equipment over the next several months and expect that our capacity to reach 2.7 million tests per month by October. Capacity expansion of this nature not only requires more equipment, but also raw materials and subcomponents, which we are addressing along the same timelines.

As I indicated earlier, U.S. revenues from our Triage Cardiac Panel sales were $10.7 million in Q2, which compares to approximately $20 million in the prior quarter. Included in the Q2 sales were $4 million of Cardiac Profiler and Shortness of Breath panels, which we supplied from inventories which we carried into the quarter.

We have discontinued the supply of these products in the U.S. at this time, given the relatively low manufacturing yields that we’ve been able to achieve on these products. For many customers, we are substituting our Cardiac Panel product and separate BNP and D-dimer tests for the previously supplied Profiler and Shortness of Breath products.

While we are making progress from a manufacturing process improvement standpoint and in expanding our production capacity, as I described earlier, for the time being, our supply of Cardiac Panel products remains constrained.

As a result, we have reduced the customers that we are currently providing product to from approximately 1,300 in Q1 to around 475 at present. We expect Q3 and Q4 Cardiac Panel revenues to be between $4 million and $8 million for Q3 and $5 million to $12 million for Q4.

Particularly as it relates to Q4, while our production capacity will increase between now and the start of Q4, the implementation of new standards for our October 1 will result in reduction yields from that point forward until such time as additional manufacturing process improvements are effectively implemented, which we expect later this year.

As it relates to the remaining 800 customers that we have not been able to supply, all have found alternative methods of supply for the panel products with approximately half indicating interest in using Triage, when supply is readily available. As our capacity improves, we will aggressively work to move these customers back to the Triage platform.

The lower revenue expectations for the Triage panels in Q3 and Q4 coupled with the higher manufacturing variances and ongoing legal costs will likely result in reduction of earnings of $0.08 to $0.10 for Q3 and $0.06 to $0.10 per share for Q4. These amounts, plus the $0.08 that we incurred in Q2, result in the lower earnings expectations of $0.22 to $0.28 per share for the year compared with our original assumptions for 2012, when we indicated that our earnings would exceed $2.50 for the year.

While we expect weakness in Europe, we did not anticipate the extent of the weakness and do not believe we can absorb it and the Triage impacts that I just described and still exceed $2.50 for the year. As a result, we are taking a cautious view of both Europe and the Triage issue and reducing our guidance for the year to a range from $2.30 to $2.45.

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

Ron Zwanziger

Thanks, Dave. Our research and development programs are progressing well, with several new platforms nearing launch. In terms of product development highlights projected to occur during the remainder of 2012, our CD4 Analyzer is expected to obtain FDA clearance later this year or early 2013, along with additional parameters on the epoc system.

The FDA submission for our iNAT molecular infectious platform is also expected to occur before the end of the year in anticipation of the U.S. commercial launch ahead of the 2013-2014 flu season.

We also expect FDA clearance for our p24 rapid test for HIV later this year or early next year. Phase 1 clinical trials for our molecular viral load platform are also expected to commence during the fourth quarter, with preliminary results looking promising.

We’ve now completed the PELICAN study, a prospective observational study to evaluate the performance of PLGF in women, who have signs or symptoms of pre-eclampsia, but do not yet have a confirmed clinical diagnosis.

The goal of this study was to show that PLGF can accurately assess disease severity and the likelihood of a pregnancy complication. To the clinician, this means that at the first presentation to the clinic they will be able to predict the progression of the disease. They will know which women are highly likely to deliver pre-term and which women are likely to be safe until the next clinic visit. There is no other biomarker or examination that can give them this data.

As with many other tests, Alere is driving PLGF into a POC setting where we have a strong competitive advantage and where the test can truly make a difference in the pregnancy management.

The data has been released at The International Society for the Study of Hypertension in Pregnancy to great acclaim and the most important global experts in pre-eclampsia. Upon commercial launch of this new indication in Q4 or Q1 of next year, we expect the increased adoption of POC in obstetrics around the world, but outside the U.S.

Finally, in the fourth quarter, we expect a commercial launch in Europe of a second generation version of Alere Heart Check. This improved platform has been designed to support patient self-testing programs, and pilots using the device are currently being planned in several countries.

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, which will allow it to be placed directly in the home.

We continue to believe, and preliminary data suggests, that Alere Heart Check will become an important monitoring tool for use in homes for patients to manage congestive heart failure remotely, resulting in a reduction in healthcare costs and downstream re-hospitalizations.

From a Healthcare IT standpoint, we made excellent progress during the second quarter with our Health Information Exchange pilots, particularly in the case of our Health Information pilot – HIE pilot in Hawaii, which was recently expanded based on the success of the initial phase.

We believe that through our HIE business; we have one of the most powerful, user-friendly exchanges in the world, which has the potential to change the way in which care providers operate.

The system provides a powerful entry point for the adoptions of Alere’s wireless diagnostic devices, decision support analytics and population health reporting capabilities and therefore serves as an important unifying element in our portfolio.

While it has taken some time to develop the individual pieces, our overall Healthcare IT strategy is beginning to transform from a set of separate initiatives into a competitive – into a comprehensive and highly differentiated offering.

Notwithstanding our optimism about the outlook for our Health Management business, we continue to consider opportunities for partnership or other strategic transactions for the less differentiated parts of our Health Management services. These types of transactions could potentially reduce our ownership interest; however, we believe they’ll strengthen the business for the long-term.

In summary, with the our Diagnostics business actually performing well despite some immediate headwinds, and with our Health Management business showing signs of stabilization, we feel optimistic about our positioning for the future. Despite the near-term challenges facing the business, which Dave addressed, in the second half of 2012 from an earnings standpoint, we’re well placed – we’re well ahead of where we were at the midpoint of 2011.

And now let me open up the call up to questions.

Emily, can you take over, please?

Question-and-Answer Session

Operator

We will begin the question-and-answer session. (Operator Instructions) Our first question will come from Dan Leonard of Leerink Swann. Please go ahead.

Dan Leonard – Leerink Swann

Hi. Thank you for all the disclosure. One quick question on the Triage issues, once you have your manufacturing up and running at the clip you want it, is there any ongoing gross margin detriment to the – from the new manufacturing processes or the new quality control processes? Or should we think about the margins looking like what they used to? And then I have a follow-up.

Ron Zwanziger

They’ll be slightly depressed, but not significantly.

Dan Leonard – Leerink Swann

Okay. Thank you. And then, Ron, my follow-up, you guys have been providing a revenue number for the new products whether they be CD4 Analyzer, epoc and the others per quarter. Could you provide that in Q2 as well?

Ron Zwanziger

Sure, Dave.

Dave Teitel

Sure. So, the total new product revenue was $13 million, of which epoc contributed $4.9 million and the CD4 revenue was $3.5 million.

Dan Leonard – Leerink Swann

Great. Thank you.

Ron Zwanziger

Just to follow-up on that, the new placements on the epoc system are progressing well around the world and the consumption rate of the instruments installed on CD4 continues to go well. So all indications are that as the units are going in consumption is strong and forward negotiations are also looking very good.

Dan Leonard – Leerink Swann

Okay. Thank you.

Operator

Our next question is from Jon Groberg of Macquarie Capital. Please go ahead.

Jon Groberg – Macquarie Capital

Hey, good morning. Thanks for taking the question. So, there’s just a couple of more kind of – on the FDA issue, and again, I appreciate the disclosure. But I know there’s a lot of moving pieces and maybe following up on that last question just a little bit, you talked about the 800 customers that you can’t supply and 400 – roughly half saying they’re interested in using Triage again when it becomes available. I guess, how should we – I know there’s a lot of moving pieces, but given the investment in manufacturing, just maybe – can you maybe just help us think of, how much of what you think you’re seeing currently is short-term and maybe how much is long-term in terms of setting expectations going forward?

Ron Zwanziger

Well, Dave, in effect, did that by giving a range of what we expect later this year and that’s before we’ve worked to get substantial amount of the customers back, and by the way, it wasn’t that we’re only going to get back the customers that have indicated, we’re obviously also going to go after the other customers as well. So – and that’ll be going on throughout next year. But, we do expect a fairly good recovery and we’ve already given a range and the range of course is dependent sort of more on the specifications than anything else.

Jon Groberg – Macquarie Capital

Okay. And then – and just a clarification, on the September 30 deadline, you said you expected to have some agreement well before then, but can you maybe just describe how that process works in terms of agreeing to the final specs and maybe just so we can get comfortable in terms of how that process will work here over the next couple of months?

Ron Zwanziger

Well, we didn’t say well before, we actually said, we’d be submitting – we’d be working with them on the – providing the specifications and working with them in September and expect to get it in before. Basically, it’s – we’ve been meeting with them regularly in a very constructive fashion and we expect that’s what will happen in September as well.

Jon Groberg – Macquarie Capital

But there’s – are the final specs going to be significantly more stringent than the current specs? Similar to the current specs? I mean, maybe, just kind of directionally how that is working?

Ron Zwanziger

It’s not that – not that dissimilar to the current spec, particularly on the key analytes.

Jon Groberg – Macquarie Capital

Okay. And then if I can ask just one last, do you have any cash flow projections for the second half? Thanks.

Dave Teitel

No, we’re not going to get into that level of granularity.

Ron Zwanziger

But business is basically good, so there’s no – there’s not something that we’re particularly concerned about.

Jon Groberg – Macquarie Capital

Okay. Thanks.

Operator

Our next question is from John Putnam of Capstone Investments. Please go ahead.

John Putnam – Capstone Investments

Yeah, thank you, and good morning. I may have missed this, but can you go over the schedule, if you will, of manufacturing increases? You said you were doing about 900,000 panels right now per month, going to 2 million, and then (inaudible)...

Ron Zwanziger

It’s already at 2 million, John. It was 900,000 when this problem started. It’s already up to 2 million. We said we’d be up to 2.7 million by October. And it’s going to continue to go up from there as well. John?

John Putnam – Capstone Investments

Thanks.

Ron Zwanziger

Okay.

John Putnam – Capstone Investments

Yeah, that’s it. Thank you.

Operator

Our next question comes from Zarak Khurshid of Wedbush Securities. Please go ahead.

Zarak Khurshid – Wedbush Securities

Good morning, guys. Thanks for taking the questions. So, I guess, Dave or Ron, with respect to the cardiac supply disruption, I’m a little bit confused. When we had chatted, I think in May or June, it sounded like when the initial, I guess, improvements or new product release criteria went into effect in April, there weren’t any issues with supply, and then I guess, that deteriorated throughout the quarter. So, maybe can you just talk about what changed in the process and in the discussions with the FDA?

Dave Teitel

So, I’m not sure we ever characterized it that there were no supply issues. I think, we’ve said from the beginning that the challenging piece of this has been the Cardiac Panels, in part because they have multiple markers on them and are therefore the most difficult to manufacture. We’ve continued to make steady progress in terms of improving the product and therefore the product supply and have a number of incremental process improvements that need to be validated and just take longer to implement.

So, from a process standpoint, there have been no, sort of, significant setbacks. We’ve had variety of targets we’ve been aiming at in terms of the original specifications we are releasing to, and then those tightened in mid-June, so there’s been sort of levels of product that’s passed at each point. But the underlying process continues to improve about as we’ve expected and the general issues around the availability of the product in the U.S. is what we’ve been facing and have expected over the course of the quarter.

Zarak Khurshid – Wedbush Securities

Understood. And then, maybe if you could talk about just the CapEx that has gone into these – in solving these issues. It looks like it kind of went up sequentially maybe by about $5 million or $6 million. How many – how much of that went into this program and what do you expect for the remainder of the year in terms of CapEx requirements?

Dave Teitel

Yeah. There’s a couple million into the program in the quarter. We’ll probably spend another $2 million or $3 million in the third and fourth quarter to continue to expand up our capacity. So, they’re not huge numbers, but they are important numbers in terms of how we drive this forward.

The remainder of the CapEx is spread across a number of different projects and investments, including the continued scale-up of CD4 in our Jena facility in Germany, as well as some incremental equipment in South Korea for the SD facility. So, we continue to be a bigger customer – bigger company through – things like the acquisition of eScreen, contributed a couple million dollars to CapEx as well. So, there’s nothing particularly huge about the investments we’re making around Triage, but they are important for our ability to recover from this and increase our supply.

Zarak Khurshid – Wedbush Securities

Understood. Thank you.

Operator

Our next question is from Isaac Ro of Goldman Sachs. Please go ahead.

Isaac Ro – Goldman Sachs

Hi. Good morning, guys. Thanks for taking the question. First off, on the sort of the back half of the year, what’s embedded in your guidance? Can you maybe give us a sense of, for Europe, what you’re expecting? I know you mentioned, it’s a tougher operating environment, we’ve all seen the headlines. Just wondering, what you guys have assumed in your guidance.

Ron Zwanziger

Well, I’m afraid we’ve taken a very pessimistic view of Europe. And – you know, we’ve been talking about Europe being a problem very early on, well in advance of most other companies and in the beginning of the year had actually assumed a fairly cautious view. But then, it’s clearly much more difficult than we expected. And so, we’ve assumed fairly significant difficulty in Europe for the rest of the year.

Isaac Ro – Goldman Sachs

Okay. So that implies sort of a sequential decline in the back half versus the first half, and is that the right way to look at it?

Dave Teitel

It is.

Ron Zwanziger

I’m afraid, so, yes, it is.

Isaac Ro – Goldman Sachs

Okay. And then, David, if you could maybe give us a little color on the SG&A load that comes with eScreen. I just want to make sure we’re modeling the run rate on SG&A properly for the back half now that it’s fully baked in.

Dave Teitel

Well, so – it was in for the full quarter. It – and the incremental period for AmMed, which we acquired in the middle of Q1 contributed in total $8.9 million of incremental SG&A compared to the first quarter. But if you look at the Q2 number, that effectively includes all the acquisitions we’ve completed.

Isaac Ro – Goldman Sachs

Okay. Great. And then last one just on flu, obviously not much going on there right now, but just wondering what your assumptions are for flu in the back half of the year as well. Thank you.

Ron Zwanziger

We’ve assumed some stocking orders, the usual stocking orders that tend to be somewhat seasonally independent in Q3 and slightly seasonally dependent of course in Q4. So, we’ve assumed some modest numbers.

Isaac Ro – Goldman Sachs

Thanks, guys.

Operator

Our next question comes from Nicholas Jansen of Raymond James & Associates. Please go ahead.

Nicholas Jansen – Raymond James & Associates

Thanks for the questions. First just going back to the guidance reduction, it looks like $0.25 at the midpoint from Triage, but if you kind of think about how much was Europe worth and kind of get a sense of the magnitude of the reduction today?

Dave Teitel

So, in total for the year, Europe is probably down about $0.10 from where we expected.

Nicholas Jansen – Raymond James & Associates

Okay, that’s helpful. And then looking at Health Management, obviously a nice little rebound in the second quarter, what’s driving that? Should we anticipate continued gains in kind of operating income from the 2Q rate or is that a good base to think about going forward?

Ron Zwanziger

I wouldn’t jump to assume that we’ve turned it around, we’re actually quite optimistic about it, because we’re seeing some good uptake in the differentiated products as we made in our – as we stated in our prepared remarks. We had good recovery in the smoking cessation program due to more sensible government policy. So – but, I would still be cautious and I wouldn’t assume the increase would continue. I’d give it another quarter or two, but we are actually and the reason – we are actually getting a feel that we’re sort of beginning to get our arms around that business.

Nicholas Jansen – Raymond James & Associates

Thanks.

Operator

Our next question comes from Greg Simpson of Wunderlich Securities. Please go ahead.

Greg Simpson – Wunderlich Securities

All right. Thanks. Good morning. And I’ll also add I appreciate the degree of disclosure this morning. I hope that indicates turning over a new leaf. Let me ask about the third follow up on guidance. The comments you made give us a little bit of insight into the original cushion you built into that $2.50 plus, especially with that follow-up comment about Europe being worse. So, we’re all obviously going to try to extrapolate into 2013.

So, I’m curious about the guidance surrounding the Triage impact that you gave out. Could you – you gave us a lot of details, you were very specific, but could you maybe give us a sense of how conservative you’re being? Obviously not having it resolved before you had to do this call puts you in a bit of a pickle. So, I’m curious, is that kind of the middle of the road impact, Dave, or is that – you know, are you being very conservative and – in kind of couching that impact in the second half?

Dave Teitel

Well, you know, we gave a fairly wide range of potential outcomes for the Cardiac Panel sales in the U.S. for the third and fourth quarter. And I think it reflects the degree of uncertainty in terms of where the standards will come in Q4. So, you know, at the bottom end of that range, it’s fairly conservative. At the top end, it reflects a little bit more optimism about the progress we’re making from a manufacturing process standpoint.

Greg Simpson – Wunderlich Securities

Okay. And then Ron, your comment – or Dave, your comment about Europe being maybe $0.10 worse than originally expected. Is that on a full year basis, 2012 kind of basis versus the original guidance you provided, that $2.50 plus guidance, or kind of what the internal expectation really was?

Dave Teitel

So, that was against our internal expectations.

Greg Simpson – Wunderlich Securities

Okay. Great. And then finally, could you maybe – Ron, maybe talk about Axis-Shield and the progress there to-date? The Diabetes revenue was a nice surprise or better than expected. Can you maybe just talk about the progress with Axis-Shield at this point?

Ron Zwanziger

Well, it’s – we’re feeling very good about it. Our units around the world are all getting a hand – getting a hold of the products – both the products. In most countries, but not all countries, we’re already well into selling it. Some countries had distribution agreements, which we have to wait for them to run out or work with the existing distributors. But – and that unfortunately includes the U.S. But – but the units are doing well with it and we’re really quite optimistic about what we can do with both the key products there.

Greg Simpson – Wunderlich Securities

Okay, great. And then I – if I could be a hog and maybe just ask one more thing. It’s – again, as we try to look towards 2013, you’ve got some potential catalysts out there; obviously, the resolution of the FDA issue is probably a big one. I appreciate the commentary surrounding Health Management and the potential for divestiture of partnerships. Also possibility – I know this is something I’ve kind of tweaked you about, but any potential that we could see you guys maybe – you’ve talked in the past about maybe improving the operating performance of the company obviously and then the FDA thing hits. Any suggestion...

Ron Zwanziger

Well, we were on the way of course to starting to see that. But then when you lose as much revenues as we’ve done. But in between the – certainly between Europe and particularly the FDA, it – you know, it affects the percentages. But if you’re talking about next year, I mean that was why in my prepared remarks, we commented about a number of the products, particularly the ones that are in front of the FDA. Because – and have been, because those have potential and they are – significant potential and they are the kind of products where the market already understands them. It won’t necessarily be a slow up tick the way CD4 is, where you have to sort of spend more time selling the concept into Africa. It’s much better understood here, of course, as it’s an understood standard of care.

Also the p24 HIV rapid, that’s clearly understood here and it’s clearly a superior product in the marketplace. So, we have a number of new product catalysts that are working. We mentioned the fact that we expect some additional products to the cleared, additional parameters to make our epoc system more effective. Our guess is that the change of control provision will trigger that we have with the current owners. So, there’s a – quite a number of areas that we’re feeling pretty bullish about. We don’t expect significant sales of the PLGF (inaudible), but they continue to do well, and the new study has really helped solidity that. That’s created a significant buzz amongst key opinion leaders, particularly in Europe. And so, we do expect to start seeing some uptick with that product as well.

Greg Simpson – Wunderlich Securities

Okay. Thanks.

Ron Zwanziger

So, as far as next year is concerned, we – we’re very optimistic. And just going back to Triage in terms of next year, not to be missed in all of this is that our overseas units are doing incredibly well with Triage and are seeing increases and we expect those increases will continue and we do expect a strong recovery in the U.S. as well.

Now one of the issues in relation to the U.S., it’s the sales force that’s dealing with this particular problem is a particularly strong sales force and we – which is fortunate. I mean, having got the problem, which is not fortunate, but having that particular sales force deal with it, means that we should be able to deal with it – we’ll have a good recovery.

Greg Simpson – Wunderlich Securities

Okay. Great. And actually, where I was going to go is, any thought to maybe getting more aggressive on the cost side? I mean, you speak obviously very positively about the revenue side of the equation for 2013, but maybe getting more aggressive on the cost side seems to be some things we can do?

Ron Zwanziger

Well, we’re – but we’re holding expenses more than needing to – we don’t see us at this stage yet and need to cut expenses. Look, if we thought we could do it and sort of achieve the $2.50, then we would have done more – we’re already freezing expenses. We could have taken some expenses out, but it – it really in the context of the Triage, it would have been an unnecessary – an unnecessary thing to do and doing so is going to affect our ability to launch all these new products that we’ve – that we referred to and there is a long list here. So, I think the best way to get efficiency out of the new organization is to grow the new products.

Greg Simpson – Wunderlich Securities

Okay. Thanks.

Operator

Our next question is from Peter Lawson of Mizuho Securities. Please go ahead.

Peter Lawson – Mizuho Securities

Ron, I was wondering if you could help us define the parts of the Healthcare Management business that you attempted to divest versus partnership? And how big are those businesses?

Ron Zwanziger

Well, the ones that we’re looking to potentially partner with are the ones which are less intensive and are more about sort of control of a large, diverse sort of group – diverse diseases amongst the groups in chronic care. So, which involved large nursing centers and so that’s about 40% of the Health Management business. So, that’s the piece that we’re looking at a variety of options and a number of transactions and have been talking to some folks about doing something.

Peter Lawson – Mizuho Securities

And the idea of divestiture is that – is that off the table now? Is that...

Ron Zwanziger

It’s not off the table. It’s something that potentially could happen. But – by doing some form of transaction, which if someone strengthens the business, it actually sets it up better for a divestiture if that’s the next step. And by the way, even if we were to go that way we would retain contractual rights to be able to use it, because what’s happening is with the offering that we have in the IT side, and particularly with the general movement towards accountable care and performance measures and improving outcomes, the need to use those services are actually beginning to go up. And we’re seeing it in the quality and the number of negotiations we’re having.

Peter Lawson – Mizuho Securities

Okay. Could this happen in the partnership with divestiture, in 3Q or 4Q?

Ron Zwanziger

It could.

Peter Lawson – Mizuho Securities

And is it more likely to be a 4Q event?

Ron Zwanziger

I don’t want to speculate anymore. We did say in the prepared remarks, we specifically commented in the prepared remarks that it could happen.

Peter Lawson – Mizuho Securities

And then, Dave, just on the higher tax rate, what was the driver there?

Dave Teitel

Again, it’s a function of the mix of income more in high tax jurisdictions and some losses in relatively low tax jurisdictions, which as we turn those losses into profits, you get the inverse effect. So, again for the year, the right way to model it, the right way to think about it is somewhere in the 33.5% range, which is the year-to-date rate.

Peter Lawson – Mizuho Securities

And then, just finally on Europe, was it pricing that got worse? Or was it utilization rates that got worse from the first half to the second half?

Dave Teitel

So, the first impact, we already see is in inventory hold levels, which tend to fluctuate. Normally what you see in the second quarter is a bit of an inventory build in advance of a slow Q3, which we just didn’t see in Q2; so more volumes and pricing.

Ron Zwanziger

Well, but the pricing we’ve already seen. So, that hasn’t let up. It’s just we didn’t particularly see more of it. But, we’ve had a lot of pricing pressure, considerable pricing pressure, relative to a year ago.

Peter Lawson – Mizuho Securities

Got you. Thank you. Thank you so much.

Operator

This does conclude our question-and-answer session. I’d like to turn the conference back over to Ron Zwanziger for any closing remarks.

Ron Zwanziger

Well, thank you. During the second quarter, despite, and partly due to the challenges that we faced, we made meaningful progress to becoming a more consistent and better-performing company. We will exit the year stronger from a regulatory and quality standpoint, with a streamlined and more profitable Health Management business and tighter integration between our product, service and technology offerings, and with better control over our global operations.

We have an unwavering focus on our longer-term objective of becoming the global leader and enabling individuals to take charge of their health under medical supervision at home. As the social and financial impacts of chronic disease continue to increase around the world, our unique approach is providing a differentiated and attractive solution, which we expect will unlock significant shareholder value over time.

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

Operator

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

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